TEMPLETON GROWTH FUND, INC.
THIS STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 1, 1996,
IS NOT A PROSPECTUS. IT SHOULD BE READ IN
CONJUNCTION WITH THE PROSPECTUS OF
TEMPLETON GROWTH FUND, INC. DATED
JANUARY 1, 1996, AS AMENDED FROM TIME TO TIME,
WHICH CAN BE OBTAINED
WITHOUT CHARGE UPON REQUEST TO
THE PRINCIPAL UNDERWRITER,
FRANKLIN TEMPLETON DISTRIBUTORS, INC.
700 CENTRAL AVENUE, P.O. BOX 33030
ST. PETERSBURG, FLORIDA 33733-8030
TOLL FREE TELEPHONE: 800/DIAL BEN
TABLE OF CONTENTS
General Information and History..........................1
Investment Objective and Policies........................2
-Investment Policies....................................2
-Repurchase Agreements..................................2
-Loans of Portfolio Securities..........................2
-Debt Securities........................................2
-Structured Investments.................................4
-Stock Index Futures Contracts..........................5
-Stock Index Options....................................7
-Investment Restrictions................................8
-Risk Factors..........................................10
-Trading Policies......................................15
-Personal Securities Transactions......................16
Management of the Fund..................................16
Director Compensation...................................21
Principal Shareholders..................................22
Investment Management and Other
Services............................................. 23
-Investment Management Agreement.......................23
-Management Fees.......................................25
-Templeton Global Advisors Limited.....................25
-Business Manager......................................25
-Custodian and Transfer Agent..........................27
-Legal Counsel.........................................27
-Independent Accountants...............................27
-Reports to Shareholders...............................27
Brokerage Allocation....................................28
Purchase, Redemption and Pricing
of Shares..............................................31
-Ownership and Authority
Disputes..............................................32
-Tax-Deferred Retirement Plans.........................32
-Letter of Intent......................................33
-Special Net Asset Value Purchases.....................34
-Redemptions in Kind. . . . . . . .....................35
Tax Status..............................................36
Principal Underwriter...................................42
Description of Shares...................................45
Performance Information.................................45
Financial Statements....................................48
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
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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 Global
Advisors Limited (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,
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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
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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.
STRUCTURED INVESTMENTS. Included among the issuers of debt securities
in which the Fund may invest are entities organized and operated solely for the
purpose of restructuring the investment characteristics of various securities.
These entities are typically organized by investment banking firms which receive
fees in connection with establishing each entity and arranging for the placement
of its securities. This type of restructuring involves the deposit with or
purchases by an entity, such as a corporation or trust, of specified instruments
and the issuance by that entity of one or more classes of securities
("Structured Investments") backed by, or representing interests in, the
underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued Structured Investments to create securities
with different investment characteristics such as varying maturities, payment
priorities or interest rate provisions; the extent of the payments made with
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respect to Structured Investments is dependent on the extent of the cash flow on
the underlying instruments. Because Structured Investments of the type in which
the Fund anticipates investing typically involve no credit enhancement, their
credit risk will generally be equivalent to that of the underlying instruments.
The Fund is permitted to invest in a class of Structured Investments
that is either subordinated or unsubordinated to the right of payment of another
class. Subordinated Structured Investments typically have higher yields and
present greater risks than unsubordinated Structured Investments. Although the
Fund's purchase of subordinated Structured Investments would have a similar
economic effect to that of borrowing against the underlying securities, the
purchase will not be deemed to be leverage for purposes of the limitations
placed on the extent of the Fund's assets that may be used for borrowing
activities.
Certain issuers of Structured Investments may be deemed to be
"investment companies" as defined in the 1940 Act. As a result, the Fund's
investment in these Structured Investments may be limited by the restrictions
contained in the 1940 Act. Structured Investments are typically sold in private
placement transactions, and there currently is no active trading market for
Structured Investments. To the extent such investments are illiquid, they will
be subject to the Fund's restrictions on investments in illiquid securities.
