TEMPLETON
GROWTH FUND, INC.
STATEMENT OF
ADDITIONAL INFORMATION LOGO
100 FOUNTAIN PARKWAY, P.O. BOX 33030
JANUARY 1, 1998 ST. PETERSBURG, FL 33733-8030 1-800/DIAL BEN
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TABLE OF CONTENTS PAGE
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How Does the Fund Invest Its Assets?. 2
What Are the Risks of Investing in
the Fund?.......................... 4
Investment Restrictions.............. 8
Officers and Directors............... 9
Investment Management and Other
Services........................... 14
How Does the Fund Buy Securities
for Its Portfolio?................. 15
How Do I Buy, Sell and Exchange
Shares?............................ 16
How Are Fund Shares Valued?.......... 19
Additional Information on
Distributions and Taxes............. 20
The Fund's Underwriter............... 25
How Does the Fund Measure
Performance?....................... 27
Miscellaneous Information............ 30
Financial Statements................. 31
Useful Terms and Definitions......... 31
Appendix............................. 32
Description of Ratings............. 32
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When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
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Templeton Growth Fund, Inc. (the "Fund") is a diversified, open-end management
investment company. The Fund's investment goal is long-term capital growth,
which it seeks to achieve by a flexible policy of investing in the equity and
debt securities of companies and governments of any nation.
The Prospectus, dated January 1, 1998, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN.
This SAI describes the Fund's Class I and Class II shares. The Fund currently
offers another class of shares with a different sales charge and expense
structure, which affects performance. This class is described in a separate SAI
and prospectus. For more information, contact your investment representative or
call 1-800/DIAL BEN.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
101 SAI 01/98
TL101 SAI
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HOW DOES THE FUND INVEST ITS ASSETS?
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The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How Does the Fund Invest Its Assets?"
EQUITY SECURITIES. The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner of
an equity security may participate in a company's success through the receipt of
dividends which are distributions of earnings by the company to its owners.
Equity security owners may also participate in a company's success or lack of
success through increases or decreases in the value of the company's shares as
traded in the public trading market for such shares. Equity securities generally
take the form of common stock or preferred stock. Preferred stockholders
typically receive greater dividends but may receive less appreciation than
common stockholders and may have greater voting rights as well. Equity
securities may also include convertible securities, warrants or rights.
Convertible securities typically are debt securities or preferred stocks which
are convertible into common stock after certain time periods or under certain
circumstances. Warrants or rights give the holder the right to purchase a common
stock at a given time for a specified price.
DEBT SECURITIES. A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes,
debentures and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the Fund's Net Asset Value.
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. Global Advisors 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, I.E., banks or broker-dealers which have
been determined by Global Advisors to present no serious risk of becoming
involved in bankruptcy proceedings within the time frame contemplated by the
repurchase transaction.
LOANS OF PORTFOLIO SECURITIES. The Fund may lend to banks and broker-dealers
portfolio securities with an aggregate market value of up to one-third of its
total assets. Such loans must be secured by collateral (consisting of any
combination of cash, U.S. government securities or irrevocable letters of
credit) in an amount at least equal (on a daily marked-to-market basis) to the
current market value of the securities loaned. The Fund retains all or a portion
of the interest received on investment of the cash collateral or receives a fee
from the borrower. The Fund may terminate the loans at any time and obtain the
return of the securities loaned within five business days. The Fund will
continue to receive any interest or dividends paid on the loaned securities and
will continue to have voting rights with respect to the securities. However, as
with other extensions of credit, there are risks of delay in recovery or even
loss of rights in collateral should the borrower fail.
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 maturi- ties, payment
priorities or interest rate provisions; the extent of the payments made with
respect to structured investments is dependent on the extent of the cash flow on
the underlying instruments. Because structured investments of the type in which
the 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 Global
Advisors' ability to predict correctly movements in the direction of the stock
markets. No assurance can be given that Global Advisors' 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 S&P 500 Stock Index (the "S&P 500 Index") is composed of 500 selected common
stocks, most of which are listed on the NYSE. The S&P 500 Index assigns relative
weightings to the value of one share of each of these 500 common stocks included
in the Index, and the Index fluctuates with changes in the market values of the
shares of those common stocks. In the case of the S&P 500 Index, contracts are
to buy or sell 500 units. Thus, if the value of the S&P 500 Index were $150, one
contract would be worth $75,000 (500 units x $150). The stock index futures
contract specifies that no delivery of the actual stocks making up the index
will take place. Instead, settlement in cash must occur upon the termination of
the contract, with the settlement being the difference between the contract
price and the actual level of the stock index at the expiration of the contract.
For example, if the Fund enters into a futures contract to BUY 500 units of the
S&P 500 Index at a specified future date at a contract price of $150 and the S&P
500 Index is at $154 on that future date, the Fund will gain $2,000 (500 units x
gain of $4). If the Fund enters into a futures contract to SELL 500 units of the
stock index at a specified future date at a contract price of $150 and the S&P
500 Index is at $154 on that future date, the Fund will lose $2,000 (500 units x
loss of $4).
During or in anticipation of a period of market appreciation, the Fund may enter
into a "long hedge" of common stock which it proposes to add to its portfolio by
purchasing stock index futures for the purpose of reducing the effective
purchase price of such common stock. To the extent that the securities which the
Fund proposes to purchase change in value in correlation with the stock index
contracted for, the purchase of futures contracts on that index would result in
gains to the Fund which could be offset against rising prices of such common
stock.
During or in anticipation of a period of market decline, the Fund may "hedge"
common stock in its portfolio by selling stock index futures for the purpose of
limiting the exposure of its portfolio to such decline. To the extent that the
Fund's portfolio of securities changes in value in correlation with a given
stock index, the sale of futures contracts on that index could substantially
reduce the risk to the portfolio of a market decline and, by so doing, provide
an alternative to the liquidation of securities positions in the portfolio with
resultant transaction costs.
Parties to an index futures contract must make initial margin deposits to secure
performance of the contract, which currently range from 1 1/2% to 5% of the
contract amount. Initial margin requirements are determined by the respective
exchanges on which the futures contracts are traded. There also are requirements
to make variation margin deposits as the value of the futures contract
fluctuates.
At the time the Fund purchases a stock index futures contract, an amount of
cash, U.S. government securities, or other highly liquid debt securities equal
to the market value of the contract will be deposited in a segregated account
with the Fund's custodian. When selling a stock index futures contract, the Fund
will maintain with its custodian liquid assets that, when added to the amounts
deposited with a futures commission merchant or broker as margin, are equal to
the market value of the instruments underlying the contract. Alternatively, the
Fund may "cover" its position by owning a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based, or holding a call option permitting the Fund to purchase the same futures
contract at a price no higher than the price of the contract written by the Fund
(or at a higher price if the difference is maintained in liquid assets with the
Fund's custodian).
STOCK INDEX OPTIONS. The Fund may purchase and sell put and call options on
securities indices in standardized contracts traded on national securities
exchanges, boards of trade, or similar entities, or quoted on NASDAQ. An option
on a securities index is a contract that gives the purchaser of the option, in
return for the premium paid, the right to receive from the writer of the option,
cash equal to the difference between the closing price of the index and the
exercise price of the option, expressed in dollars, times a specified multiplier
for the index option. An index is designed to reflect specified facets of a
particular financial or securities market, a specific group of financial
instruments or securities, or certain indicators.
The Fund may write call options and put options only if they are "covered." A
call option on an index is covered if the Fund maintains with its custodian cash
or cash equivalents equal to the contract value. A call option is also covered
if the Fund holds a call on the same index as the call written where the
exercise price of the call held is (i) equal to or less than the exercise price
of the call written, or (ii) greater than the exercise price of the call
written, provided the difference is maintained by the Fund in cash or cash
equivalents in a segregated account with its custodian. A put option on an index
is covered if the Fund maintains cash or cash equivalents equal to the exercise
price in a segregated account with its custodian. A put option is also covered
if the Fund holds a put on the same index as the put written where the exercise
price of the put held is (i) equal to or greater than the exercise price of the
put written, or (ii) less than the exercise price of the put written, provided
the difference is maintained by the Fund in cash or cash equivalents in a
segregated account with its custodian.
If an option written by the Fund expires, the Fund will realize a capital gain
equal to the premium received at the time the option was written. If an option
purchased by the Fund expires unexercised, the Fund will realize a capital loss
equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out by
an offsetting purchase or sale of an option of the same series (type, exchange,
index, exercise price, and expiration). There can be no assurance, however, that
a closing purchase or sale transaction can be effected when the Fund desires.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
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FOREIGN SECURITIES. The Fund has an unlimited right to purchase securities in
any foreign country, developed or developing, if they are listed on a stock
exchange, as well as a limited right to purchase such securities if they are
unlisted. Investors should consider carefully the substantial risks involved in
securities of companies and governments of foreign nations, which are in
addition to the usual risks inherent in domestic investments.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or financial
reporting standards, and auditing practices and requirements may not be
comparable to those applicable to U.S. companies. The Fund, therefore, may
encounter difficulty in obtaining market quotations for purposes of valuing its
portfolio and calculating its Net Asset Value. Foreign markets have
substantially less volume than the NYSE and securities of some foreign companies
are less liquid and more volatile than securities of comparable U.S. companies.
Although the Fund may invest up to 15% of its total assets in unlisted foreign
securities, including up to 10% of its total assets in securities with a limited
trading market, in the opinion of management such securities with a limited
trading market do not present a significant liquidity problem. Commission rates
in foreign countries, which are generally fixed rather than subject to
negotiation as in the U.S., are likely to be higher. In many foreign countries
there is less government supervision and regulation of stock exchanges, brokers,
and listed companies than in the U.S.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries.
