TEMPLETON VARIABLE PRODUCTS SERIES FUND
THIS STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1996,
IS NOT A PROSPECTUS. IT SHOULD BE READ IN
CONJUNCTION WITH THE PROSPECTUSES OF TEMPLETON MONEY MARKET FUND,
TEMPLETON BOND FUND, TEMPLETON STOCK FUND, TEMPLETON ASSET ALLOCATION FUND,
TEMPLETON DEVELOPING MARKETS FUND AND TEMPLETON INTERNATIONAL FUND
DATED MAY 1, 1996, AS EACH PROSPECTUS IS AMENDED FROM
TIME TO TIME, WHICH MAY BE OBTAINED WITHOUT CHARGE UPON REQUEST TO
FRANKLIN TEMPLETON DISTRIBUTORS, INC.,
700 CENTRAL AVENUE, P.O. BOX 33030,
ST. PETERSBURG, FLORIDA 33733-8030
TOLL FREE TELEPHONE: (800) 292-9293
TABLE OF CONTENTS
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General Information and - Investment Management
History.......................... 1 Agreements................... 24
Investment Objectives and - Management Fees.............. 25
Policies......................... 2 - The Investment Managers...... 26
- Investment Policies........... 2 - Business Manager............. 26
- Debt Securities............... 2 - Custodian.................... 27
- Structured Investments........ 3 - Legal Counsel................ 28
- Futures Contracts............. 3 - Independent Accountants...... 28
- Foreign Currency Hedging - Reports to Shareholders...... 28
Transactions.................. 4 Brokerage Allocation............ 28
- Options on Securities or - Portfolio Turnover........... 30
Indices....................... 6 Purchase, Redemption and Pricing
- Stock Index Futures Contracts. 7 of Shares....................... 31
- Risk Factors.................. 9 - Redemptions in Kind.......... 32
Investment Restrictions.......... 14 Tax Status...................... 32
Trading Policies................. 15 Description of Shares........... 36
- Personal Securities Yield and Performance
Transactions.................. 16 Information..................... 36
Management of the Trust.......... 16 Financial Statements............ 40
Trustee Compensation............. 22 Appendix - Corporate Bond, Preferred Stock and
Principal Shareholders........... 22 Commercial Paper Ratings...................
Investment Management and Other i
Services......................... 24
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GENERAL INFORMATION AND HISTORY
.......Templeton Variable Products Series Fund (the "Trust") was organized as a
Massachusetts business trust on February 25, 1988 and is registered under the
Investment Company Act of 1940 (the "1940 Act") as an open-end diversified
management investment company. The Trust currently has six series of Shares:
Templeton Money Market Fund, Templeton Bond Fund, Templeton Stock Fund,
Templeton Asset Allocation Fund, Templeton Developing Markets Fund and Templeton
International Fund (collectively, the "Funds"). Shares of the Funds are sold
only to insurance company separate accounts to serve as the investment vehicle
for certain variable annuity and life insurance contracts. Not all of the Funds
are available as an investment vehicle for all contracts. Please refer to the
contract prospectus for information concerning the availability of the Funds.
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT POLICIES. The investment objective and policies of each
Fund are described in each Fund's Prospectus under the heading "Investment
Objective and Policies."
DEBT SECURITIES. Each Fund may invest in debt securities to the extent
provided in the Fund's prospectus. 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 general increases. Conversely, during periods of rising interest
rates, the value of such securities generally declines. These changes in market
value will be reflected in a Fund's net asset value.
Bonds rated Ba or lower by Moody's Investors Service, Inc. ("Moody's") or
BB or lower by Standard & Poor's Corporation ("S&P") are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and may be in default.
Bonds which are rated C by Moody's are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Bonds rated C by S&P are obligations on
which no interest is being paid. For a full description of each debt securities
rating, see the Appendix.
Although they may offer higher yields than do higher rated securities,
low rated and unrated debt securities generally involve greater volatility of
price and risk of principal and income, including the possibility of default by,
or bankruptcy of, the issuers of the securities. In addition, the markets in
which low rated and unrated debt securities are traded are more limited than
those in which higher rated securities are traded. The existence of limited
markets for particular securities may diminish a 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 a Fund to obtain accurate market
quotations for the purposes of valuing a 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 a Fund to
achieve its investment objective may, to the extent of investment in low rated
debt securities, be more dependent upon such creditworthiness analysis than
would be the case if the Fund were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low rated debt securities have been found to be less
sensitive to interest rate changes than higher rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in low rated debt securities prices because the
advent of a recession could 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, a Fund may incur additional expenses to seek
recovery.
STRUCTURED INVESTMENTS. Included among the issuers of debt securities in
which the Funds (except Templeton Money Market 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 purchase by an entity, such as a
corporation or trust, of specified instruments and the issuance by that entity
of one or more classes of securities ("Structured Investments") backed by, or
representing interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued Structured
Investments to create securities with different investment characteristics such
as varying maturities, payment priorities or interest rate provisions; the
extent of the payments made with respect to Structured Investments is dependent
on the extent of the cash flow on the underlying instruments. Because Structured
Investments of the type in which such Funds anticipate investing typically
involve no credit enhancement, their credit risk will generally be equivalent to
that of the underlying instruments.
The Funds are 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 a
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 a Fund's assets that may be used for borrowing
activities.
Certain issuers of Structured Investments may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, a Fund's investment in these
Structured Investments may be limited by the restrictions contained in the 1940
Act. Structured Investments are typically sold in private placement
transactions, and there currently is not an active trading market for Structured
Investments. To the extent such investments are illiquid, they will be subject
to a Fund's restrictions on investments in illiquid securities.
FUTURES CONTRACTS. Templeton Bond, Asset Allocation, International
and Developing Markets Funds may purchase and sell financial futures contracts.
Currently, futures contracts are available on several types of fixed-income
securities including: U.S. Treasury bonds, notes and bills, commercial paper,
and certificates of deposit.
As long as required by regulatory authorities, Templeton Bond, Asset
Allocation, International and Developing Markets Funds will limit their use of
futures contracts to hedging transactions in order to avoid being a commodity
pool. For example, they might use futures contracts to hedge against anticipated
changes in interest rates that might adversely affect either the value of the
Funds' securities or the price of the securities which the Funds intend to
purchase. The Funds' hedging may include sales of futures contracts as an offset
against the effect of expected increases in interest rates and purchases of
futures contracts as an offset against the effect of expected declines in
interest rates. Although other techniques could be used to reduce the Funds'
exposure to interest rate fluctuations, they may be able to hedge their exposure
more effectively and perhaps at a lower cost by using futures contracts.
At the time a Fund purchases or sells a futures contract, it is required
to deposit with its custodian (or broker, if legally permitted) a specified
amount of cash or U.S. Government securities ("initial margin"). The margin
required for a futures contract is set by the exchange or board of trade on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied. The Funds expect to earn interest income on initial margin deposits.