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 ("NYSE"). The S&P 500 Index assigns relative weightings to the value of
one share of each of these 500 common stocks included in the Index, and the
Index fluctuates with changes in the market values of the shares of those common
stocks. In the case of the S&P 500 Index, contracts are to buy or sell 500
units. Thus, if the value of the S&P 500 Index were
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$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,
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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.
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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
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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.
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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 NYSE 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
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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.
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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
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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
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<PAGE>
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
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<PAGE>
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 certain of these funds and clients may
contain many or some of the same securities. When certain funds or clients are
engaged simultaneously in the purchase or sale of the same security, the trades
may be aggregated for execution and then allocated in a manner designed to be
equitable to each party. The larger size of the transaction may affect the price
of the security and/or the quantity which may be bought or sold for each party.
If the transaction is large enough, brokerage commissions 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.
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<PAGE>
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
HARRIS J. ASHTON
Metro Center
1 Station Place
Stamford, Connecticut
Director
Chairman of the Board, president and chief executive officer of General Host
Corporation (nursery and craft centers); and a director of RBC Holdings
(U.S.A.)Inc. (a bank holding company) and Bar-S Foods. Age 63.
- 16 -
<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
NICHOLAS F. BRADY*
The Bullitt House
102 East Dover Street
Easton, Maryland
Director
Chairman of Templeton Emerging Markets Investment Trust PLC; chairman
of Templeton Latin America Investment Trust PLC; chairman of Darby Overseas
Investments, Ltd. (an investment firm) (1994- present); director of the Amerada
Hess Corporation, Capital Cities/ABC, Inc., Christiana Companies, and the H.J.
Heinz Company; Secretary of the United States Department of the Treasury
(1988-January 1993); and chairman of the board of Dillion, Read & Co. Inc.
(investment banking) prior thereto. Age 65.
F. BRUCE CLARKE
19 Vista View Blvd.
Thornhill, Ontario
Director
Retired; formerly, credit
adviser, National Bank of
Canada, Toronto. Age 85.
HASSO-G VON DIERGARDT-NAGLO
R.R. 3
Stouffville, Ontario
Director
Farmer; and president of
Clairhaven Investments, Ltd.
and other private investment
companies. Age 79.
S. JOSEPH FORTUNATO
200 Campus Drive
Florham Park, New Jersey
Director
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and a
director of General Host Corporation. Age 63.
JOHN Wm. GALBRAITH
360 Central Avenue
Suite 1300
St. Petersburg, Florida
Director
President of Galbraith
Properties, Inc. (personal
investment company); director
of Gulfwest Banks, Inc. (bank
holding company) (1995-
present) and Mercantile Bank
(1991-present); vice chairman
of Templeton, Galbraith &
Hansberger Ltd. (1986-1992);
and chairman of Templeton
Funds Management, Inc. (1974-
1991). Age 74.
- 17 -
<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
ANDREW H. HINES, JR.
150 2nd Avenue N.
St. Petersburg, Florida
Director
Consultant for the Triangle Consulting Group; chairman of the board
and chief executive officer of Florida Progress Corporation (1982-February 1990)
and director of various of its subsidiaries; chairman and director of Precise
Power Corporation; executive-in-residence of Eckerd College (1991-present); and
a director of Checkers Drive-In Restaurants, Inc. Age 72.
CHARLES B. JOHNSON*
777 Mariners Island Blvd.
San Mateo, California
Chairman of the Board and
Vice President
President, chief executive officer, and director of Franklin Resources, Inc.;
chairman of the board and director of Franklin Advisers, Inc. and Franklin
Templeton Distributors, Inc.; director of General Host Corporation, and
Templeton Global Investors, Inc.; and officer and director, trustee or managing
general partner, as the case may be, of most other subsidiaries of Franklin and
of 55 of the investment companies in the Franklin Templeton Group. Age 62.