In addition, many countries in which the Fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Investments in Eastern European countries may involve risks of nationalization,
expropriation and confiscatory taxation. The Communist governments of a number
of Eastern European countries expropriated large amounts of private property in
the past, in many cases without adequate compensation, and there can be no
assurance that such expropriation will not occur in the future. In the event of
such expropriation, the Fund could lose a substantial portion of any investments
it has made in the affected countries. Further, no accounting standards exist in
certain Eastern European countries. Finally, even though certain Eastern
European currencies may be convertible into U.S. dollars, the conversion rates
may be artificial to the actual market values and may be adverse to Fund
shareholders.
Investing in Russian companies involves a high degree of risk and special
considerations not typically associated with investing in the U.S. securities
markets, and should be considered highly speculative. Such risks include,
together with Russia's continuing political and economic instability and the
slow-paced development of its market economy, the following: (a) delays in
settling portfolio transactions and risk of loss arising out of Russia's system
of share registration and custody; (b) the risk that it may be impossible or
more difficult than in other countries to obtain and/or enforce a judgment; (c)
pervasiveness of corruption, insider trading, and crime in the Russian economic
system; (d) currency exchange rate volatility and the lack of available currency
hedging instruments; (e) higher rates of inflation (including the risk of social
unrest associated with periods of hyper-inflation); (f) controls on foreign
investment and local practices disfavoring foreign investors and limitations on
repatriation of invested capital, profits and dividends, and on the Fund's
ability to exchange local currencies for U.S. dollars; (g) the risk that the
government of Russia or other executive or legislative bodies may decide not to
continue to support the economic reform programs implemented since the
dissolution of the Soviet Union and could follow radically different political
and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, a return to the centrally planned economy
that existed prior to the dissolution of the Soviet Union, or the
nationalization of privatized enterprises; (h) the risks of investing in
securities with substantially less liquidity and in issuers having significantly
smaller market capitalizations, when compared to securities and issuers in more
developed markets; (i) the difficulties associated in obtaining accurate market
valuations of many Russian securities, based partly on the limited amount of
publicly available information; (j) the financial condition of Russian
companies, including large amounts of inter-company debt which may create a
payments crisis on a national scale; (k) dependency on exports and the
corresponding importance of international trade; (l) the risk that the Russian
tax system will not be reformed to prevent inconsistent, retroactive and/or
exorbitant taxation or, in the alternative, the risk that a reformed tax system
may result in the inconsistent and unpredictable enforcement of the new tax
laws; (m) possible difficulty in identifying a purchaser of securities held by
the Fund due to the underdeveloped nature of the securities markets; (n) the
possibility that pending legislation could restrict the levels of foreign
investment in certain industries, thereby limiting the number of investment
opportunities in Russia; (o) the risk that pending legislation would confer to
Russian courts the exclusive jurisdiction to resolve disputes between foreign
investors and the Russian government, instead of bringing such disputes before
an internationally-accepted third-country arbitrator; and (p) the difficulty in
obtaining information about the financial condition of Russian issuers, in light
of the different disclosure and accounting standards applicable to Russian
companies.
There is little long-term historical data on Russian securities markets because
they are relatively new and a substantial proportion of securities transactions
in Russia are privately negotiated outside of stock exchanges. Because of the
recent formation of the securities markets as well as the underdeveloped state
of the banking and telecommunications systems, settlement, clearing and
registration of securities transactions are subject to significant risks.
Ownership of shares (except where shares are held through depositories that meet
the requirements of the 1940 Act) is defined according to entries in the
company's share register and normally evidenced by extracts from the register or
by formal share certificates. However, there is no central registration system
for shareholders and these services are carried out by the companies themselves
or by registrars located throughout Russia. These registrars are not necessarily
subject to effective state supervision nor are they licensed with any
governmental entity and it is possible for the Fund to lose its registration
through fraud, negligence or even mere oversight. While the Fund will endeavor
to ensure that its interest continues to be appropriately recorded either itself
or through a custodian or other agent inspecting the share register and by
obtaining extracts of share registers through regular confirmations, these
extracts have no legal enforceability and it is possible that subsequent illegal
amendment or other fraudulent act may deprive the Fund of its ownership rights
or improperly dilute its interests. In addition, while applicable Russian
regulations impose liability on registrars for losses resulting from their
errors, it may be difficult for the Fund to enforce any rights it may have
against the registrar or issuer of the securities in the event of loss of share
registration. Furthermore, although a Russian public enterprise with more than
500 shareholders is required by law to contract out the maintenance of its
shareholder register to an independent entity that meets certain criteria, in
practice this regulation has not always been strictly enforced. Because of this
lack of independence, management of a company may be able to exert considerable
influence over who can purchase and sell the company's shares by illegally
instructing the registrar to refuse to record transactions in the share
register. In addition, so-called "financial-industrial groups" have emerged in
recent years that seek to deter outside investors from interfering in the
management of companies they control. These practices may prevent the Fund from
investing in the securities of certain Russian companies deemed suitable by
Global Advisors. Further, this also could cause a delay in the sale of Russian
company securities by the Fund if a potential purchaser is deemed unsuitable,
which may expose the Fund to potential loss on the investment.
The Fund's management endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when the Fund changes
investments from one country to another or when proceeds of the sale of shares
in U.S. dollars are used for the purchase of securities in foreign countries.
Also, some countries may adopt policies which would prevent the Fund from
transferring cash out of the country or withhold portions of interest and
dividends at the source. There is the possibility of cessation of trading on
national exchanges, expropriation, nationalization or confiscatory taxation,
withholding and other foreign taxes on income or other amounts, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), default in foreign government securities, political or social
instability, or diplomatic developments that could affect investments in
securities of issuers in foreign nations.
The Fund may be affected either unfavorably or favorably by fluctuations in the
relative rates of exchange between the currencies of different nations, by
exchange control regulations and by indigenous economic and political
developments. Some countries in which the Fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Further,
certain currencies may not be internationally traded.
Certain of these currencies have experienced a steady devaluation relative to
the U.S. dollar. Any devaluations in the currencies in which the Fund's
portfolio securities are denominated may have a detrimental impact on the Fund.
Through the Fund's flexible policy, management endeavors to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where, from time to time, it places the Fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove profitable
and others may not. No assurance can be given that profits, if any, will exceed
losses.
The Board considers at least annually the likelihood of the imposition by any
foreign government of exchange control restrictions which would affect the
liquidity of the Fund's assets maintained with custodians in foreign countries,
as well as the degree of risk from political acts of foreign governments to
which such assets may be exposed. The Board also considers the degree of risk
involved through the holding of portfolio securities in domestic and foreign
securities depositories (see "Investment Management and Other Services --
Shareholder Servicing Agent and Custodian"). However, in the absence of willful
misfeasance, bad faith or gross negligence on the part of Global Advisors, any
losses resulting from the holding of the Fund's portfolio securities in foreign
countries and/or with securities depositories will be at the risk of the
shareholders. No assurance can be given that the Board's appraisal of the risks
will always be correct or that such exchange control restrictions or political
acts of foreign governments might not occur.
LOWER-RATED SECURITIES. Bonds rated Caa by Moody's are of poor standing. Such
securities may be in default or there may be present elements of danger with
respect to principal or interest. Bonds rated CCC by S&P are regarded, on
balance, as speculative. Such securities will have some quality and protective
characteristics, but these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
Although they may offer higher yields than do higher rated securities, low rated
and unrated debt securities generally involve greater volatility of price and
risk to principal and income, including the possibility of default by, or
bankruptcy of, the issuers of the securities. 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
goal may, to the extent of investment in low rated debt securities, be more
dependent upon such creditworthiness analysis than would be the case if the Fund
were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of low rated debt securities have been found to be less sensitive to
interest rate changes than higher rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. A projection of
an economic downturn or of a period of rising interest rates, for example, could
cause a decline in low rated debt securities prices because the advent of a
recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of low
rated debt securities defaults, the Fund may incur additional expenses to seek
recovery.
The Fund may accrue and report interest on high yield bonds structured as zero
coupon bonds or pay-in-kind securities as income even though it receives no cash
interest until the security's maturity or payment date. In order to qualify for
beneficial tax treatment afforded regulated investment companies, the Fund must
distribute substantially all of its income to shareholders (see "Additional
Information on Distributions and Taxes"). Thus, the Fund may have to dispose of
its portfolio securities under disadvantageous circumstances to generate cash in
order to satisfy the distribution requirement.
DERIVATIVE SECURITIES. There are additional risks involved in stock index
futures transactions. These risks relate to the Fund's ability to reduce or
eliminate its futures positions, which will depend upon the liquidity of the
secondary markets for such futures. The Fund intends to purchase or sell futures
only on exchanges or boards of trade where there appears to be an active
secondary market, but there is no assurance that a liquid secondary market will
exist for any particular contract or at any particular time. Use of stock index
futures for hedging may involve risks because of imperfect correlations between
movements in the prices of the stock index futures on the one hand and movements
in the prices of the securities being hedged or of the underlying stock index on
the other. Successful use of stock index futures by the Fund for hedging
purposes also depends upon Global Advisors' 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.
INVESTMENT RESTRICTIONS
- -------------------------------------------------------------------------------
The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. The Fund MAY NOT:
1. Invest in real estate or mortgages on real estate (although the Fund may
invest in marketable securities secured by real estate or interests
therein or issued by companies or investment trusts which invest in real
estate or interests therein); invest in 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, invest in closed-end
investment companies.
2. Purchase or retain securities of any company in which directors or
officers of the Fund or of Global Advisors, individually owning more than
1/2 of 1% of the securities of such company, in the aggregate own more
than 5% of the securities of such company.