A futures contract held by a Fund is valued daily at the official settlement
price of the exchange on which it is traded. Each day the Funds pay or receive
cash, called "variation margin," equal to the daily change in value of the
futures contract. This process is known as "marking to market." Variation margin
does not represent a borrowing or loan by a Fund but is instead settlement
between the Fund and the broker of the amount one would owe the other if the
futures contract expired. In computing daily net asset value, a Fund will mark
to market its open futures positions. In addition, the Fund must deposit in a
segregated account additional cash or high quality debt securities to ensure the
futures contracts are unleveraged. The value of assets held in the segregated
account must be equal to the daily market value of all outstanding futures
contracts less any amounts deposited as margin.
Although some financial futures contracts call for making or taking
delivery of the underlying securities, in most cases these obligations are
closed out before the settlement date. The closing of a contractual obligation
is accomplished by purchasing or selling an identical offsetting futures
contract. Other financial futures contracts by their terms call for cash
settlements.
FOREIGN CURRENCY HEDGING TRANSACTIONS. In order to hedge against foreign
currency exchange rate risks, Templeton Bond, Asset Allocation and Developing
Markets Funds may enter into forward foreign currency exchange contracts, as
well as purchase put or call options on foreign currencies. In addition, for
hedging purposes only, Templeton Bond, Asset Allocation, International and
Developing Markets Funds may enter into foreign currency futures contracts, as
described below. The Funds may also conduct their foreign currency exchange
transactions on a spot (I.E., cash) basis at the spot rate prevailing in the
foreign currency exchange market.
A Fund may enter into forward foreign currency exchange contracts
("forward contracts") to attempt to minimize the risk to the Fund from adverse
changes in the relationship between the U.S. dollar and foreign currencies. A
forward contract is an obligation to purchase or sell a specific currency for an
agreed price at a future date which is individually negotiated and privately
traded by currency traders and their customers. A Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security. In addition, for example, when a Fund believes
that a foreign currency may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell an amount of that foreign
currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency, or when a Fund believes that
the U.S. dollar may suffer a substantial decline against a foreign currency, it
may enter into a forward contract to buy that foreign currency for a fixed
dollar amount. This second investment practice is generally referred to as
"cross-hedging." Because in connection with a Fund's forward foreign currency
transactions an amount of the Fund's assets equal to the amount of the purchase
will be held aside or segregated to be used to pay for the commitment, a Fund
will always have cash, cash equivalents or high quality debt securities
available sufficient to cover any commitments under these contracts or to limit
any potential risk. The segregated account will be marked-to-market on a daily
basis. While these contracts are not presently regulated by the Commodity
Futures Trading Commission ("CFTC"), the CFTC may in the future assert authority
to regulate forward contracts. In such event, a Fund's ability to utilize
forward contracts in the manner set forth above may be restricted. Forward
contracts may limit potential gain from a positive change in the relationship
between the U.S. dollar and foreign currencies. Unanticipated changes in
currency prices may result in poorer overall performance for a Fund than if it
had not engaged in such contracts.
Templeton Bond, Asset Allocation and Developing Markets Funds may
purchase and write put and call options on foreign currencies for the purpose of
protecting against declines in the dollar value of foreign portfolio securities
and against increases in the dollar cost of foreign securities to be acquired.
As is the case with other kinds of options, however, the writing of an option on
foreign currency will constitute only a partial hedge, up to the amount of the
premium received, and a Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against fluctuation in exchange rates, although, in the event of rate movements
adverse to a Fund's position, the Fund may forfeit the entire amount of the
premium plus related transaction costs. Options on foreign currencies to be
written or purchased by a Fund will be traded on U.S. and foreign exchanges or
over-the-counter.
Templeton Bond, Asset Allocation, International and Developing Markets
Funds may enter into exchange-traded contracts for the purchase or sale for
future delivery of foreign currencies ("foreign currency futures"). This
investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of a
Fund's portfolio securities or adversely affect the prices of securities that a
Fund intends to purchase at a later date. The successful use of foreign currency
futures will usually depend on the ability of a Fund's Investment Manager to
forecast currency exchange rate movements correctly. Should exchange rates move
in an unexpected manner, a Fund may not achieve the anticipated benefits of
foreign currency futures or may realize losses.
OPTIONS ON SECURITIES OR INDICES. Templeton Developing Markets Fund may
write covered call and put options and purchase call and put options on
securities or stock indices that are traded on United States and foreign
exchanges and in the over-the-counter markets.1
An option on a security is a contract that gives the purchaser of the
option, in return for the premium paid, the right to buy a specified security
(in the case of a call option) or to sell a specified security (in the case of a
put option) from or to the writer of the option at a designated price during the
term of the option. An option on a securities index gives the purchaser of the
option, in return for the premium paid, the right to received from the seller
cash equal to the difference between the closing price of the index and the
exercise price of the option.
Templeton Developing Markets Fund may write a call or put option only if
the option is "covered". A call option on a security written by the Fund is
"covered" if the Fund owns the underlying security covered by the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities held in its
portfolio. A call option on a security is also "covered" if the Fund holds a
call on the same security and in the same principal amount as the call written
where the exercise price of the call held (1) is equal to or less than the
exercise price of the call written or (2) is greater than the exercise price of
the call written if the difference is maintained by the Fund in cash or high
grade U.S. Government securities in a segregated account with its custodian. A
put option on a security written by the Fund is "covered" if the Fund maintains
cash or fixed income securities with a value equal to the exercise price in a
segregated account with its custodian, or else holds a put on the same security
and in the same principal amount as the put written where the exercise price of
the put held is equal to or greater than the exercise price of the put written.
Templeton Developing Markets Fund will cover call options on stock
indices that it writes by owning securities whose price changes, in the opinion
of its Investment Manager, are expected to be similar to those of the index, or
in such other manner as may be in accordance with the rules of the exchange on
which the option is traded and applicable laws and regulations. Nevertheless,
where the Fund covers a call option on a stock index through ownership of
securities, such securities may not match the composition of the index. In that
event, the Fund will not be fully covered and could be subject to risk of loss
in the event of adverse changes in the value of the index. The Fund will cover
put options on stock indices that it writes by segregating assets equal to the
option's exercise price, or in such other manner as may be in accordance with
the rules of the exchange on which the option is traded and applicable laws and
regulations.
Templeton Developing Markets Fund will receive a premium from writing a
put or call option, which increases the Fund's gross income in the event the
option expires unexercised or is closed out at a profit. If the value of a
security or an index on which the Fund has written a call option falls or
remains the same, the Fund will realize a profit in the form of the premium
received (less transaction costs) that could offset all or a portion of any
decline in the value of the portfolio securities being hedged. If the value of
the underlying security or index rises, however, the Fund will realize a loss in
its call option position, which will reduce the benefit of any unrealized
appreciation in the Fund's investments. By writing a put option, the Fund
assumes the risk of a decline in the underlying security or index. To the extent
that the price changes of the portfolio securities being hedged correlate with
changes in the value of the underlying security or index, writing covered put
options on indices or securities will increase the Fund's losses in the event of
a market decline, although such losses will be offset in part by the premium
received for writing the option.