BETTY P. KRAHMER
2201 Kentmere Parkway
Wilmington, Delaware
Director
Director or trustee of various civic associations; formerly, economic
analyst, U.S. Government. Age 66.
- 18 -
<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
GORDON S. MACKLIN
8212 Burning Tree Road
Bethesda, Maryland
Director
Chairman of White River Corporation (information services); director of Fund
America Enterprises Holdings, Inc., Lockheed Martin
Corporation, MCI Communications Corporation, Fusion Systems Corporation,
Infovest Corporation, and Medimmune, Inc.; formerly, chairman of Hambrecht and
Quist Group, director of H&Q Healthcare Investors, and president of the National
Association of Securities Dealers, Inc. Age 67.
FRED R. MILLSAPS
2665 NE 37th Drive
Fort Lauderdale, Florida
Director
Manager of personal investments (1978-present); chairman and chief executive
officer of Landmark Banking Corporation (1969-1978); financial vice president
of Florida Power and Light (1965- 1969); vice president of The Federal
Reserve Bank of Atlanta (1958-1965); and director of various other business
and nonprofit organizations. Age 66.
MARK G. HOLOWESKO
Lyford Cay
Nassau, Bahamas
President
President and director of Templeton Global Advisors Limited; chief
investment officer of global equity research for Templeton Worldwide, Inc.;
president or vice president of the Templeton Funds; formerly, investment
administrator with Roy West Trust Corporation (Bahamas) Limited (1984-1985).
Age 35.
- 19 -
<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
MARTIN L. FLANAGAN
777 Mariners Island Blvd.
San Mateo, California
Vice President
Senior vice president, treasurer and chief financial officer of Franklin
Resources, Inc., director and executive vice president of Templeton Investment
Counsel, Inc.; director, president and chief executive officer of Templeton
Global Investors, Inc.; director or trustee and president or vice president of
various Templeton Funds; accountant, Arthur Andersen & Company (1982-1983); and
a member of the International Society of Financial Analysts and the American
Institute of Certified Public Accountants.
Age 35.
JOHN R. KAY
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President
Vice president of the Templeton Funds; vice president and treasurer of
Templeton Global Investors, Inc. and Templeton Worldwide, Inc.; assistant vice
president of Franklin Templeton Distributors, Inc.; formerly, vice president
and controller, the Keystone Group, Inc. Age 55.
THOMAS M. MISTELE
700 Central Avenue
St. Petersburg, Florida
Secretary
Senior vice president of Templeton Global Investors, Inc.; vice
president of Franklin Templeton Distributors, Inc.; secretary of the Templeton
Funds; formerly, attorney, Dechert Price & Rhoads (1985-1988) and Freehill,
Hollingdale & Page (1988); and judicial clerk, U.S. District Court (Eastern
District of Virginia) (1984-1985). Age 42.
- 20 -
<PAGE>
JAMES R. BAIO
500 East Broward Blvd.
Fort Lauderdale, Florida
Treasurer
Certified public accountant; treasurer of the Templeton Funds;
senior vice president of Templeton Worldwide, Inc., Templeton Global Investors,
Inc., and Templeton Funds Trust Company; formerly, senior tax manager, Ernst &
Young (certified public accountants) (1977-1989). Age 41.
JEFFREY L. STEELE
1500 K Street, N.W.
Washington, D.C.
Assistant Secretary
Partner, Dechert Price &
Rhoads. Age 50.
- -------------------------
* These are Directors who are "interested persons" of the Fund
as that term is defined in the 1940 Act. Mr. Brady and
Franklin Resources, Inc. are limited partners of Darby
Overseas Partners, L.P. ("Darby Overseas"). Mr. Brady
established Darby Overseas in February, 1994, and is
Chairman and a shareholder of the corporate general partner
of Darby Overseas. In addition, Darby Overseas and
Templeton Global Advisor Limited are limited partners of
Darby Emerging Markets Fund, L.P.
There are no family relationships between any of the Directors.