3. Purchase more than 10% of any class of securities of any one company,
including more than 10% of its outstanding voting securities, or invest
in any company for the purpose of exercising control or management.
4. Act as an underwriter; issue senior securities; purchase on margin or
sell short; write, buy or sell puts, calls, straddles or spreads (but the
Fund may make margin payments in connection with, and purchase and sell,
stock index futures contracts and options on securities indices).
5. Loan money, apart from the purchase of a portion of an issue of publicly
distributed bonds, debentures, notes and other evidences of indebtedness,
although the Fund may buy U.S. government obligations with a simultaneous
agreement by the seller to repurchase them within no more than seven days
at the original purchase price plus accrued interest.
6. Borrow money for any purpose other than redeeming its shares or
purchasing its shares for cancellation, and then only as a temporary
measure 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 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 NYSE or the 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 U.S. or foreign securities
exchange, including no more than 10% of its total assets (including
warrants) which may be invested in securities with a limited trading
market. The Fund's position in the latter type of securities may be of
such size as to affect adversely their liquidity and marketability and
the Fund may not be able to dispose of its holdings in these securities
at the current market price.
10. Invest more than 25% of the Fund's total assets in a single industry.
11. Invest in "letter stocks" or securities on which there are sales
restrictions under a purchase agreement.
12. Participate on a joint or a joint and several basis in any trading
account in securities. (See "How Does the Fund Buy Securities for Its
Portfolio?" as to transactions in the same securities for the Fund,
other clients and/or other mutual funds within the Franklin Templeton
Group of Funds.)
The Fund may also be subject to investment limitations imposed by foreign
jurisdictions in which the Fund sells its shares.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the Fund, the Fund may receive stock, real estate, or other
investments that the Fund would not, or could not, buy. In this case, the Fund
intends to dispose of the investment as soon as practicable while maximizing the
return to shareholders.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions. 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).
OFFICERS AND DIRECTORS
- -------------------------------------------------------------------------------
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
<TABLE>
<CAPTION>
Positions and
Offices
Name, Address and Age with the Fund Principal Occupation During the Past Five Years
<S> <C> <C>
- ------------------------- ------------------- -------------------------------------------------
HARRIS J. ASHTON Director Chairman of the board, president and chief
Metro Center executive officer of General Host Corporation
1 Station Place (nursery and craft centers); director of RBC
Stamford, Connecticut Holdings Inc. (a bank holding company) and
Age 65 Bar-S Foods (a meat packing company); and
director or trustee of 52 of the investment
companies in the Franklin Templeton Group of
Funds.
- ------------------------- -------------------- ------------------------------------------------------
* NICHOLAS F. BRADY Director Chairman of Templeton Emerging Markets Invest-
The Bullitt House ment Trust PLC; chairman of Templeton Latin
102 East Dover Street America Investment Trust PLC; chairman of Darby
Easton, Maryland Overseas Investments, Ltd. and Darby Emerging
Age 67 Markets Investments LDC (investment firms)
(1994- present); chairman and director of
Templeton Central and Eastern European
Investment Company; director of the Templeton
Global Strategy Funds, Amerada Hess
Corporation, Christiana Companies, and the H.J.
Heinz Company; formerly, Secretary of the
United States Department of the Treasury (1988-
1993) and chairman of the board of Dillon, Read
& Co., Inc. (investment banking) prior to 1988;
and director or trustee of 23 of the investment
companies in the Franklin Templeton Group of
Funds.
- ------------------------- -------------------- ------------------------------------------------------
S. JOSEPH FORTUNATO Director Member of the law firm of Pitney, Hardin, Kipp
200 Campus Drive & Szuch; director of General Host Corporation
Florham Park, New Jersey (nursery and craft centers); and director or
Age 65 trustee of 54 of the investment companies in
the Franklin Templeton Group of Funds.
- ------------------------- -------------------- ------------------------------------------------------
JOHN Wm. GALBRAITH Director President of Galbraith Properties, Inc.
360 Central Avenue (personal investment company); director of Gulf
Suite 1300 West Banks, Inc. (bank holding company)
St. Petersburg, Florida (1995-present); formerly, director of
Age 76 Mercantile Bank (1991-1995), vice chairman of
Templeton, Galbraith & Hansberger Ltd.
(1986-1992) and chairman of Templeton Funds
Management, Inc. (1974-1991); and director or
trustee of 22 of the investment companies in
the Franklin Templeton Group of Funds.
- ------------------------- -------------------- ------------------------------------------------------
ANDREW H. HINES, JR. Director Consultant for the Triangle Consulting Group;
150 Second Avenue N. executive-in-residence of Eckerd College
St. Petersburg, Florida (1991-present); formerly, chairman of the board
Age 74 and chief executive officer of Florida Progress
Corporation (1982-1990) and director of various
of its subsidiaries; and director or trustee of
24 of the investment companies in the Franklin
Templeton Group of Funds.
- ------------------------- ------------------- -----------------------------
* CHARLES B. JOHNSON Chairman of President, chief executive officer and director
777 Mariners Island Blvd. the Board and of Franklin Resources, Inc.; chairman of the
San Mateo, California Vice President board and director of Franklin Advisers, Inc.,
Age 64 Franklin Investment Advisory Services, Inc.,
Franklin Advisory Services, Inc. and Franklin
Templeton Distributors, Inc.; director of
Franklin/Templeton Investor Services, Inc.,
Franklin Templeton Services, Inc. and General
Host Corporation (nursery and craft centers);
and officer and/or director or trustee, as the
case may be, of most of the other subsidiaries
of Franklin Resources, Inc. and 53 of the
investment companies in the Franklin Templeton
Group of Funds.
- ------------------------- ------------------- -------------------------------------------------------
BETTY P. KRAHMER Director Director or trustee of various civic
2201 Kentmere Parkway associations; formerly, economic analyst, U.S.
Wilmington, Delaware government; and director or trustee of 23 of
Age 68 the investment companies in the Franklin
Templeton Group of Funds.
- ------------------------- -------------------- ------------------------------------------------------
GORDON S. MACKLIN Director Chairman of White River Corporation (financial
8212 Burning Tree Road services); director of Fund American
Bethesda, Maryland Enterprises Holdings, Inc., MCI Communications
Age 69 Corporation, CCC Information Services Group,
Inc. (information services), MedImmune, Inc.
(biotechnology), Shoppers Express (home
shopping) and Spacehab, Inc. (aerospace
services); formerly, chairman of Hambrecht and
Quist Group, director of H&Q Healthcare
Investors and president of the National
Association of Securities Dealers, Inc.; and
director or trustee of 51 of the investment
companies in the Franklin Templeton Group of
Funds.
- ------------------------- --------------------- -----------------------------------------------------
FRED R. MILLSAPS Director Manager of personal investments (1978-present);
2665 N.E. 37th Drive director of various business and nonprofit
Fort Lauderdale, Florida organizations; formerly, chairman and chief
Age 68 executive officer of Landmark Banking
Corporation (1969-1978), financial vice
president of Florida Power and Light
(1965-1969), and vice president of the Federal
Reserve Bank of Atlanta (1958-1965); and
director or trustee of 24 of the investment
companies in the Franklin Templeton Group of
Funds.
- -------------------------- -------------------- -----------------------------------------------------
MARK G. HOLOWESKO President President and director of Templeton Global
Lyford Cay Advisors Limited; chief investment officer of
Nassau, Bahamas global equity research for Templeton Worldwide,
Age 37 Inc.; formerly, investment administrator with
RoyWest Trust Corporation (Bahamas) Limited
(1984-1985); and officer of 23 of the
investment companies in the Franklin Templeton
Group of Funds.
- -------------------------- ------------------- ------------------------------------------------------
RUPERT H. JOHNSON, JR. Vice President Executive vice president and director of
777 Mariners Island Blvd. Franklin Resources, Inc. and Franklin Templeton
San Mateo, California Distributors, Inc.; president and director of
Age 57 Franklin Advisers, Inc.; senior vice president
and director of Franklin Advisory Services,
Inc. and Franklin Investment Advisory Services,
Inc.; director of Franklin/Templeton Investor
Services, Inc.; and officer and/or director or
trustee, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and 57
of the investment companies in the Franklin
Templeton Group of Funds.
- ------------------------- ---------------------- ----------------------------------------------------
HARMON E. BURNS Vice President Executive vice president, secretary and
777 Mariners Island Blvd. director of Franklin Resources, Inc.; executive
San Mateo, California vice president and director of Franklin
Age 52 Templeton Distributors, Inc. and Franklin
Templeton Services, Inc.; executive vice
president of Franklin Advisers, Inc.; director
of Franklin/Templeton Investor Services, Inc.;
and officer and/or director or trustee, as the
case may be, of most of the other subsidiaries
of Franklin Resources, Inc. and 57 of the
investment companies in the Franklin Templeton
Group of Funds.
- ------------------------- ----------------------- ---------------------------------------------------
CHARLES E. JOHNSON Vice President Senior vice president and director of Franklin
500 East Broward Blvd. Resources, Inc.; senior vice president of
Fort Lauderdale, Florida Franklin Templeton Distributors, Inc.;
Age 41 president and director of Templeton Worldwide,
Inc.; president, chief executive officer, chief
investment officer and director of Franklin
Institutional Services Corporation; chairman
and director of Templeton Investment Counsel,
Inc.; vice president of Franklin Advisers,
Inc.; officer and/or director of some of the
other subsidiaries of Franklin Resources, Inc.;
and officer and/or director or trustee, as the
case may be, of 37 of the investment companies
in the Franklin Templeton Group of Funds.