Templeton Developing Markets Fund may also purchase put options to hedge
its investments against a decline in value. By purchasing a put option, the Fund
will seek to offset a decline in the value of the portfolio securities being
hedged through appreciation of the put option. If the value of the Fund's
investments does not decline as anticipated, or if the value of the option does
not increase, the Fund's loss will be limited to the premium paid for the option
plus related transaction costs. The success of this strategy will depend, in
part, on the correlation between the changes in value of the underlying security
or index and the changes in value of the Fund's security holdings being hedged.
Templeton Developing Markets Fund may purchase call options on individual
securities to hedge against an increase in the price of securities that the Fund
anticipates purchasing in the future. Similarly, the Fund may purchase call
options on a securities index to attempt to reduce the risk of missing a broad
market advance, or an advance in an industry or market segment, at a time when
the Fund holds uninvested cash or short-term debt securities awaiting
investment. When purchasing call options, the Fund will bear the risk of losing
all or a portion of the premium paid if the value of the underlying security or
index does not rise.
There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. Trading could be interrupted, for
example, because of supply and demand imbalances arising from a lack of wither
buyers or sellers, or the options exchange could suspend trading after the price
has risen or fallen more than the maximum specified by the exchange. Although
the Fund may be able to offset to some extent any adverse effects of being
unable to liquidate an option position, the Fund may experience losses in some
cases as a result of such inability.
STOCK INDEX FUTURES CONTRACTS. Templeton Stock, Asset Allocation,
Developing Markets and International Funds may buy and sell index futures
contracts with respect to any stock index, and Templeton Bond Fund may buy and
sell index futures contracts with respect to any bond index traded on a
recognized stock exchange or board of trade. The Funds may invest in index
futures contracts for hedging purposes only, and not for speculation. A Fund may
engage in such transactions only to an extent that the total contract value of
the futures contracts do not exceed 20% of the Fund's total assets at the time
when such contracts are entered into. Successful use of stock index futures is
subject to the ability of Templeton Investment Counsel, Inc. (the Investment
Manager of Templeton Stock Fund, Templeton Asset Allocation Fund, and Templeton
International Fund), Templeton Asset Management Ltd. (the Investment Manager of
Templeton Developing Markets Fund) and the Templeton Global Bond Managers
division of Templeton Investment Counsel, Inc. (the Investment Manager of
Templeton Bond Fund and Templeton Money Market Fund)(collectively, the
"Investment Managers") to predict correctly movements in the direction of the
stock markets. No assurance can be given that the Investment Manager's judgment
in this respect will be correct.
A stock index futures contract is a contract to buy or sell units of a
stock index at a specified future date at a price agreed upon when the contract
is made. The value of a unit is the current value of the stock index. For
example, the Standard & Poor's Stock Index ("S&P 500 Index" or "Index") is
composed of 500 selected common stocks, most of which are listed on the New York
Stock Exchange. The S&P 500 Index assigns a relative weighing 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 a 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 a 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 the future date, the Fund will lose $2,000 (500 units x loss of $4).
During or in anticipation of a period of market appreciation, Templeton
Stock Fund, Templeton Asset Allocation Fund, Templeton International Fund or
Templeton Developing Markets 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 a 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, Templeton Stock
Fund, Templeton Asset Allocation Fund, Templeton International Fund or Templeton
Developing Markets 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 a 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.
RISK FACTORS. Templeton Bond Fund, Templeton Stock Fund, Templeton Asset
Allocation Fund, Templeton International Fund and Templeton Developing Markets
Fund have the right to purchase securities in any foreign country, developed or
developing, if they are listed on an exchange, as well as a limited right to
purchase such securities if they are unlisted. Investors should consider
carefully the risks involved in securities of companies and governments of
foreign nations, which are in addition to the usual risks inherent in domestic
investments.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the United
States. Foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards, and auditing practices and
requirements may not be comparable to those applicable to United States
companies. Foreign markets have substantially less volume than the New York
Stock Exchange ("NYSE"), and securities of some foreign companies are less
liquid and more volatile than securities of comparable United States companies A
Fund, therefore, may encounter difficulty in obtaining market quotations for
purposes of valuing its portfolio and calculating its net asset value. Although
the Funds may invest up to 15% of their total assets in unlisted securities or
securities with a limit trading market, in the opinion of management such
securities do not present a significant liquidity problem. Commission rates in
foreign countries, which are generally fixed rather than subject to negotiation
as in the United States, are likely to be higher. In many foreign countries
there is less government supervision and regulation of stock exchanges, brokers
and listed companies than in the United States.
Investments in companies domiciled in developing countries may be subject
to potentially higher risks than investments in developed countries. These risks
include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
Funds' investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed 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 Funds may invest have
experienced substantial, and in some periods extremely high, rates of inflation
for many years. Inflation and rapid fluctuations in inflation rates have had and
may continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the United States economy in such respects
as growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
Investments in Eastern European countries may involve risks of
nationalization, expropriation and confiscatory taxation. The communist
governments of a number of Eastern European countries expropriated large amounts
of private property in the past, in many cases without adequate compensation,
and there can be no assurance that such expropriation will not occur in the
future. In the event of such expropriation, the Funds could lose a substantial
portion of any investments it has made in the affected countries. Further, no
accounting standards exist in Eastern European countries. Finally, even though
certain Eastern European currencies may be convertible into U.S. dollars, the
conversion rates may be artificial to the actual market values and may be
adverse to the Funds' Shareholders.
Certain Eastern European countries, which do not have market economies,
are characterized by an absence of developed legal structures governing private
and foreign investments and private property. Certain countries require
governmental approval prior to investments by foreign persons, or limit the
amount of investment of foreign persons in a particular company, or limit the
investment of foreign persons to only a specific class of securities of a
company that may have less advantageous terms than securities of the company
available for purchase by nationals.
Authoritarian governments in certain Eastern European countries may
require that a governmental or quasi-governmental authority act as custodian of
a Fund's assets invested in such country. To the extent such governmental or
quasi-governmental authorities do not satisfy the requirements of the 1940 Act
to act as foreign custodians of a Fund's cash and securities, the Fund's
investment in such countries may be limited or may be required to be effected
through intermediaries. The risk of loss through governmental confiscation may
be increased in such countries.
Investing in Russian companies involves a high degree of risk and special
considerations not typically associated with investing in the United States
securities markets, and should be considered highly speculative. Such risks
include: (1) delays in settling portfolio transactions and risk of loss arising
out of Russia's system of share registration and custody; (2) the risk that it
may be impossible or more difficult than in other countries to obtain and/or
enforce a judgment; (3) pervasiveness of corruption and crime in the Russian
economic system; (4) currency exchange rate volatility and the lack of available
currency hedging instruments; (5) higher rates of inflation (including the risk
of social unrest associated with periods of hyper-inflation); (6) controls on
foreign investment and local practices disfavoring foreign investors and
limitations on repatriation of invested capital, profits and dividends, and on a
Fund's ability to exchange local currencies for U.S. dollars; (7) the risk that
the government of Russia or other executive or legislative bodies may decide not
to continue to support the economic reform programs implemented since the
dissolution of the Soviet Union and could follow radically different political
and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, or a return to the centrally planned
economy that existed prior to the dissolution of the Soviet Union; (8) the
financial condition of Russian companies, including large amounts of
inter-company debt which may create a payments crisis on a national scale; (9)
dependency on exports and the corresponding importance of international trade;
(10) the risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation; and (11) possible
difficulty in identifying a purchaser of securities held by a Fund due to the
underdeveloped nature of the securities markets.