DIRECTOR COMPENSATION
All of the Fund's Officers and Directors also hold positions with other
investment companies in the Franklin Templeton Group. No compensation is paid by
the Fund to any officer or Director who is an officer, trustee or employee of
the Investment Manager or its affiliates. Each Templeton Fund pays its
independent directors and trustees and Mr. Brady an annual retainer and/or fees
for attendance at Board and Committee meetings, the amount of which is based on
the level of assets in each fund. Accordingly, the Fund currently pays the
independent Directors and Mr. Brady an annual retainer of $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
- 21 -
<PAGE>
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:
<TABLE>
<CAPTION>
Number of Total Compensation
Aggregate Franklin Templeton from all Funds in
Name of Compensation Fund Boards on which Franklin Templeton
DIRECTOR FROM THE FUND* DIRECTOR SERVES GROUP**
- -------- -------------- ---------------------- ---------------
<S> <C> <C> <C>
Harris J. Ashton $10,900 56 $327,925
Nicholas F. Brady 10,900 24 98,225
F. Bruce Clarke 11,900 20 83,350
Hasso-G von Diergardt-Naglo 10,900 20 77,350
S. Joseph Fortunato 10,900 58 344,745
John Wm. Galbraith 3,300 24 70,100
Andrew H. Hines, Jr. 11,900 24 106,325
Betty P. Krahmer 10,900 24 93,475
Gordon S. Macklin 10,900 53 321,525
Fred R. Millsaps 11,900 24 104,325
</TABLE>
- ---------------
* For the fiscal year ended August 31, 1995.
** For the calendar year ended December 31, 1995.
PRINCIPAL SHAREHOLDERS
As of December 1, 1995, there were 414,319,951 Shares of the Fund
outstanding, of which 448,931 Shares (0.108%) were owned beneficially, directly
or indirectly, by all the Directors and officers of the Fund as a group. As of
December 1, 1995, to the knowledge of management, no person owned beneficially
or of record 5% or more of the outstanding Shares of Class I, and no persons
owned beneficially or of record 5% or more of the outstanding shares of Class
II, except Merrill Lynch, Pierce, Fenner & Smith, Inc., Mutual Funds Operations,
4800 Deer Lake Dr., E., 3rd Floor, Jacksonville, Florida 32246-6484 owned of
record 457,753 Shares (9% of the outstanding Shares).
- 22 -
<PAGE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGEMENT AGREEMENT. The Investment Manager of the Fund is
Templeton Global Advisors Limited, 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,
amended and restated December 6, 1994 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 5, 1995, and will continue
through December 31, 1996. 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 certain of its
affiliates have recommended for one or more of the Investment Manager's other
- 23 -
<PAGE>
clients or for clients of its affiliates, the orders for all such securities
trades may be placed for execution by methods determined by the Investment
Manager, with approval by the 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 Manager also provides management services to numerous
other investment companies or funds and accounts pursuant to management
agreements with each fund or account. The Investment Manager may give advice and
take action with respect to any of the other funds and accounts it manages, or
for its own account, which may differ from action taken by the Investment
Manager on behalf of the Fund. Similar, with respect to the Fund, the Investment
Manager is not obligated to recommend, purchase or sell, or to refrain from
recommending, purchasing or selling any security that the Investment Manager and
access persons, as defined by the 1940 Act, may purchase and sell for its own
and their own account or for the accounts of any other fund or account.
Furthermore, the Investment Manager is not obligated to refrain from investing
in securities held by the Fund or other funds or accounts which it manages or
administers. Any transactions for the accounts of the Investment Manager and
Code of Ethics as described in the section "Investment Objectives and
Policies--Personal Securities Transactions."