- ------------------------- ---------------------- ----------------------------------------------------
DEBORAH R. GATZEK Vice President Senior vice president and general counsel of
777 Mariners Island Blvd. Franklin Resources, Inc.; senior vice president
San Mateo, California of Franklin Templeton Services, Inc. and
Age 49 Franklin Templeton Distributors, Inc.; vice
president of Franklin Advisers, Inc. and
Franklin Advisory Services, Inc.; vice
president, chief legal officer and chief
operating officer of Franklin Investment
Advisory Services, Inc.; and officer of 57 of
the investment companies in the Franklin
Templeton Group of Funds.
- --------------------------- -------------------- ---------------------------------------------------
MARTIN L. FLANAGAN Vice President Senior vice president and chief financial
777 Mariners Island Blvd. officer of Franklin Resources, Inc.; director
San Mateo, California and executive vice president of Templeton
Age 37 Worldwide, Inc.; director, executive vice
president and chief operating officer of
Templeton Investment Counsel, Inc.; senior vice
president and treasurer of Franklin Advisers,
Inc.; treasurer of Franklin Advisory Services,
Inc.; treasurer and chief financial officer of
Franklin Investment Advisory Services, Inc.;
president of Franklin Templeton Services, Inc.;
senior vice president of Franklin/Templeton
Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of 58
of the investment companies in the Franklin
Templeton Group of Funds.
- --------------------------- -------------------- ----------------------------------------------------
JOHN R. KAY Vice President Vice president and treasurer of Templeton
500 East Broward Blvd. Worldwide, Inc.; assistant vice president of
Fort Lauderdale, Florida Franklin Templeton Distributors, Inc.;
Age 57 formerly, vice president and controller of the
Keystone Group, Inc.; and officer of 27 of the
investment companies in the Franklin Templeton
Group of Funds.
- -------------------------- --------------------- ----------------------------------------------------
ELIZABETH M. KNOBLOCK Vice President- General counsel, secretary and a senior vice
500 East Broward Blvd. Compliance president of Templeton Investment Counsel,
Fort Lauderdale, Florida Inc.; senior vice president of Templeton Global
Age 42 Investors, Inc.; formerly, vice president and
associate general counsel of Kidder Peabody &
Co. Inc. (1989-1990), assistant general counsel
of Gruntal & Co., Inc. (1988), vice president
and associate general counsel of Shearson
Lehman Hutton Inc. (1988), vice president and
assistant general counsel of E.F. Hutton & Co.
Inc. (1986-1988), and special counsel of the
Division of Investment Management of the U.S.
Securities and Exchange Commission (1984- 1986);
and officer of 23 of the investment companies
in the Franklin Templeton Group of Funds.
- ------------------------- ---------------------- ----------------------------------------------------
JAMES R. BAIO Treasurer Certified public accountant; treasurer of
500 East Broward Blvd. Franklin Mutual Advisers, Inc.; senior vice
Fort Lauderdale, Florida president of Templeton Worldwide, Inc.,
Age 43 Templeton Global Investors, Inc. and Templeton
Funds Trust Company; formerly, senior tax
manager with Ernst & Young (certified public
accountants) (1977-1989); and treasurer of 24
of the investment companies in the Franklin
Templeton Group of Funds.
- ------------------------- --------------------- -----------------------------------------------------
BARBARA J. GREEN Secretary Senior vice president of Templeton Worldwide,
500 East Broward Blvd. Inc. and an officer of other subsidiaries of
Fort Lauderdale, Florida Templeton Worldwide, Inc.; senior vice
Age 50 president of Templeton Global Investors, Inc.;
formerly, deputy director of the Division of
Investment Management, executive assistant and
senior advisor to the chairman, counsellor to
the chairman, special counsel and attorney
fellow, U.S. Securities and Exchange Commission
(1986-1995), attorney, Rogers & Wells, and
judicial clerk, U.S. District Court (District
of Massachusetts); and secretary of 23 of the
investment companies in the Franklin Templeton
Group of Funds.
</TABLE>
*Nicholas F. Brady and Charles B. Johnson are "interested persons" of the Fund
under the 1940 Act, which limits the percentage of interested persons that can
comprise a fund's board. Charles B. Johnson is an interested person due to his
ownership interest in Resources. Mr. Brady's status as an interested person
results from his business affiliations with Resources and Global Advisors. Mr.
Brady and Resources are both limited partners of Darby Overseas Partners, L.P.
("Darby Overseas"). Mr. Brady established Darby Overseas in February 1994, and
is Chairman and shareholder of the corporate general partner of Darby Overseas.
In addition, Darby Overseas and Global Advisors are limited partners of Darby
Emerging Markets Fund, L.P. The remaining Board members of the Fund are not
interested persons.
The table above shows the officers and Board members who are affiliated with
Distributors and Global Advisors. Nonaffiliated members of the Board and Mr.
Brady are currently paid an annual retainer and/or fees for attendance at Board
and committee meetings. Currently, the Fund pays the nonaffiliated Board members
and Mr. Brady an annual retainer of $12,500, a fee of $950 per Board meeting,
and its portion of a flat fee of $2,000 for each audit committee meeting and/or
nominating and compensation committee meeting attended. As shown above, the
nonaffiliated Board members also serve as directors or trustees of other
investment companies in the Franklin Templeton Group of Funds. They may receive
fees from these funds for their services. The following table provides the total
fees paid to nonaffiliated Board members and Mr. Brady by the Fund and by other
funds in the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
TOTAL FEES NUMBER OF BOARDS IN
TOTAL FEES RECEIVED FROM THE THE FRANKLIN TEMPLETON
RECEIVED FROM FRANKLIN TEMPLETON GROUP OF FUNDS ON
NAME THE FUND* GROUP OF FUNDS** WHICH EACH SERVES***
------------------- -------------- ------------------- -----------------------
<S> <C> <C> <C>
Harris J. Ashton... $ 16,300 $ 339,842 52
Nicholas F. Brady.. 16,300 119,675 23
S. Joseph Fortunato. 16,300 356,762 54
John Wm. Galbraith. 16,886 117,675 22
Andrew H. Hines,Jr. 16,886 144,175 24
Betty P. Krahmer... 16,300 119,675 23
Gordon S. Macklin.. 16,300 332,492 51
Fred R. Millsaps... 16,886 144,175 24
</TABLE>
* For the fiscal year ended August 31, 1997.
** For the calendar year ended December 31, 1997.
*** We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the Board members are responsible. The Franklin Templeton Group of
Funds currently includes 59 registered investment companies, with
approximately 172 U.S. based funds or series.
Nonaffiliated members of the Board and Mr. Brady are reimbursed for expenses
incurred in connection with attending board meetings, paid pro rata by each fund
in the Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or Board member received any other compensation, including
pension or retirement benefits, directly or indirectly from the Fund or other
funds in the Franklin Templeton Group of Funds. Certain officers or Board
members who are shareholders of Resources may be deemed to receive indirect
remuneration by virtue of their participation, if any, in the fees paid to its
subsidiaries.
As of November 26, 1997, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately 304,205
Class I shares and 48,751 Advisor Class shares, or 0.05% and 3.10%, respectively
of the total outstanding Class I and Advisor Class shares of the Fund. Many of
the Board members also own shares in other funds in the Franklin Templeton Group
of Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Charles E. Johnson.
INVESTMENT MANAGEMENT AND
OTHER SERVICES
- -------------------------------------------------------------------------------
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
Global Advisors. Global Advisors provides investment research and portfolio
management services, including the selection of securities for the Fund to buy,
hold or sell and the selection of brokers through whom the Fund's portfolio
transactions are executed. Global Advisors renders its services to the Fund from
outside the U.S. and its activities are subject to the review and supervision of
the Board to whom Global Advisors renders periodic reports of the Fund's
investment activities. Global Advisors and its officers, directors and employees
are covered by fidelity insurance for the protection of the Fund.
Global Advisors and its affiliates act as investment manager to numerous other
investment companies and accounts. Global Advisors may give advice and take
action with respect to any of the other funds it manages, or for its own
account, that may differ from action taken by Global Advisors on behalf of the
Fund. Similarly, with respect to the Fund, Global Advisors is not obligated to
recommend, buy or sell, or to refrain from recommending, buying or selling any
security that Global Advisors and access persons, as defined by the 1940 Act,
may buy or sell for its or their own account or for the accounts of any other
fund. Global Advisors is not obligated to refrain from investing in securities
held by the Fund or other funds that it manages. Of course, any transactions for
the accounts of Global Advisors and other access persons will be made in
compliance with the Fund's Code of Ethics. Please see "Miscellaneous Information
- -- Summary of Code of Ethics."
MANAGEMENT FEES. Under its management agreement, the Fund pays Global Advisors a
monthly management fee equal to an annual rate of 0.75% of the first
$200,000,000 of the Fund's average daily net assets during the month preceding
each payment, reduced to a fee of 0.675% of such average 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 pays its proportionate share of the management
fee.
For the fiscal years ended August 31, 1997, 1996 and 1995, management fees
totaling $65,767,491, $48,379,594 and $37,081,820, respectively, were paid to
Global Advisors.
MANAGEMENT AGREEMENT. The management agreement is in effect until December 31,
1998. It may continue in effect for successive annual periods if its continuance
is specifically approved at least annually by a vote of the Board or by a vote
of the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Board members who are not parties to the
management agreement or interested persons of any such party (other than as
members of the Board), cast in person at a meeting called for that purpose. The
management agreement may be terminated without penalty at any time by the Board
or by a vote of the holders of a majority of the Fund's outstanding voting
securities, or by Global Advisors on 60 days' written notice, and will
automatically terminate in the event of its assignment, as defined in the 1940
Act.