There is little historical data on Russian securities markets because
they are relatively new and a substantial proportion of securities transactions
in Russia are privately negotiated outside of stock exchanges. Because of the
recent formation of the securities markets as well as the underdeveloped state
of the banking and telecommunications systems, settlement, clearing and
registration of securities transactions are subject to significant risks.
Ownership of shares (except where shares are held through depositories that meet
the requirements of the 1940 Act) is defined according to entries in the
company's share register and normally evidenced by extracts from the register or
by formal share certificates. However, there is no central registration system
for shareholders and these services are carried out by the companies themselves
or by registrars located throughout Russia. These registrars are not necessarily
subject to effective state supervision and it is possible for a Fund to lose its
registration through fraud, negligence or even mere oversight. While each 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 a 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 a Fund to enforce any
rights it may have against the registrar or issuer of the securities in the
event of loss of share registration. Furthermore, although a Russian public
enterprise with more than 1,000 shareholders is required by law to contract out
the maintenance of its shareholder register to an independent entity that meets
certain criteria, in practice this regulation has not always been strictly
enforced. Because of this lack of independence, management of a company may be
able to exert considerable influence over who can purchase and sell the
company's shares by illegally instructing the registrar to refuse to record
transactions in the share register. This practice may prevent a Fund from
investing in the securities of certain Russian companies deemed suitable by the
Investment Manager. Further, this also could cause a delay in the sale of
Russian company securities by a Fund if a potential purchaser is deemed
unsuitable, which may expose the Fund to potential loss on the investment.
The Funds endeavor 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 a Fund changes investment 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 a Fund from transferring cash out of the
country or withhold portions of interest and dividends at the source, or impose
other taxes with respect to a Fund's investments in securities of issuers of
that country. There is the possibility of expropriation, nationalization or
confiscatory taxation, foreign exchange controls (which may include suspension
of the ability to transfer currency from a given country), default in foreign
government securities, political or social instability, or diplomatic
developments which could affect investments in securities of issuers in those
nations.
Each 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 a Fund may invest may also have fixed or
managed currencies that are free floating against the U.S. dollar. Further,
certain currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which a Fund's securities are
denominated may have a detrimental impact on the Fund. Through each Fund's
flexible policy, the Investment Managers endeavor to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where from time to time it places a 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 Trustees consider at least annually the likelihood of the imposition
by any foreign government of exchange control restrictions which would affect
the liquidity of the Funds' 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 Trustees also consider the
degree of risk involved through the holding of portfolio securities in domestic
and foreign securities depositories (see "Investment Management and Other
Services -- Custodian"). However, in the absence of willful misfeasance, bad
faith or gross negligence on the part of the Investment Managers, or reckless
disregard of the obligations and duties under the Investment Management
Agreements, any losses resulting from the holding of a Fund's portfolio
securities in foreign countries and/or with securities depositories will be at
risk of the Shareholders. No assurance can be given that the Trustees' appraisal
of the risks will always be correct or that such exchange control restrictions
or political acts of foreign governments might not occur.
There are several risks associated with the use of futures contracts and
stock index futures contracts as hedging techniques. A purchase or sale of a
futures contract may result in losses in excess of the amount invested. There
can be significant differences between the securities and futures markets that
could result in an imperfect correlation between the markets, causing a given
hedge not to achieve its objectives. The degree of imperfection of correlation
depends on circumstances such as variations in speculative market demand for
futures, including technical influences in futures trading, and differences
between the financial instruments being hedged and the instruments underlying
the standard contracts available for trading in such respects as interest rate
levels, maturities, and creditworthiness of issuers. A decision as to whether,
when, and how to hedge involves the exercise of skill and judgment, and even a
well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and, therefore, does not limit potential losses because
the limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
There can be no assurance that a liquid market will exist at a time when
a Fund seeks to close out a futures position, and it would remain obligated to
meet margin requirements until the position is closed. Templeton Bond, Stock,
Asset Allocation, Developing Markets and International Funds intend 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. In
addition, many of the futures contracts available may be relatively new
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist.
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 a Fund for hedging purposes also depends upon the Investment
Manager's ability to predict correctly movements in the direction of the market,
as to which no assurance can be given.
Templeton Bond, Asset Allocation, International and Developing Markets
Funds may enter into a contract for the purchase or sale of a security
denominated in a foreign currency and may enter into a forward foreign currency
contract ("forward contract") in order to "lock in" the U.S. dollar price of the
security. In addition, when an Investment Manager believes that the currency of
a particular foreign country may suffer or enjoy a substantial movement against
another currency, it may enter into a forward contract to sell or buy the amount
of the former foreign currency, approximating the value of some or all of the
Fund's portfolio securities denominated in such foreign currency. The projection
of short-term currency market movement is extremely difficult, and the
successful execution of a short-term hedging strategy is highly uncertain.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of the contract. Accordingly, it may be
necessary for the Funds to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency a Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency a Fund is obligated to
deliver.
If a Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If a Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
foreign currency. Should forward prices decline during the period between a Fund
entering into a forward contract for the sale of a foreign currency and the date
it enters into an offsetting contract for the purchase of the foreign currency,
the Fund will realize a gain to the extent the price of the currency it has
agreed to sell exceeds the price of the currency it has agreed to purchase.
Should forward prices increase, a Fund will suffer a loss to the extent the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
INVESTMENT RESTRICTIONS
The Funds have imposed upon themselves certain investment restrictions
which, together with their investment objectives, are fundamental policies
except as otherwise indicated. No changes in a Fund's investment objectives,
policies or investment restrictions (except those which are not fundamental
policies) can be made without the approval of the Shareholders of that Fund. For
this purpose, the provisions of the 1940 Act require the affirmative vote of the
lesser of either (a) 67% or more of the Fund's Shares present at a Shareholders'
meeting at which the holders more than 50% of the outstanding Shares are present
or represented by proxy or (b) more than 50% of the outstanding Shares of the
Fund.
In accordance with these restrictions, a Fund will not:
1. Invest in real estate or mortgages on real estate, or purchase or
sell commodity contracts, except that Templeton Bond, Asset
Allocation and Developing Markets Funds may invest in marketable
securities secured by real estate or interests therein, such as
CMOs, or issued by companies or investment trusts which invest in
real estate or interests therein and Templeton Bond, Asset
Allocation, Developing Markets and International Funds may purchase
and sell foreign currency futures and financial futures, and
Templeton Stock, Asset Allocation, Developing Markets and
International Funds may purchase and sell stock index futures
contracts, and Templeton Bond Fund may purchase and sell bond index
futures contracts.
2. With respect to 75% of its total assets, invest more than 5% of the
total value of its assets in the securities of any one issuer, or
purchase more than 10% of any class of securities of any one
company, including more than 10% of its outstanding voting
securities (except for investments in obligations issued or
guaranteed by the U.S. Government or its agencies or
instrumentalities).