The Investment Management Agreement provides that the Investment
Manager shall have no liability to the Fund or any Shareholder of the Fund for
any error of judgment, mistake of law, or any loss arising out of any investment
or other act or omission in the performance by the Investment Manager of its
duties under the Investment Management Agreement, or for any loss or damage
resulting from the imposition by any government of exchange control restrictions
which might affect the liquidity of the Fund's assets, or from acts or omissions
of custodians or 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
- 24 -
<PAGE>
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, 1995, 1994, and 1993, the
Investment Manager received from the Fund fees of $37,081,820, $29,634,284, and
$22,294,296, respectively, pursuant to the Agreement.
TEMPLETON GLOBAL ADVISORS LIMITED. The Investment Manager
is an indirect wholly owned subsidiary of Franklin, a publicly
traded company whose shares are listed on the NYSE. Charles B.
Johnson (a Director and officer of the Fund) and Rupert H.
Johnson, Jr. are principal shareholders of Franklin and own,
respectively, approximately 20% and 16% of its outstanding
shares. Messrs. Charles B. Johnson and Rupert H. Johnson, Jr.
are brothers.
BUSINESS MANAGER. Templeton Global Investors, Inc. performs
certain administrative functions as Business Manager for the
Fund, including:
o providing office space, telephone, office equipment and
supplies for the Fund;
o paying compensation of the Fund's officers for services
rendered as such;
o authorizing expenditures and approving bills for
payment on behalf of the Fund;
o supervising preparation of annual and semiannual
reports to Shareholders, notices of dividends, capital
gain distributions and tax credits, and attending to
- 25 -
<PAGE>
routine correspondence and other communications with
individual Shareholders;
o 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;
o monitoring relationships with organizations serving the
Fund, including the Custodian and printers;
o providing trading desk facilities to the Fund;
o 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;
o monitoring the qualifications of tax-deferred
retirement plans providing for investment in Shares of
the Fund; and
o 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, 1995, 1994, and 1993, the Business Manager (and,
prior to April 1, 1993, Templeton Funds Management, Inc., the previous business
manager) received business management fees of $5,069,519, $4,138,659, and
$3,221,160, 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
- 26 -
<PAGE>
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
("SEC") and the Internal Revenue Service ("IRS").
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,
- 27 -
<PAGE>
including an annual report with financial statements audited by the independent
accountants. Shareholders who would like to receive an interim quarterly report
may phone the Fund Information Department at 1-800/DIAL BEN.
BROKERAGE ALLOCATION
The Investment 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
- 28 -
<PAGE>
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
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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,
1995, 1994, and 1993 (not including any spreads or concessions on principal
transactions) were $8,559,000, $6,914,000, and $4,154,000, respectively. All
portfolio transactions are allocated to broker-dealers only when their prices
and execution, in the good faith judgment of the
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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 NYSE (generally 4:00 p.m., New York time), every Monday through Friday
(exclusive of national business holidays). The Fund's offices will be closed,
and net asset value will not be calculated, on those days on which the NYSE is
closed, which currently are: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Trading in securities on European and Far Eastern securities exchanges
and over-the-counter markets is normally completed well before the close of
business in New York on each day on which the NYSE is open. Trading of European
or Far Eastern securities generally, or in a particular country or countries,
may not take place on every New York business day. Furthermore, trading takes
place in various foreign markets on days which are not business days in New York
and on which the Fund's net asset value is not calculated. The Fund calculates
net asset value per Share, and therefore effects sales, redemptions and
repurchases of its Shares, as of the close of the NYSE once on each day on which
that Exchange is open. Such calculation does not take place contemporaneously
with the determination of the prices of many of the portfolio securities used in
such calculation and if events occur which materially affect the value of those
foreign securities, they will be valued at fair market value as determined by
the management and approved in good faith by the Board of Directors.
The Board of Directors may establish procedures under which the Fund
may suspend the determination of net asset value for the whole or any part of
any period during which (1) the NYSE is closed other than for customary weekend
and holiday closings, (2) trading on the NYSE is restricted, (3) an emergency
exists as a result of which disposal of securities owned by the Fund is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or (4) for such other period as the
SEC may by order permit for the protection of the holders of the Fund's Shares.