ADMINISTRATIVE SERVICES. Since October 1, 1996, FT Services has provided certain
administrative services and facilities for the Fund. Prior to that date,
Templeton Global Investors, Inc. provided the same services to the Fund. These
include preparing and maintaining books, records, and tax and financial reports,
and monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under its administration agreement, the Fund pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
During the fiscal years ended August 31, 1997, 1996 and 1995, the Fund paid
administration fees totaling $8,655,311, $6,481,909 and $5,069,519,
respectively.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these services
per benefit plan participant Fund account per year may not exceed the per
account fee payable by the Fund to Investor Services in connection with
maintaining shareholder accounts.
CUSTODIAN. The Chase Manhattan Bank, at its principal office at MetroTech
Center, Brooklyn, New York 11245, and at the offices of its branches and
agencies throughout the world, acts as custodian of the Fund's assets. The
custodian does not participate in decisions relating to the purchase and sale of
portfolio securities.
AUDITORS. McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, New York 10017,
are the Fund's independent auditors. During the fiscal year ended August 31,
1997, their auditing services consisted of rendering an opinion on the financial
statements of the Fund included in the Fund's Annual Report to Shareholders for
the fiscal year ended August 31, 1997, and review of the Fund's filings with the
SEC.
HOW DOES THE FUND BUY SECURITIES
FOR ITS PORTFOLIO?
- -------------------------------------------------------------------------------
Global Advisors selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the Board may give.
When placing a portfolio transaction, Global Advisors seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid by the Fund is
negotiated between Global Advisors and the broker executing the transaction. The
determination and evaluation of the reasonableness of the brokerage commissions
paid are based to a large degree on the professional opinions of the persons
responsible for placement and review of the transactions. These opinions are
based on the experience of these individuals in the securities industry and
information available to them about the level of commissions being paid by other
institutional investors of comparable size. Global Advisors will ordinarily
place orders to buy and sell over-the-counter securities on a principal rather
than agency basis with a principal market maker unless, in the opinion of Global
Advisors, a better price and execution can otherwise be obtained. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask price.
Global Advisors may pay certain brokers commissions that are higher than those
another broker may charge, if Global Advisors determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and research
services it receives. This may be viewed in terms of either the particular
transaction or Global Advisors' overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to Global Advisors include, among others, supplying information about particular
companies, markets, countries, or local, regional, national or transnational
economies, statistical data, quotations and other securities pricing
information, and other information that provides lawful and appropriate
assistance to Global Advisors in carrying out its investment advisory
responsibilities. These services may not always directly benefit the Fund. They
must, however, be of value to Global Advisors in carrying out its overall
responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services Global Advisors receives from dealers effecting transactions
in portfolio securities. The allocation of transactions in order to obtain
additional research services permits Global Advisors to supplement its own
research and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, Global Advisors and its affiliates may use this
research and data in their investment advisory capacities with other clients. If
the Fund's officers are satisfied that the best execution is obtained, the sale
of Fund shares, as well as shares of other funds in the Franklin Templeton Group
of Funds, may also be considered a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender- offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to Global Advisors will be reduced by the amount of any fees
received by Distributors in cash, less any costs and expenses incurred in
connection with the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Global Advisors are considered at or about
the same time, transactions in these securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all by
Global Advisors, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. In some cases this procedure could
have a detrimental effect on the price or volume of the security so far as the
Fund is concerned. In other cases it is possible that the ability to participate
in volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
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.
During the fiscal years ended August 31, 1997, 1996 and 1995, the Fund paid
brokerage commissions totaling $15,953,126, $7,918,000 and $8,559,000,
respectively.
As of August 31, 1997, the Fund owned securities issued by Merrill Lynch & Co.,
Inc. valued in the aggregate at $88,658,400. Except as noted, the Fund did not
own any other securities issued by its regular broker-dealers as of the end of
the fiscal year.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
- -------------------------------------------------------------------------------
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities Dealers may at times receive the entire
sales charge. A Securities Dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? --
Purchase Price of Fund Shares" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.
Class I shares of the Fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
SALES
SIZE OF PURCHASE-U.S. DOLLARS CHARGE
--------------------------------- --------
Under $30,000.................... 3.0%
$30,000 but less than $50,000.... 2.5%
$50,000 but less than $100,000... 2.0%
$100,000 but less than $200,000.. 1.5%
$200,000 but less than $400,000.. 1.0%
$400,000 or more................. 0%
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares of $1 million or more: 1% on
sales of $1 million to $2 million, plus 0.80% on sales over $2 million to $3
million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on sales
over $50 million to $100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases of Class I shares by certain retirement plans without a front-end
sales charge, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on sales
over $3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million. Distributors may make these
payments in the form of contingent advance payments, which may be recovered from
the Securities Dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy Class
I shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds acquired more than 90 days before the Letter is filed will be counted
towards completion of the Letter, but they will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions you make during the 13
month period, except in the case of certain retirement plans, will be subtracted
from the amount of the purchases for purposes of determining whether the terms
of the Letter have been completed. If the Letter is not completed within the 13
month period, there will be an upward adjustment of the sales charge, depending
on the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute a
Letter before a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the sales
charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the Fund registered in
your name until you fulfill the Letter. This policy of reserving shares does not
apply to certain retirement plans. If total purchases, less redemptions, equal
the amount specified under the Letter, the reserved shares will be deposited to
an account in your name or delivered to you or as you direct. If total
purchases, less redemptions, exceed the amount specified under the Letter and is
an amount that would qualify for a further quantity discount, a retroactive
price adjustment will be made by Distributors and the Securities Dealer through
whom purchases were made pursuant to the Letter (to reflect such further
quantity discount) on purchases made within 90 days before and on those made
after filing the Letter. The resulting difference in Offering Price will be
applied to the purchase of additional shares at the Offering Price applicable to
a single purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified under the
Letter, you will remit to Distributors an amount equal to the difference in the
dollar amount of sales charge actually paid and the amount of sales charge that
would have applied to the aggregate purchases if the total of the purchases had
been made at a single time. Upon remittance, the reserved shares held for your
account will be deposited to an account in your name or delivered to you or as
you direct. If within 20 days after written request the difference in sales
charge is not paid, the redemption of an appropriate number of reserved shares
to realize the difference will be made. In the event of a total redemption of
the account before fulfillment of the Letter, the additional sales charge due
will be deducted from the proceeds of the redemption, and the balance will be
forwarded to you.
If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These 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 these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will be
purchased at the Net Asset Value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment goal exist
immediately. This money will then be withdrawn from the short-term, money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be made
from the redemption of an equivalent amount of shares in your account, generally
on the 25th day of the month in which a payment is scheduled. If the 25th falls
on a weekend or holiday, we will process the redemption on the next business
day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions that
maintain omnibus accounts with the Fund on behalf of numerous beneficial owners
for recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, the Fund may reimburse Investor
Services an amount not to exceed the per account fee that the Fund normally pays
Investor Services. These financial institutions may also charge a fee for their
services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
- -------------------------------------------------------------------------------
We calculate the Net Asset Value per share as of the scheduled close of the
NYSE, generally 4:00 p.m. Eastern time, each day that the NYSE is open for
trading. As of the date of this SAI, the Fund is informed that the NYSE observes
the following holidays: New Year's Day, Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securi- ties exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by Global Advisors.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
of the NYSE on each day that the NYSE is open. Trading in European or Far
Eastern securities generally, or in a particular country or countries, may not
take place on every NYSE business day. Furthermore, trading takes place in
various foreign markets on days that are not business days for the NYSE and on
which the Net Asset Value of each class is not calculated. Thus, the calculation
of the Net Asset Value of each class does not take place contemporaneously with
the determination of the prices of many of the portfolio securities used in the
calculation and, if events materially affecting the values of these foreign
securities occur, the securities will be valued at fair value as determined by
management and approved in good faith by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the Net Asset Value of each class is determined as of such times. Occasionally,
events affecting the values of these securities may occur between the times at
which they are determined and the scheduled close of the NYSE that will not be
reflected in the computation of the Net Asset Value. If events materially
affecting the values of these securities occur during this period, the
securities will be valued at their fair value as determined in good faith by the
Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES
- ------------------------------------------------------------------------------
DISTRIBUTIONS
1. DISTRIBUTIONS OF NET INVESTMENT INCOME. The Fund receives income generally in
the form of dividends, interest, original issue, market and acquisition
discount, and other income derived from its investments. This income, less
expenses incurred in the operation of the Fund, constitutes its net investment
income from which dividends may be paid to you. Any distributions by the Fund
from such income will be taxable to you as ordinary income, whether you take
them in cash or in additional shares.
2. DISTRIBUTIONS OF CAPITAL GAINS. The Fund may derive capital gains and losses
in connection with sales of its portfolio securities. Distributions derived from
the excess of net short-term capital gain over net long-term capital loss will
be taxable to you as ordinary income. Distributions paid from long-term capital
gains realized by the Fund will be taxable to you as long-term capital gain,
regardless of how long you have held your shares in the Fund. Any net short-term
or long-term capital gains realized by the Fund (net of any capital loss
carryovers) generally will be distributed once each year, and may be distributed
more frequently, if necessary, in order to reduce or eliminate federal excise or
income taxes on the Fund.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), the Fund is required to
report the capital gain distributions paid to you from gains realized on the
sale of portfolio securities using the following categories:
"28% RATE GAINS": gains resulting from securities sold by the Fund after
July 28, 1997 that were held for more than one year but not more than 18
months, and securities sold by the Fund before May 7, 1997 that were held
for more than one year. These gains will be taxable to individual investors
at a maximum rate of 28%.