3. Act as an underwriter, or issue senior securities except as set
forth in Investment Restriction 6 below.
4. Lend money, except that all Funds may purchase publicly distributed
bonds, debentures, notes and other evidences of indebtedness and may
buy from a bank or broker-dealer U.S. Government obligations with a
simultaneous agreement by the seller to repurchase them at the
original purchase price plus accrued interest, and may lend their
portfolio securities.
5. Borrow money for any purpose other than redeeming its Shares or
purchasing its Shares for cancellation, and then only as a
temporary measure up to an amount not exceeding 5% of the value of
its total assets, except that Templeton Bond, Stock, Asset
Allocation and International Funds may borrow money in amounts up
to 30% of the value of its net assets. Templeton Developing
Markets Fund may borrow money from banks in an amount up to 33 1/3%
of such Fund's total assets (including the amount borrowed),
but may not pledge, mortgage or hypothecate its assets for any
purpose, except to secure borrowings and then only to an extent
not greater than 15% of the Fund's total assets. Arrangements with
respect to margin for futures contracts, forward contracts and
related options are not deemed to be pledge of assets.
6. Invest more than 25% of its total assets in a single industry,
except that this limitation will not apply to investments in
securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities, or repurchase agreements on such securities,
and Templeton Money Market Fund may invest in obligations issued by
domestic banks (including certificates of deposit, repurchase
agreements, and bankers' acceptances) without regard to this
limitation.
As non-fundamental investment policies, which may be changed by the Board
of Trustees without Shareholder approval, a Fund will not invest more than 15%
of its total assets in securities of foreign issuers which are not listed on a
recognized United States or foreign securities exchange, or more than 15% of its
total assets in (a) securities with a limited trading market, (b) securities
subject to legal or contractual restrictions as to resale, and (c) repurchase
agreements not terminable within seven days. In addition, as non-fundamental
investment policies, Templeton Stock, Asset Allocation, Developing Markets and
International Funds will not invest more than 5% of each Fund's assets in debt
securities rated lower than Baa by Moody's Investors Service, Inc. or BBB by
Standard & Poor's Corporation.
Whenever any investment policy or investment restriction states a maximum
percentage of a Fund's assets which may be invested in any security or other
property, it is intended that such maximum percentage limitation be determined
immediately after and as a result of the Fund's acquisition of such security or
property. The investment restrictions do not preclude a Fund from purchasing the
securities of any issuer pursuant to the exercise of subscription rights
distributed to a Fund by the issuer, unless such purchase would result in a
violation of investment restriction number 7, or the non-fundamental investment
policies discussed above.
TRADING POLICIES
The Investment Managers and their affiliated companies serve as
investment manager to other investment companies and private clients.
Accordingly, the respective portfolios of certain of these funds and clients may
contain many or some of the same securities. When certain funds or clients are
engaged simultaneously in the purchase or sale of the same security, the trades
may be aggregated for execution and then allocated in a manner designed to be
equitable to each party. The larger size of the transaction may affect the price
of the security and/or the quantity which may be bought or sold for each party.
If the transaction is large enough, brokerage commissions may be negotiated
below those otherwise chargeable.
Sale or purchase of securities, without payment of brokerage commissions,
fees (except customary transfer fees) or other remuneration in connection
therewith, may be effected between any of these funds, or between funds and
private clients, under procedures adopted pursuant to Rule 17a-7 under the 1940
Act.
PERSONAL SECURITIES TRANSACTIONS. Access persons of the Franklin
Templeton Group, as defined in the SEC Rule 17(j) under the 1940 Act, who are
employees of Franklin Resources, Inc. or their subsidiaries, are permitted to
engage in personal securities transactions subject to the following general
restrictions and procedures: (1) The trade must receive advance clearance from a
Compliance Officer and must be completed within 24 hours after this clearance;
(2) Copies of all brokerage confirmations must be sent to the Compliance Officer
and within 10 days after the end of each calendar quarter, a report of all
securities transactions must be provided to the Compliance Officer; (3) In
addition to items (1) and (2), access persons involved in preparing and making
investment decisions must file annual reports of their securities holdings each
January and also inform the Compliance Officer (or other designated personnel)
if they own a security that is being considered for a fund or other client
transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
MANAGEMENT OF THE TRUST
The name, address, principal occupation during the past five years and
other information with respect to each of the Trustees and Principal Executive
Officers of the Trust are as follows:
<TABLE>
<CAPTION>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH TRUST DURING PAST FIVE YEARS
<S> <C>
HARRIS J. ASHTON Chairman of the Board, president, and chief executive
Metro Center officer of General Host Corporation (nursery and craft
1 Station Place centers); and a director of RBC Holdings (U.S.A.) Inc. (a
Stamford, Connecticut bank holding company) and Bar-S Foods. Age 63.
Trustee
NICHOLAS F. BRADY* Chairman of Templeton Emerging Markets Investment Trust
102 East Dover Street PLC; chairman of Templeton Latin America Investment Trust
Easton, Maryland PLC; chairman of Darby Overseas Investments, Ltd. (an
Trustee investment firm) (1994-present); director of the Amerada
Hess Corporation, Capital Cities/ABC, Inc., Christiana
Companies, and the H.J. Heinz Company; Secretary of the
United States Department of the Treasury (1988-January
1993); and chairman of the board of Dillion, Read & Co.
Inc. (investment banking) prior thereto. Age 65.
F. BRUCE CLARKE Retired; formerly, credit adviser for the Bank of Canada,
19 Vista View Blvd. Toronto. Age 86.
Thornhill, Ontario
Trustee
HASSO-G VON DIERGARDT-NAGLO Farmer; and president of Clairhaven Investments, Ltd. and
R.R. 3 other private investment companies. Age 79.
Stouffville, Ontario
Trustee
S. JOSEPH FORTUNATO Member of the law firm of Pitney, Hardin, Kipp & Szuch;
200 Campus Drive and a director of General Host Corporation. Age 63.
Florham Park, New Jersey
Trustee
</TABLE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH TRUST DURING PAST FIVE YEARS
<C> <C>
ANDREW H. HINES, JR. Consultant for the Triangle Consulting Group; chairman of
150 2nd Avenue N. the board and chief executive officer of Florida Progress
St. Petersburg, Florida Corporation (1982-February 1990) and director of various
Trustee of its subsidiaries;
chairman and director
of Precise Power
Corporation;
executive-in-residence
of Eckerd College
(1991-present); and a
director of Checkers
Drive-In Restaurants,
Inc. Age 72.
CHARLES B. JOHNSON* President and director of Franklin Resources, Inc.;
777 Mariners Island Blvd. chairman of the board and director of Franklin Advisers,
San Mateo, California Inc. and Franklin Templeton Distributors, Inc.; director
Chairman of the Board of General Host Corporation (nursery and craft centers),
and Vice President and Templeton Global Investors, Inc.; and officer and
director, trustee or
managing general
partner, as the case
may be, of most other
subsidiaries of
Franklin Resources,
Inc. Age 63.