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OWNERSHIP AND AUTHORITY DISPUTES. In the event of disputes involving
multiple claims of ownership or authority to control a Shareholder's account,
the Fund has the right (but has no obligation) to: (1) freeze the account and
require the written agreement of all persons deemed by the Fund to have a
potential property interest in the account, prior to executing instructions
regarding the account; or (2) interplead disputed funds or accounts with a court
of competent jurisdiction. Moreover, the Fund may surrender ownership of all or
a portion of an account to the IRS in response to a Notice of Levy.
In addition to the special purchase plans described in the Prospectus,
other special purchase plans also are available:
TAX-DEFERRED RETIREMENT PLANS. The Fund offers its
Shareholders the opportunity to participate in the following
types of retirement plans:
o For individuals whether or not covered by other
qualified plans;
o For simplified employee pensions;
o For employees of tax-exempt organizations; and
o For corporations, self-employed individuals and
partnerships.
Capital gains and income received by the foregoing plans generally are
exempt from taxation until distribution from the plans. Investors considering
participation in any such plan should review specific tax laws relating thereto
and should consult their attorneys or tax advisers with respect to the
establishment and maintenance of any such plan. Additional information,
including the fees and charges with respect to all of these plans, is available
upon request to the Principal Underwriter. No distribution under a retirement
plan will be made until Franklin Templeton Trust Company ("FTTC") receives the
participant's election on IRS Form W-4P (available on request from FTTC) and
such other documentation as it deems necessary, as to whether or not U.S. income
tax is to be withheld from such distribution.
INDIVIDUAL RETIREMENT ACCOUNT (IRA). All individuals
(whether or not covered by qualified private or governmental
retirement plans) may purchase Shares of the Fund pursuant to an
IRA. However, contributions to an IRA by an individual who is
covered by a qualified private or governmental plan may not be
tax-deductible depending on the individual's income. Custodial
services for IRAs are available through FTTC. Disclosure
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statements summarizing certain aspects of IRAs are furnished to all persons
investing in such accounts, in accordance with IRS regulations.
SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRA). For employers who wish to
establish a simplified form of employee retirement program investing in Shares
of the Fund, there are available Simplified Employee Pensions invested in IRA
Plans. Details and materials relating to these Plans will be furnished upon
request to the Principal Underwriter.
RETIREMENT PLAN FOR EMPLOYEES OF TAX-EXEMPT ORGANIZATIONS (403(B)).
Employees of public school systems and certain types of charitable organizations
may enter into a deferred compensation arrangement for the purchase of Shares of
the Fund without being taxed currently on the investment. Contributions which
are made by the employer through salary reduction are excludable from the gross
income of the employee. Such deferred compensation plans, which are intended to
qualify under Section 403(b) of the Internal Revenue Code of 1986, as amended
(the "Code"), are available through the Principal Underwriter.
Custodial services are provided by FTTC.
QUALIFIED PLAN FOR CORPORATIONS, SELF-EMPLOYED INDIVIDUALS AND
PARTNERSHIPS. For employers who wish to purchase Shares of the Fund in
conjunction with employee retirement plans, there is a prototype master plan
which has been approved by the IRS. A "Section 401(k) plan" is also available.
FTTC furnishes custodial services for these plans. For further details,
including custodian fees and plan administration services, see the master plan
and related material which is available from the Principal Underwriter.