"20% RATE GAINS": gains resulting from securities sold by the Fund after
July 28, 1997 that were held for more than 18 months, and under a
transitional rule, securities sold by the Fund between May 7 and July 28,
1997 (inclusive) that were held for more than one year. These gains will be
taxable to individual investors at a maximum rate of 20% for individual
investors in the 28% or higher federal income tax brackets, and at a maximum
rate of 10% for investors in the 15% federal income tax bracket.
The Act also provides for a new maximum rate of tax on capital gains of 18% for
individuals in the 28% or higher federal income tax brackets and 8% for
individuals in the 15% bracket for "qualified 5-year gains." For individuals in
the 15% bracket, qualified 5-year gains are net gains on securities held for
more than 5 years which are sold after December 31, 2000. For individuals who
are subject to tax at higher rates, qualified 5-year gains are net gains on
securities which are purchased after December 31, 2000 and are held for more
than 5 years. Taxpayers subject to tax at the higher rates may also make an
election for shares held on January 1, 2001 to recognize gain on their shares in
order to qualify such shares as qualified 5-year property.
The Fund will advise you at the end of each calendar year of the amount of its
capital gain distributions paid during the calendar year that qualify for these
maximum federal tax rates. Additional information on reporting these
distributions on your personal income tax returns is available in Franklin
Templeton's Tax Information Handbook (call toll-free 1-800-342-5236). This
handbook has been revised to include 1997 Act tax law changes, and will be
available in January, 1998. Questions concerning each investor's personal tax
reporting should be addressed to the investor's personal tax advisor.
3. CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions which are declared in
October, November or December and paid to you in January of the following year,
will be treated for tax purposes as if they had been received by you on December
31 of the year in which they were declared. The Fund will report this income to
you on your Form 1099-DIV for the year in which these distributions were
declared.
4. FOREIGN TAX CREDITS INCLUDED IN DISTRIBUTIONS. The Fund may be subject to
foreign withholding taxes on income from certain of its foreign securities. If
more than 50% of the total assets of the Fund at the end of its fiscal year are
invested in securities of foreign corporations, the Fund may elect to
pass-through to you your pro rata share of foreign taxes paid by the Fund. If
this election is made, you will be (i) required to include in your gross income
your pro rata share of foreign source income (including any foreign taxes paid
by the Fund), and (ii) entitled to either deduct your share of such foreign
taxes in computing your taxable income or to claim a credit for such taxes
against your U.S. income tax, subject to certain limitations under the Code. If
the Fund elects to pass through to you the foreign income taxes that it has
paid, you will be informed at the end of the calendar year of the amount of
foreign taxes paid and foreign source income that must be included on your
federal income tax return. If the Fund invests 50% or less of its total assets
in securities of foreign corporations, it will not be entitled to pass-through
to you your pro-rata share of the foreign taxes paid by the Fund. In this case,
these taxes will be taken as a deduction by the Fund, and the income reported to
you will be the net amount after these deductions.
The 1997 Act also simplifies the procedures by which investors in funds that
invest in foreign securities can claim tax credits on their individual income
tax returns for the foreign taxes paid by the Fund. These provisions will allow
investors who claim a credit for foreign taxes paid of $300 or less on a single
return or $600 or less on a joint return during any year (all of which must be
reported on IRS Form 1099-DIV from the Fund to the investor) to bypass the
burdensome and detailed reporting requirements on the supporting foreign tax
credit schedule (Form 1116), and report foreign taxes paid directly on page 2 of
Form 1040. YOU SHOULD NOTE THAT THIS SIMPLIFIED PROCEDURE WILL NOT BE AVAILABLE
UNTIL CALENDAR YEAR 1998.
5. INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The Fund will inform you
of the amount and character of your distributions at the time they are paid, and
will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. Shareholders who
have not held Fund shares for a full year may have designated and distributed to
them as ordinary income or capital gain a percentage of income that is not equal
to the actual amount of such income earned during the period of their investment
in the Fund.
TAXES
1. ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. In order to qualify
as a regulated investment company for tax purposes, the Fund must meet certain
specific requirements, including:
The Fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. Government securities and securities of other
regulated investment companies) can exceed 25% of the Fund's total assets,
and, with respect to 50% of the Fund's total assets, no investment (other
than cash and cash items, U.S. Government securities and securities of other
regulated investment companies) can exceed 5% of the Fund's total assets;
The Fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the sale
or disposition of stock, securities or foreign currencies, or other income
derived with respect to its business of investing in such stock, securities
or currencies; and
The Fund must distribute to its shareholders at least 90% of its net
investment income and net tax-exempt income for each of its fiscal years.
2. EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires the Fund to
distribute at least 98% of its taxable ordinary income earned during the
calendar year and 98% of its capital gain net income earned during the twelve
month period ending October 31 (in addition to undistributed amounts from the
prior year) to you by December 31 of each year in order to avoid federal excise
taxes. The Fund intends to declare and pay sufficient dividends in December (or
in January that are treated by you as received in December), but can give no
assurances that its distributions will be sufficient to eliminate all such
taxes.
3. REDEMPTION OF FUND SHARES. Redemptions and exchanges of Fund shares are
taxable transactions for federal and state income tax purposes. The tax law
requires that you recognize a gain or loss in an amount equal to the difference
between your tax basis and the amount you received in exchange for your shares,
subject to the rules described below. If you hold your shares as a capital
asset, the gain or loss that you realize will be capital gain or loss, and will
be long-term for federal income tax purposes if you have held your shares for
more than one year at the time of redemption or exchange. Any loss incurred on
the redemption or exchange of shares held for six months or less will be treated
as a long-term capital loss to the extent of any long-term capital gains
distributed to you by the Fund on those shares. The holding periods and
categories of capital gain that apply under the 1997 Act are described above in
the DISTRIBUTIONS section.
All or a portion of any loss that you realize upon the redemption of your Fund
shares will be disallowed to the extent that you purchase other shares in the
Fund (through reinvestment of dividends or otherwise) within 30 days before or
after your share redemption. Any loss disallowed under these rules will be added
to your tax basis in the new shares purchased.
4. DEFERRAL OF BASIS. All or a portion of the sales charge that you paid for
your shares in the Fund will be excluded from your tax basis in any of shares
sold within 90 days of their purchase (for the purpose of determining gain or
loss upon the sale of such shares) if you reinvest the sales proceeds in the
Fund or in another Fund in the Franklin Templeton Group of Funds7, and the sales
charge that would otherwise apply to your reinvestment is reduced or eliminated
because of your reinvestment with Franklin Templeton. The portion of the sales
charge excluded from your tax basis in the shares sold will equal the amount
that the sales charge is reduced on your reinvestment. Any portion of the sales
charge excluded from your tax basis in the shares sold will be added to the tax
basis of the shares you acquire from your reinvestment in another Franklin
Templeton fund.
5. U.S. GOVERNMENT OBLIGATIONS. Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S. Government,
subject in some states to minimum investment requirements that must be met by
the Fund. Investments in GNMA/FNMA securities, bankers' acceptances, commercial
paper and repurchase agreements collateralized by U.S. Government securities do
not generally qualify for tax-free treatment. At the end of each calendar year,
the Fund will provide you with the percentage of any dividends paid that may
qualify for tax-free treatment on your personal income tax return. You should
consult with your own tax advisor to determine the application of your state and
local laws to these distributions. Because the rules on exclusion of this income
are different for corporations, corporate shareholders should consult with their
corporate tax advisors about whether any of their distributions may be exempt
from corporate income or franchise taxes.
6. DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. As a corporate shareholder,
you should note that only a small percentage of the dividends paid by the Fund
for the most recent calendar year qualified for the dividends-received
deduction. You will be permitted in some circumstances to deduct these qualified
dividends, thereby reducing the tax that you would otherwise be required to pay
on these dividends. The dividends-received deduction will be available only with
respect to dividends designated by the Fund as eligible for such treatment.
Dividends so designated by the Fund must be attributable to dividends earned by
the Fund from U.S. corporations that were not debt financed.
Under the 1997 Act, the amount that the Fund may designate as eligible for the
dividends-received deduction will be reduced or eliminated if the shares on
which the dividends were earned by the Fund were debt financed or held by the
Fund for less than a 46 day period during a 90 day period beginning 45 days
before the ex-dividend date of the corporate stock. Similarly, if your Fund
shares are debt financed or held by you for less than this same 46 day period,
then the dividends-received deduction may also be reduced or eliminated. Even if
designated as dividends eligible for the dividends-received deduction, all
dividends (including the deducted portion) must be included in your alternative
minimum taxable income calculation.
7. INVESTMENT IN COMPLEX SECURITIES. The Fund's investment in options, futures
contracts and forward contracts, including transactions involving actual or
deemed short sales or foreign exchange gains or losses are subject to many
complex and special tax rules. Over-the-counter options on debt securities and
equity options, including options on stock and on narrow-based stock indexes,
will be subject to tax under Section 1234 of the Code, generally producing a
long-term or short-term capital gain or loss upon exercise, lapse, or closing
out of the option or sale of the underlying stock or security. Certain other
options, futures and forward contracts entered into by the Fund are generally
governed by Section 1256 of the Code. These "Section 1256" positions generally
include listed options on debt securities, options on broad-based stock indexes,
options on securities indexes, options on futures contracts, regulated futures
contracts and certain foreign currency contracts and options thereon.