BETTY P. KRAHMER Director or trustee of various civic associations;
2201 Kentmere Parkway formerly, economic analyst, U.S. Government. Age 66.
Wilmington, Delaware
Trustee
GORDON S. MACKLIN Chairman of White River Corporation (information
8212 Burning Tree Road services); director of Fund America Enterprises Holdings,
Bethesda, Maryland 20817 Inc., Lockheed Martin Corporation, MCI Communications
Trustee Corporation, Fusion
Systems Corporation,
Infovest Corporation,
and Medimmune, Inc.;
formerly chairman of
Hambrecht and Quist
Group; director, H&Q
Healthcare Investors;
and president of the
National Association
of Securities
Dealers, Inc. Age 67.
</TABLE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH TRUST DURING PAST FIVE YEARS
<S> <C>
FRED R. MILLSAPS Manager of personal investments (1978-present); chairman
2665 NE 37th Drive and chief executive officer of Landmark Banking
Fort Lauderdale, Florida Corporation (1969-1978); financial vice president of
Trustee Florida Power and
Light (1965-1969);
vice president of The
Federal Reserve Bank
of Atlanta
(1958-1965); director
of various other
business and
nonprofit
organizations.
Age 66.
CHARLES E. JOHNSON Senior vice president and director of Franklin Resources,
777 Mariners Island Blvd. Inc.; senior vice president of Franklin Templeton
San Mateo, California Distributors, Inc.; president and director of Franklin
President Institutional Service
Corporation and
Templeton Worldwide,
Inc.; chairman of the
board of Templeton
Investment Counsel,
Inc.; vice president
and/or director, as
the case may be, for
some of the
subsidiaries of
Franklin Resources,
Inc. Age 39.
MARK G. HOLOWESKO President and director of Templeton Global Advisors
Lyford Cay Limited; chief investment officer of the global equity
Nassau, Bahamas group for Templeton Worldwide, Inc.; president or vice
Vice President president
of the Templeton
Funds; formerly,
investment
administrator with
Roy West Trust
Corporation (Bahamas)
Limited (1984-1985).
Age 36.
</TABLE>
<TABLE>
<CAPITON>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH TRUST DURING PAST FIVE YEARS
<S> <C>
MARTIN L. FLANAGAN Senior vice president, treasurer, and chief financial
777 Mariners Island Blvd. officer of Franklin Resources, Inc.; executive vice
San Mateo, California president and director of Templeton Investment Counsel,
Vice President Inc.; director, president and chief executive officer of
Templeton Global Investors, Inc.; director or trustee and
president or vice president of various Templeton Funds;
accountant with Arthur Andersen & Company (1982-1983);
and a member of the International Society of Financial
Analysts and the American Institute of Certified Public
Accountants. Age 35.
SAMUEL J. FORESTER, JR. President of the Templeton Global Bond Managers Division
500 East Broward Blvd. of Templeton Investment Counsel, Inc.; president or vice
Fort Lauderdale, Florida president of other Templeton Funds; founder and partner
Vice President of Forester, Hairston Investment Management (1989-1990);
managing director (Mid-East Region) of Merrill Lynch,
Pierce, Fenner & Smith Inc. (1987-1988); and an advisor
for Saudi Arabian Monetary Agency (1982-1987). Age 47.
JOHN R. KAY Vice president of the Templeton Funds; vice president and
500 East Broward Blvd. treasurer of Templeton Global Investors, Inc. and
Fort Lauderdale, Florida Templeton Worldwide, Inc.; assistant vice president of
Vice President Franklin Templeton Distributors, Inc.;
formerly, vice president and controller, the
Keystone Group, Inc.
Age 55.
</TABLE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH TRUST DURING PAST FIVE YEARS
<S> <C>
THOMAS J. LATTA Vice president of the Templeton Global Bond Managers
500 East Broward Blvd. division of Templeton Investment Counsel, Inc.; vice
Fort Lauderdale, Florida president of various Templeton Funds; formerly, portfolio
Vice President manager,
Forester & Hairston
(1988-1991);
investment adviser,
Merrill Lynch,
Pierce, Fenner &
Smith Incorporated
(1981-1988).
Age 35.
RUPERT H. JOHNSON, JR. Executive vice president, secretary and director,
777 Mariners Island Blvd. Franklin Resources, Inc.; executive vice president and
San Mateo, California director, Franklin Templeton Distributors, Inc.;
Vice President executive
vice president,
Franklin Advisers,
Inc.; director,
Franklin Templeton
Investor Services,
Inc.; officer and/or
director, as the case
may be, of other
subsidiaries of
Franklin Resources,
Inc. Age 55
HARMON E. BURNS Executive vice president, secretary and director,
777 Mariners Island Blvd. Franklin Resources, Inc.; executive vice president and
San Mateo, California director, Franklin Templeton Distributors, Inc.;
Vice President executive
vice president,
Franklin Advisers,
Inc; director,
Franklin Templeton
Investor Services,
Inc.; officer and/or
director, as the case
may be, of other
subsidiaries of
Franklin Resources,
Inc. Age 51
DEBORAH R. GATZEK Senior Vice President, Legal,
777 Mariners Island Blvd. Franklin Resources, Inc.and
San Mateo, California Franklin Templeton Distributors, Inc.;
Vice President vice president, Franklin Advisers, Inc. Age 47
</TABLE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH TRUST DURING PAST FIVE YEARS
<S> <C>
THOMAS M. MISTELE Senior vice president of Templeton Global Investors,
700 Central Avenue Inc.; vice president of Franklin Templeton Distributors,
St. Petersburg, Florida Inc.; secretary of the Templeton Funds; formerly,
Secretary attorney, Dechert Price & Rhoads (1985-1988) and
Freehill, Hollingdale & Page (1988); and judicial clerk,
U.S. District Court (Eastern District of Virginia)
(1984-1985). Age 42.
JAMES R. BAIO Certified public accountant; treasurer of the Templeton
500 East Broward Blvd. Funds; senior vice president of Templeton Worldwide,
Fort Lauderdale, Florida Inc., Templeton Global Investors, Inc., and Templeton
Treasurer Funds Trust Company;
formerly, senior tax
manager, Ernst &
Young (certified
public accountants)
(1977-1989).
Age 41.
</TABLE>
--------------------------------------------------
* These are Trustees who are "interested persons" of the Trust as that
term is defined in the 1940 Act. Mr.Brady and Franklin Resources, Inc.
are limited partners of Darby Overseas Partners, L.P. ("Darby
Overseas"). Mr. Brady established Darby Overseas in February, 1994,
and is chairman and a shareholder of the corporate general partner of
Darby Overseas. In addition, Darby Overseas and Templeton Global
Advisors Limited are limited partners of Darby Emerging Markets Fund,
L.P.
There are no family relationships between any of the Trustees.