LETTER OF INTENT. Purchasers who intend to invest $50,000 or more in
Class I Shares of the Fund or any other fund in the Franklin Group of Funds and
the Templeton Family of Funds, except Templeton Capital Accumulator Fund, Inc.,
Templeton Variable Annuity Fund, Templeton Variable Products Series Fund,
Franklin Valuemark Funds and Franklin Government Securities Trust (the "Franklin
Templeton Funds"), within 13 months (whether in one lump sum or in installments,
the first of which may not be less than 5% of the total intended amount and each
subsequent installment not less than $25 unless the investor is a qualifying
employee benefit plan (the "Benefit Plan"), including automatic investment and
payroll deduction plans), and to beneficially hold the total amount of such
Class I Shares fully paid for and outstanding simultaneously for at least one
full business day before the expiration of that period, should execute a Letter
of Intent ("LOI") on the form provided in the Shareholder
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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 Funds under the LOI. Benefit
Plans are not subject to the requirement to reserve 5% of the total intended
purchase, or to any penalty as a result of the early termination of a plan, nor
are Benefit Plans entitled to receive retroactive adjustments in price for
investments made before executing LOIs.
SPECIAL NET ASSET VALUE PURCHASES. As discussed in the
Prospectus under "How to Buy Shares of the Fund -- Description of
Special Net Asset Value Purchases," certain categories of
investors may purchase Class I Shares of the Fund at net asset
value (without a front-end or contingent deferred sales charge).
Franklin Templeton Distributors, Inc. ("FTD") or one of its
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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.
Under agreements with certain banks in Taiwan, Republic of China, the
Fund's Shares are available to such banks' discretionary trust funds at net
asset value. The banks may charge service fees to their customers who
participate in the discretionary trusts. Pursuant to agreements, a portion of
such service fees may be paid to FTD, or an affiliate of FTD to help defray
expenses of maintaining a service office in Taiwan, including expenses related
to local literature fulfillment and communication facilities.
REDEMPTIONS IN KIND. Redemption proceeds are normally paid in cash;
however, the Fund may pay the redemption price in whole or in part by a
distribution in kind of securities from the portfolio of the Fund, in lieu of
cash, in conformity with applicable rules of the SEC. In such circumstances, the
securities distributed would be valued at the price used to
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compute the Fund's net assets value. If Shares are redeemed in kind, the
redeeming Shareholder might incur brokerage costs in converting the assets into
cash. A Fund is obligated to redeem Shares solely in cash up to the lesser of
$250,000 or 1% of its net assets during any 90-day period for any one
Shareholder.
TAX STATUS
The Fund intends normally to pay a dividend at least once annually
representing substantially all of its net investment income (which includes,
among other items, dividends and interest) and to distribute at least annually
any realized capital gains. By so doing and meeting certain diversification of
assets and other requirements of the Code, the Fund intends to qualify annually
as a regulated investment company under the 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
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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.
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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
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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.
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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
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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.
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The Fund generally will be required to withhold Federal income tax at a
rate of 31% ("backup withholding") from dividends paid, capital gain
distributions, and redemption proceeds to Shareholders if (1) the Shareholder
fails to furnish the Fund with the Shareholder's correct taxpayer identification
number or social security number and to make such certifications as the Fund may
require, (2) the IRS notifies the Shareholder or the Fund that the Shareholder
has failed to report properly certain interest and dividend income to the IRS
and to respond to notices to that effect, or (3) when required to do so, the
Shareholder fails to certify that he is not subject to backup withholding. Any
amounts withheld may be credited against the Shareholder's Federal income tax
liability.
Ordinary dividends and taxable capital gain distributions declared in
October, November, or December with a record date in such 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
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(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, 1995, FTD incurred costs and
expenses of $13,939,769 in connection with distribution of Class I Shares of the
Fund, which amount was reimbursed by the Fund pursuant to the Plan and costs and
expenses of $230,790 in connection with distribution of Class II 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, 1995. In the event that the Plan adopted with
respect to Class I Shares is terminated, the Fund will not be liable to FTD for
any unreimbursed expenses that had been carried forward from previous months or
years. During the fiscal year ended August 31, 1995, FTD spent, pursuant to the
Plans, with respect to Class I Shares the following amounts on: compensation to
dealers, $11,336,949; sales promotion, $284,760; printing, $655,526;
advertising, $1,396,358; and wholesale costs and expenses, $266,176; and with
respect to Class II Shares the following amounts on: compensation to dealers,
$16,410; sales promotion, $212; printing, $500; advertising, $680; and wholesale
costs and expenses, $212,988.