Absent a tax election to the contrary, each Section 1256 position held by the
Fund will be marked-to-market (I.E., treated as if it were sold for fair market
value) on the last business day of the Fund's fiscal year (and on other dates as
prescribed by the Code), and all gain or loss associated with fiscal year
transactions and mark-to-market positions at fiscal year end (except certain
currency gain or loss covered by Section 988 of the Code) will generally be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. Under legislation pending in technical corrections to the 1997 Act, the
60% long-term capital gain portion will qualify as "20% rate gain" and will be
subject to tax to individual investors at a maximum rate of 20% for investors in
the 28% or higher federal income tax brackets, or at a maximum rate of 10% for
investors in the 15% federal income tax bracket. Even though marked-to-market,
gains and losses realized on foreign currency and foreign security investments
will generally be treated as ordinary income. The effect of Section 1256
mark-to-market rules may be to accelerate income or to convert what otherwise
would have been long-term capital gains into short-term capital gains or
short-term capital losses into long-capital losses within the Fund. The
acceleration of income on Section 1256 positions may require the Fund to accrue
taxable income without the corresponding receipt of cash. In order to generate
cash to satisfy the distribution requirements of the Code, the Fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares. In these ways, any or all of these rules may affect the amount,
character and timing of income distributed to you by the Fund.
When the Fund holds an option or contract which substantially diminishes the
Fund's risk of loss with respect to another position of the Fund (as might occur
in some hedging transactions), this combination of positions could be treated as
a "straddle" for tax purposes, possibly resulting in deferral of losses,
adjustments in the holding periods and conversion of short-term capital losses
into long-term capital losses. The Fund may make certain tax elections for mixed
straddles (I.E., straddles comprised of at least one Section 1256 position and
at least one non-Section 1256 position) which may reduce or eliminate the
operation of these straddle rules.
The 1997 Act has also added new provisions for dealing with transactions that
are generally called "Constructive Sale Transactions." Under these rules, the
Fund must recognize gain (but not loss) on any constructive sale of an
appreciated financial position in stock, a partnership interest or certain debt
instruments. The Fund will generally be treated as making a constructive sale
when it: 1) enters into a short sale on the same property, 2) enters into an
offsetting notional principal contract, or 3) enters into a futures or forward
contract to deliver the same or substantially similar property. Other
transactions (including certain financial instruments called collars) will be
treated as constructive sales as provided in Treasury regulations to be
published. There are also certain exceptions that apply for transactions that
are closed before the end of the 30th day after the close of the taxable year.
8. INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES. The Fund is
authorized to invest in foreign currency denominated securities. Such
investments, if made, will have the following additional tax consequences:
Under the Code, gains and losses attributable to fluctuations in foreign
currency exchange rates which occur between the time the Fund accrues income
(including dividends), or accrues expenses, and the time the Fund actually
collects such income or pays such expenses generally are treated as ordinary
income or loss. Similarly, on the disposition of debt securities denominated in
a foreign currency and on the disposition of certain options, futures and
forward contracts, gain or loss attributable to fluctuations in the value of
foreign currency between the date of acquisition of the security or contract and
the date its disposition also are treated as ordinary gain or loss. These gains
or losses, referred to under the Code as "Section 988" gains or losses, may
increase or decrease the amount of the Fund's net investment income, which, in
turn, will affect the amount of income to be distributed to you by the Fund.
If the Fund's Section 988 losses exceed the Fund's other net investment income
during a taxable year, the Fund generally will not be able to make ordinary
dividend distributions to you for that year, or distributions made before the
losses were realized will be recharacterized as return of capital distributions
for federal income tax purposes, rather than as an ordinary dividend or capital
gain distribution. If a distribution is treated as a return of capital, your tax
basis in your Fund shares will be reduced by a like amount (to the extent of
such basis), and any excess of the distribution over your tax basis in your Fund
shares will be treated as capital gain to you.
The 1997 Act generally requires that foreign income taxes be translated into
U.S. dollars at the average exchange rate for the tax year in which the taxes
are accrued. Certain exceptions apply to taxes paid or more than two years after
the taxable year to which they relate. This new law may require the Fund to
track and record adjustments to foreign taxes paid on foreign securities in
which it invests. Under the Fund's current reporting procedure, foreign taxes
paid are generally recorded at the time of each transaction using the foreign
currency spot rate available for the date of each payment. Under the new law,
the Fund will be required to record at fiscal year end (and at calendar year end
for excise tax purposes) an adjustment that reflects the difference between the
spot rates recorded for each payment and the year-end average exchange rate for
all of the Fund's foreign tax payments. There is a possibility that the mutual
fund industry will be given relief from this new provision, in which case no
year-end adjustments will be required.
9. INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANY SECURITIES. The Fund may
invest in shares of foreign corporations which may be classified under the Code
as passive foreign investment companies ("PFICs"). In general, a foreign
corporation 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.
If the Fund receives an "excess distribution" with respect to PFIC stock, the
Fund itself may be subject to U.S. federal income tax on a portion of the
distribution, whether or not the corresponding income is distributed by the Fund
to you. In general, under the PFIC rules, an excess distribution is treated as
having been realized ratably over the period during which the Fund held the PFIC
shares. The Fund itself will be subject to tax on the portion, if any, of an
excess distribution that is so allocated to prior Fund taxable years, and an
interest factor will be added to the tax, as if the tax had been payable in such
prior taxable years. In this case, you would not be permitted to claim a credit
on your own tax return for the tax paid by the Fund. Certain distributions from
a PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain. This may have the effect of increasing
Fund distributions to you that are treated as ordinary dividends rather than
long-term capital gain dividends.
The Fund may be eligible to elect alternative tax treatment with respect to PFIC
shares. Under an election that currently is available in some circumstances, 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 distributions are
received from the PFIC during such period. If this election were made, the
special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, the 1997 Act provides for another
election that would involve marking-to-market the Fund's PFIC shares at the end
of each taxable year (and on certain other dates as prescribed in the Code),
with the result that unrealized gains would be treated as though they were
realized. The Fund would also be allowed an ordinary deduction for the excess,
if any, of the adjusted basis of its investment in the PFIC stock over its fair
market value at the end of the taxable year. This deduction would be limited to
the amount of any net mark-to-market gains previously included with respect to
that particular PFIC security. If the Fund were to make this second PFIC
election, tax at the Fund level under the PFIC rules would generally be
eliminated.
The application of the PFIC rules may affect, among other things, the amount of
tax payable by the Fund (if any), the amounts distributable to you by the Fund,
the time at which these distributions must be made, and whether these
distributions will be classified as ordinary income or capital gain
distributions to you.
You should be aware that it is not always possible at the time shares of a
foreign corporation are acquired to ascertain that the foreign corporation is a
PFIC, and that there is always a possibility that a foreign corporation will
become a PFIC after the Fund acquires shares in that corporation. While the Fund
will generally seek to avoid investing in PFIC shares to avoid the tax
consequences detailed above, there are no guarantees that it will do so and it
reserves the right to make such investments as a matter of its fundamental
investment policy.
10. CONVERSION TRANSACTIONS. Gains realized by a Fund from transactions that are
deemed to be "conversion transactions" under the Code, and that would otherwise
produce capital gain may be recharacterized as ordinary income to the extent
that such gain does not exceed an amount defined as the "applicable imputed
income amount".
A conversion transaction is any transaction in which substantially all of the
Fund's expected return is attributable to the time value of the Fund's net
investment in such transaction, and any one of the following criteria are met:
1) there is an acquisition of property with a substantially contemporaneous
agreement to sell the same or substantially identical property in the
future;
2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the Fund on the basis that it
would have the economic characteristics of a loan but would be taxed as
capital gain; or
4) the transaction is specified in Treasury regulations to be promulgated in
the future.
The applicable imputed income amount, which represents the deemed return on the
conversion transaction based upon the time value of money, is computed using a
yield equal to 120 percent of the applicable federal rate, reduced by any prior
recharacterizations under this provision or the provisions of Section 263(g) of
the Code dealing with capitalized carrying costs.
11. STRIPPED PREFERRED STOCK. Occasionally, the Fund may purchase "stripped
preferred stock", that is subject to special tax treatment. Stripped preferred
stock is defined as certain preferred stock issues where ownership of the stock
has been separated from the right to receive dividends that have not yet become
payable. The stock must have a fixed redemption price, must not participate
substantially in the growth of the issuer, and must be limited and preferred as
to dividends. The difference between the redemption price and purchase price is
taken into Fund income over the term of the instrument as if it were original
issue discount. The amount that must be included in each period generally
depends on the original yield to maturity, adjusted for any prepayments of
principal.
THE FUND'S UNDERWRITER
- ------------------------------------------------------------------------------
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the Fund's shares. The
underwriting agreement will continue in effect for successive annual periods if
its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of the Fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting called
for that purpose. The underwriting agreement terminates automatically in the
event of its assignment and may be terminated by either party on 90 days'
written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statement and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal years ended August 31, 1997, 1996 and 1995, were
$40,795,777, $37,616,480 and $33,102,397, respectively. After allowances to
dealers, Distributors retained $6,509,259, $5,546,704 and $5,682,478 in net
underwriting discounts and commissions and received $178,223, $52,196 and
$7,640, in connection with redemptions or repurchases of shares for the
respective years. Distributors may be entitled to reimbursement under the Rule
12b-1 plan for each class, as discussed below. Except as noted, Distributors
received no other compensation from the Fund for acting as underwriter.