TRUSTEE COMPENSATION
All of the Trust's Officers and Trustees also hold positions with other
investment companies in the Franklin Templeton Group. No compensation is paid by
the Trust to any officer or trustee who is an officer, trustee or employee of
the Investment Managers or their affiliates. Each Templeton Fund pays its
independent directors and trustees and Mr. Brady an annual retainer and/or fees
for attendance at Board and Committee meetings, the amount of which is based on
the level of assets in each fund. Accordingly, the Trust currently pays the
independent Trustees and Mr. Brady an annual retainer of $6000.00 and a fee of
$500.00 per meeting attended of the Board and its Committees. The independent
Trustees and Mr. Brady are reimbursed for any expenses incurred in attending
meetings, paid pro rata by each Franklin Templeton Fund in which they serve. No
pension or retirement benefits are accrued as part of Trust expenses.
The following table shows the total compensation paid to the Trustees by
the Trust and by all investment companies in the Franklin Templeton Group:
<TABLE>
<CAPTION>
NUMBER OF FRANKLIN
AGGREGATE TEMPLETON FUND BOARDS TOTAL COMPENSATION FROM
COMPENSATION FROM ON WHICH TRUSTEE ALL FUNDS IN FRANKLIN
THE SERVES TEMPLETON GROUP*
NAME OF TRUSTEE TRUST*
<S> <C> <C> <C>
Harris J. Ashton $7,350 56 $327,925
Nicholas F. Brady 7,350 24 98,225
F. Bruce Clarke 7,697 20 83,350
Hasso-G von Diergardt-Naglo 7,697 20 77,350
S. Joseph Fortunato 7,350 58 344,745
Andrew H. Hines, Jr. 8,027 24 106,325
Betty P. Krahmer 7,350 24 93,475
Gordon S. Macklin 7,680 53 321,525
Fred R. Millsaps 7,697 24 104,325
</TABLE>
* FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995.
PRINCIPAL SHAREHOLDERS
Shares of the Fund are sold to and owned only by insurance company
separate accounts to serve as the investment vehicle for variable annuity and
life insurance contracts. As of March 18, 1996, there were 15,543,760 Shares of
Templeton Money Market Fund outstanding, of which no Shares were owned by the
Trustees and officers of the Trust; 3,019,923 Shares of Templeton Bond Fund
outstanding, of which no Shares were owned by the Trustees and officers of the
Trust; 27,074,495 Shares of Templeton Stock Fund outstanding, of which no Shares
were owned by the Trustees and officers of the Trust; 23,584,151 Shares of
Templeton Asset Allocation Fund outstanding, of which no Shares were owned by
the Trustees and officers of the Trust; and 27,604,099 Shares of Templeton
International Fund outstanding, of which no Shares were owned by the Trustees
and officers of the Trust. As of March 18, 1996, Phoenix Home Mutual Life
Insurance Company ("Phoenix Home Life") owned 100% of the outstanding Shares of
Templeton Money Market Fund, 59% of the outstanding Shares of Templeton Bond
Fund, 57% of the outstanding Shares of Templeton Stock Fund, 34% of the
outstanding Shares of Templeton Asset Allocation Fund, and 23% of the
outstanding Shares of Templeton International Fund As of March 18, 1996, The
Travelers Insurance Company ("The Travelers") owned 41% of the outstanding
Shares of Templeton Bond Fund, 43% of the outstanding Shares of Templeton Stock
Fund, and 40% of the outstanding Shares of Templeton Asset Allocation Fund. As
of March 18, 1996, the Variable Annuity Life Insurance Company ("VALIC") owned
26% of the outstanding shares of Templeton Asset Allocation Fund and 73% of
Templeton International Fund. However, Phoenix Home Life, The Travelers and
VALIC will exercise voting rights attributable to these Shares in accordance
with voting instructions received by owners of the contracts issued by Phoenix
Home Life, The Travelers, and VALIC. To this extent, Phoenix Home Life, The
Travelers and VALIC do not exercise control over the Trust by virtue of the
voting rights from their ownership of Trust Shares. To the knowledge of
management, as of March 18, 1996, no other person owned of record or
beneficially 5% or more of the Shares of any of the Funds.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGEMENT AGREEMENTS. The Investment Manager of Templeton
Money Market Fund and Templeton Bond Fund is the Templeton Global Bond Managers
division ("TGBM") of Templeton Investment Counsel, Inc. ("TICI"), a Florida
corporation with offices in Fort Lauderdale, Florida. The Investment Manager of
Templeton Asset Allocation Fund, Templeton Stock Fund, and Templeton
International Fund is TICI. The Investment Manager of Templeton Developing
Markets Fund is Templeton Asset Management Ltd. ("Templeton Singapore"). The
Investment Management Agreements between TICI and TGBM and the Trust on behalf
of such Funds (the "Management Agreements"), dated October 30, 1992, and amended
and restated on February 25, 1994, were approved by the Shareholders of the
Funds on October 30, 1992, and were last approved by the Board of Trustees,
including a majority of the Trustees who were not parties to the Agreements or
interested persons of any such party, at a meeting held on February 23, 1996,
and will continue through April 30, 1997. The Investment Management Agreement
between Templeton Singapore and the Trust on behalf of Templeton Developing
Markets Fund, dated February 23, 1996, was approved by the sole shareholder of
the Fund on March 1, 1996 and by the Board of Trustees, including a majority of
the Trustees who were not parties to the Agreement or interested persons of any
such party, at a meeting held on February 23, 1996 and will continue in effect
through April 30, 1997. The Management Agreements will continue from year to
year thereafter subject to approval annually by the Board of Trustees or by vote
of a majority of the outstanding Shares of each Fund (as defined in the 1940
Act) and also, in either event, the approval of a majority of those Trustees who
are not parties to the Management Agreements or interested persons of any such
party in person at a meeting called for the purpose of voting on such approval.
The Investment Management Agreements require the Investment Managers to
manage the investment and reinvestment of each Fund's assets. The Investment
Managers are not required to furnish any personnel, overhead items or facilities
for the Funds, including daily pricing or trading desk facilities, although such
expenses are paid by investment advisers of some other investment companies.
The Management Agreements provide that the Investment Managers will
select brokers and dealers for execution of each Fund's portfolio transactions
consistent with the Fund's brokerage policies (see "Brokerage Allocation").
Although the services provided by broker-dealers in accordance with the
brokerage policies incidentally may help reduce the expenses of or otherwise
benefit the Investment Managers and other investment management clients of the
Investment Managers and of their affiliates, as well as the Funds, the value of
such services is indeterminable and the Investment Managers' fee is not reduced
by any offset arrangement by reason thereof.
Under the Management Agreements, the Investment Managers are permitted to
provide investment advisory services to other clients, including clients which
may invest in the same types of securities as the Funds and, in providing such
services, the Investment Managers may use information furnished by others.
Conversely, information furnished by others to the Investment Managers in
providing services to other clients may be useful to the Investment Managers in
providing services to the Funds. When an Investment Manager determines to buy or
sell the same security for a Fund that the Investment Manager or certain of its
affiliates have selected for one or more of the Investment Manager's other
clients or for clients of its affiliates, the orders for all such securities
trades may be placed for execution by methods determined by the Investment
Manager, with approval by the Board of Trustees, to be impartial and fair, in
order to seek good results for all parties. Records of securities transactions
of persons who know when orders are placed by a Fund are available for
inspection at least four times annually by the compliance officer of the Trust
so that the non-interested Trustees (as defined in the 1940 Act) can be
satisfied that the procedures are generally fair and equitable to all parties.