The Distribution Agreement provides that the Principal Underwriter will
use its best efforts to maintain a broad
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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, 1995, 1994,
and 1993, FTD (and, prior to June 1, 1993, Templeton Funds Distributor, Inc.)
retained of such discount $5,685,601, $5,682,478, and $3,162,262, or
approximately 14.66%, 16.12%, and 22.30% of the gross sales commissions,
respectively.
The Distribution Agreement provides that the Fund shall pay the costs
and expenses incident to registering and qualifying its Shares for sale under
the Securities Act of 1933 and under the applicable 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 Distribution Agreement is subject to renewal from year to year in
accordance with the provisions of the 1940 Act and terminates automatically in
the event of its assignment. The Distribution Agreement may be terminated
without penalty by either party on 60 days' written notice to the other,
provided termination by the Fund shall be approved by the Board of Directors or
a majority (as defined in the 1940 Act) of the Shareholders. The Principal
Underwriter is relieved of liability for any act or omission in the course of
its performance of the Distribution Agreement, in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations.
FTD is the Principal Underwriter of the Shares of the Fund throughout
the world, except for Europe, Hong Kong and other parts of Asia, and such other
countries or territories as it might hereafter relinquish to another principal
underwriter. Templeton Global Strategic Services (DEUTSCHLAND) GmbH ("Templeton
Strategic Services"), whose office address is Taunusanlage 11, 60329 Frankfurt
am Main, Germany is principal underwriter for sale of the Shares in all
countries in Europe. The Fund has also entered into a non-exclusive underwriting
agreement with Templeton Franklin Investment Services (Asia) Limited ("Templeton
Investment Services"), whose office address
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is 2701 Shui On Centre, Hong Kong as principal underwriter for sale of the
Shares in Hong Kong and other parts of Asia. The terms of the underwriting
agreements with Templeton Strategic Services and Templeton Investment Services
are substantially similar to those of the Distribution Agreement with FTD.
Templeton Strategic Services and Templeton Investment Services are indirect
wholly owned subsidiaries of Franklin.
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, 1995 was 3.21%, 13.67% and 14.22%,
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
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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 and industry distribution of the Fund's
portfolio and the Fund's top ten holdings.
(5) The gross national product and populations, including age
characteristics, literacy rates, foreign investment
improvements due to a liberalization of securities laws and a
reduction of foreign exchange controls, and improving
communication technology, of various countries as published by
various statistical organizations.
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(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:
o "Never follow the crowd. Superior performance is
possible only if you invest differently from the
crowd."
o "Diversify by company, by industry and by
country."
o "Always maintain a long-term perspective."
o "Invest for maximum total real return."
- --------
* Sir John Templeton sold the Templeton organization to
Franklin Resources, Inc. in October, 1992 and resigned from
the Fund's Board on April 16, 1995. He is no longer
involved with the investment management process.
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o "Invest - don't trade or speculate."
o "Remain flexible and open-minded about types of
investment."
o "Buy low."
o "When buying stocks, search for bargains among
quality stocks."
o "Buy value, not market trends or the economic
outlook."
o "Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
o "Do your homework or hire wise experts to help
you."
o "Aggressively monitor your investments."
o "Don't panic."
o "Learn from your mistakes."
o "Outperforming the market is a difficult task."
o "An investor who has all the answers doesn't even
understand all the questions."
o "There's no free lunch."
o "And now the last principle: Do not be fearful or
negative too often."
In addition, the Fund and the Investment Manager may also refer to the
number of Shareholders in the Fund or the aggregate number of shareholders of
the Franklin Templeton Funds or the dollar amount of fund and private account
assets under management in advertising materials.
FINANCIAL STATEMENTS
The financial statements included in the Fund's Annual Report to
Shareholders dated August 31, 1995 are incorporated herein by reference.
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