Pursuant to underwriting agreements, Distributors acts as principal underwriter
in a continuous public offering for all classes of the Fund's shares throughout
the world, except for Europe, Hong Kong and other parts of Asia, and other
countries or territories as it might hereafter relinquish to another principal
underwriter. The Fund has entered into a non-exclusive underwriting agreement
with Templeton Global Strategic Services (DEUTSCHLAND) GmbH ("Templeton
Strategic Services"), whose office address is Taunusanlage 11, D-60329,
Frankfurt, as principal underwriter for sales 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 is 2701 Shui On Centre, Hong Kong,
as principal underwriter for sales 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 Distributors. Templeton Strategic Services and
Templeton Investment Services are indirect, wholly-owned subsidiaries of
Resources.
In connection with the offering of the Fund's shares in Europe, aggregate
foreign underwriting commissions for the fiscal years ended August 31, 1997,
1996 and 1995, were $22,502,343, $8,433,252 and $6,827,779, respectively. After
allowances to dealers, Templeton Strategic Services retained $4,522,039,
$1,735,895 and $149,240 in net underwriting discounts and commissions and
received $0, $0 and $0 in connection with redemptions or repurchases of shares
for the respective years. In connection with the offering of the Fund's shares
in Hong Kong and other parts of Asia, aggregate foreign underwriting commissions
for the fiscal years ended August 31, 1997, 1996 and 1995, were $5,178, $10,262
and $0, respectively. After allowances to dealers, Templeton Investment Services
retained $945, $1,965 and $0 in net underwriting discounts and commissions and
received $0, $0 and $0 in connection with redemptions or repurchases of shares
for the respective years.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 plans" that
were adopted pursuant to Rule 12b-1 of the 1940 Act.
THE CLASS I PLAN. Under the Class I plan, the Fund may pay up to a maximum of
0.25% per year of Class I's average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of Class I shares.
THE CLASS II PLAN. Under the Class II plan, the Fund pays Distributors up to
0.75% per year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the Fund.
Under the Class II plan, the Fund also pays an additional 0.25% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
THE CLASS I AND CLASS II PLANS. The terms and provisions of each plan relating
to required reports, term, and approval are consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the Board, including a majority vote
of the Board members who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such Board members be done by the non-interested
members of the Board. The plans and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of the
management agreement with Global Advisors or by vote of a majority of the
outstanding shares of the class. Distributors or any dealer or other firm may
also terminate their respective distribution or service agreement at any time
upon written notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the non-interested
members of the Board, cast in person at a meeting called for the purpose of
voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plans should be continued.
For the fiscal year ended August 31, 1997, the total amounts paid by the Fund
pursuant to the Class I and Class II plans were $23,905,348 and $4,866,909,
respectively, which were used for the following purposes:
CLASS I CLASS II
-------------------- ------------ -----------
Advertising........ $ 1,139,760 $ 54,064
Printing and
mailing
of prospectuses
other than to
current
shareholders..... 896,139 42,508
Payments to
underwriters..... 1,185,297 370,578
Payments to broker-
dealers.......... 20,684,155 4,399,759
Other.............. 0 0
HOW DOES THE FUND MEASURE PERFORMANCE?
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Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return quotations used by the Fund are based on the
standardized methods of computing performance mandated by the SEC. If a Rule
12b-1 plan is adopted, performance figures reflect fees from the date of the
plan's implementation. An explanation of these and other methods used by the
Fund to compute or express performance follows. Regardless of the method used,
past performance does not guarantee future results, and is an indication of the
return to shareholders only for the limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over the periods indicated below that
would equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes the maximum front-end sales charge is deducted
from the initial $1,000 purchase, and income dividends and capital gain
distributions are reinvested at Net Asset Value. The quotation assumes the
account was completely redeemed at the end of each period and the deduction of
all applicable charges and fees. If a change is made to the sales charge
structure, historical performance information will be restated to reflect the
maximum front-end sales charge currently in effect.
The average annual total return for Class I for the one-, five- and ten-year
periods ended August 31, 1997, was 20.93%, 16.33% and 11.83%, respectively. The
average annual total return for Class II for the one-year period ended August
31, 1997, and for the period from inception (May 1, 1995) through August 31,
1997, was 25.02% and 18.90%, respectively.
These figures were calculated according to the SEC formula:
P (1+T)(n) = ERV
where:
P = a hypothetical initial payment
of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a
hypothetical $1,000 payment
made at the beginning of each
period at the end of each
period
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at Net Asset Value. Cumulative total return, however, is based on the
actual return for a specified period rather than on the average return over the
periods indicated above. The cumulative total return for Class I for the one-,
five- and ten-year periods ended August 31, 1997, was 20.93%, 113.10% and
205.85%, respectively. The cumulative total return for Class II for the one-year
period ended August 31, 1997, and for the period from inception (May 1, 1995)
through August 31, 1997, was 25.02% and 49.93%, respectively.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
(i) unmanaged indices so that you may compare the Fund's results with those of a
group of unmanaged securities widely regarded by investors as representative of
the securities market in general; (ii) other groups of mutual funds tracked by
Lipper Analytical Services, Inc., a widely used independent research firm that
ranks mutual funds by overall performance, investment 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.
From time to time, the Fund and Global Advisors may also refer to the following
information:
(a) Global Advisors' and its affiliates' market share of international equities
managed in mutual funds prepared or published by Strategic Insight or a
similar statistical organization.
(b) The performance of U.S. equity and debt markets relative to foreign
markets prepared or published by Morgan Stanley Capital International(R)
or a similar financial organization.
(c) The capitalization of U.S. and foreign stock markets as prepared or
published by the International Finance Corporation, Morgan Stanley Capital
International(R) or a similar financial organization.
(d) The geographic and industry distribution of the Fund's portfolio and the
Fund's top ten holdings.
(e) The gross national product and populations, including age characteristics,
literacy rates, foreign investment improvements due to a liberali- zation
of securities laws and a reduction of foreign exchange controls, and
improving communication technology, of various countries as published by
various statistical organizations.
(f) 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).
(g) The major industries located in various jurisdictions as published by the
Morgan Stanley Index.
(h) Rankings by DALBAR Surveys, Inc. with respect to mutual fund shareholder
services.
(i) Allegorical stories illustrating the importance of persistent long-term
investing.
(j) The Fund's portfolio turnover rate and its ranking relative to industry
standards as published by Lipper Analytical Services, Inc. or
Morningstar, Inc.
(k) 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.
(l) The number of shareholders in the Fund or the aggregate number of
shareholders of the open-end investment companies in the Franklin Templeton
Group of Funds or the dollar amount of fund and private account assets
under management.
(m) Comparison of the characteristics of various emerging markets, including
population, financial and economic conditions.
(n) Quotations from the Templeton organization's founder, Sir John Templeton,*
advocating the virtues of diversification and long-term investing,
including the following:
"Never follow the crowd. Superior performance is possible only if you
invest differently from the crowd."
"Diversify by company, by industry and by country."
"Always maintain a long-term perspective."
"Invest for maximum total real return."
"Invest -- don't trade or speculate."
"Remain flexible and open-minded about types of investment."
"Buy low."
"When buying stocks, search for bargains among quality stocks."
"Buy value, not market trends or the economic outlook."
"Diversify. In stocks and bonds, as in much else, there is safety in
numbers."
"Do your homework or hire wise experts to help you."
"Aggressively monitor your investments."
"Don't panic."
"Learn from your mistakes."
"Outperforming the market is a difficult task."
"An investor who has all the answers doesn't even understand all the
questions."
"There's no free lunch."
"And now the last principle: Do not be fearful or negative too often."
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the Fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, if any, as well as the value of its shares that are
based upon the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition,
there can be no assurance that the Fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
- -------------------------------------------------------------------------------
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 49 years and
now services more than 2.8 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton, a pioneer in international
investing. The Mutual Series team, known for its value-driven approach to
domestic equity investing, became part of the organization four years later.
Together, the Franklin Templeton Group has over $215 billion in assets under
management for more than 5.8 million U.S. based mutual fund shareholder and
other accounts. The Franklin Templeton Group of Funds offers 121 U.S. based
open-end investment companies to the public. The Fund may identify itself by its
NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the NYSE.
While many of them have similar investment objectives, no two are exactly alike.
As noted in the Prospectus, shares of the Fund are generally sold through
Securities Dealers. Investment representatives of such Securities Dealers are
experienced professionals who can offer advice on the type of investment
suitable to your unique goals and needs, as well as the types of risks
associated with such investment.
As of November 26, 1997, the principal shareholders of the Fund, beneficial or
of record, were as follows:
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
------------------------ --------------- ----------
ADVISOR CLASS
Franklin Templeton Trust
Company 283,625 17%
Trustee for
ValueSelect
Franklin Resources
Profit Sharing Plan
PO Box 2438
Rancho Cordova, CA
95741-2438
FTC & Co 98,794 6%
PO Box 173736
Denver, CO 80217-3736
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations must be sent to a 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; and
(iii) access persons involved in preparing and making investment decisions must,
in addition to (i) and (ii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
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The audited financial statements contained in the Annual Report to Shareholders
of the Fund, for the fiscal year ended August 31, 1997, including the auditors'
report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
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1940 ACT - Investment Company Act of 1940, as amended
BOARD - The Board of Directors of the Fund
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds7 and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds7 and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
GLOBAL ADVISORS - Templeton Global Advisors Limited, the Fund's investment
manager
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NASDAQ - National Association of Securities Dealers Automated Quotations
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 5.75% for Class I and 1% for Class II.
PROSPECTUS - The prospectus for the Fund's Class I and Class II shares dated
January 1, 1998, as may be amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
<PAGE>
APPENDIX
DESCRIPTION OF RATINGS
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CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt-
edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present that make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and, thereby, not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC-rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (--): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
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* Sir John Templeton sold the Templeton organization to Resources in October
1992 and resigned from the Board on April 16, 1995. He is no longer involved
with the investment management process.