The Investment Managers also provide management services to numerous
other investment companies or funds and accounts pursuant to management
agreements with each fund or account. The Investment Managers may give advice
and take action with respect to any of the other funds and accounts they manage,
or for their own accounts, which may differ from the action taken by an
Investment Manager on behalf of a Fund. Similarly, with respect to a Fund, an
Investment Manager is not obligated to recommend, purchase or sell, or to
refrain from recommending, purchasing or selling any security that the
Investment Manager and access persons, as defined by the 1940 Act, may purchase
or sell for its or their own account or for the accounts of any other fund or
accounts. Furthermore, the Investment Managers are not obligated to refrain from
investing in securities held by a Fund or other funds which they manage or
administer. Any transactions for the accounts of the Investment Managers and
other access persons will be made in compliance with the Trust's Code of Ethics
as described in the section "Trading Policies - Personal Securities
Transactions."
The Management Agreements provide that the Investment Managers shall have
no liability to the Trust, a Fund or any Shareholder of a Fund for any error of
judgment, mistake of law, or any loss arising out of any investment or other act
or omission in the performance by the Investment Manager of its duties under the
Management Agreement, or for any loss or damage resulting from the imposition by
any government of exchange control restrictions which might affect the liquidity
of a Fund's assets, or from acts or omissions of custodians or securities
depositories, or from any wars or political acts of any foreign governments to
which such assets might be exposed, except any liability resulting from willful
misfeasance, bad faith or gross negligence on the Investment Manager's part, or
reckless disregard of its duties under the Management Agreement. The Management
Agreements will terminate automatically in the event of their assignment, and
may be terminated by the Trust on behalf of a Fund at any time without payment
of any penalty on 60 days' written notice, with the approval of a majority of
the Trustees in office at the time or by vote of a majority of the outstanding
voting securities of that Fund (as defined by the 1940 Act).
MANAGEMENT FEES. For its services, Templeton Money Market Fund pays its
Investment Manager a monthly fee equal on an annual basis to 0.35% of its
average daily net assets up to $200 million, reduced to 0.30% of such net assets
from $200 million up to $1,300 million and further reduced to 0.25% of such net
assets in excess of $1,300 million. Templeton Bond, Stock, Asset Allocation and
International Funds each pay their Investment Manager a monthly fee equal on an
annual basis to 0.50% of its average daily net assets up to $200 million,
reduced to 0.45% of such net assets from $200 million up to $1,300 million and
further reduced to 0.40% of such net assets in excess of $1,300 million.
Templeton Developing Markets Fund pays its Investment Manager a monthly fee
equal on an annual basis to 1.25% of its average daily net assets. During the
fiscal years ended December 31, 1995, 1994 and 1993, the Funds paid the
following investment management fees:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C>
Templeton Money Market Fund $74,375 $88,106 $55,445
Templeton Bond Fund $156,062 $149,843 $111,575
Templeton Stock Fund $2,102,259 $1,686,602 $1,089,643
Templeton Asset Allocation Fund $1,662,023 $1,186,540 $608,471
Templeton International Fund $1,222,834 $404,532 $95,518
</TABLE>
The Investment Managers may determine in advance to limit the management
fees or to assume responsibility for the payment of certain operating expenses
relating to the operation of any Fund, which may have the effect of decreasing
the total expenses and increasing the total return of such Fund. Any such action
is voluntary and may be terminated by the Investment Managers at any time unless
otherwise indicated. Templeton Singapore, the Investment Manager of Templeton
Developing Markets Fund, has agreed in advance to reduce its fee to the extent
necessary to limit the total expenses (excluding interest, taxes, brokerage
commissions, and extraordinary expenses) of such Fund to an annual rate of 1.70%
of the Fund's average daily net assets until May 1, 1997. If such fee reduction
is insufficient to limit such Fund's total expenses to 1.70% of average daily
net assets, the Fund's Business Manager has agreed to reduce its fee and, to the
extent necessary, assume other Fund expenses, so as to so limit the Fund's total
expenses.
THE INVESTMENT MANAGERS. The Investment Managers are indirect wholly
owned subsidiaries of Franklin, a publicly traded company whose shares are
listed on the NYSE. Charles B. Johnson (a Trustee and Vice President of the
Trust) and Rupert H. Johnson, Jr. are principal shareholders of Franklin and
own, respectively, approximately 20% and 16% of its outstanding shares.
Messrs. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
BUSINESS MANAGER. Templeton Funds Annuity Company performs certain
administrative functions as Business Manager for the Trust, including:
providing office space, telephone, office equipment and supplies
for the Trust; paying compensation of the Trust's officers for
services rendered as such; authorizing expenditures and approving
bills for payment on behalf of the Trust; supervising preparation
of annual and semi-annual reports, notices of dividends, capital
gains
distributions and tax credits;
daily pricing of the Funds' investment portfolios and supervising
publication of daily quotations of the bid and asked prices of the
Funds' Shares, earnings reports and other financial data;
providing trading desk facilities for the Funds;
monitoring relationships with organizations serving the
Trust, including the Custodian and printers;
supervising compliance by the Trust with recordkeeping
requirements under the 1940 Act and regulations thereunder, with
state regulatory requirements, maintaining books and records for
the Trust (other than those maintained by the Custodian and
Transfer Agent), and filing of tax reports on behalf of the Trust
other than the Trust's income tax returns; and
providing executive, clerical and secretarial help needed to
carry out these responsibilities.
For its services, the Business Manager receives a monthly fee equal on an
annual basis to 0.15% of the combined average daily net assets of the Funds,
reduced to 0.135% of the Funds' aggregate net assets in excess of $200 million,
further reduced to 0.10% annually of such net assets in excess of $700 million
and further reduced to 0.075% annually of such net assets in excess of $1,200
million. The fee is allocated among the Funds according to their respective
average daily net assets. Since the Business Manager's fee covers services often
provided by investment advisers to other funds, the Funds' combined expenses for
management and administrative services together may be higher than those of some
other investment companies. During the fiscal years ended December 31, 1995,
1994, and 1993, the Business Manager received fees of $1,380,760, $1,006,867 and
$568,481, respectively.
The Business Manager is relieved of liability to the Trust for any act or
omission in the course of its performance under the Business Management
Agreement, in the absence of willful misfeasance, bad faith, gross negligence,
or reckless disregard of its obligations and duties under the Agreement. The
Business Management Agreement may be terminated by a Fund at any time on 60
days' written notice without payment of penalty, provided that such termination
shall be directed or approved by vote of a majority of the Trustees of the Trust
in office at the time or by vote of a majority of the outstanding voting
securities of that Fund, and shall terminate automatically and immediately in
the event of its assignment.
Templeton Funds Annuity Company is an indirect wholly-owned subsidiary of
Franklin.
CUSTODIAN. The Chase Manhattan Bank, N.A. serves as Custodian of the
Trust's assets, which are maintained at the Custodian's principal office,
MetroTech Center, Brooklyn, New York, New York 11245 and at the offices of its
branches and agencies throughout the world. The Custodian has entered into
agreements with foreign sub-custodians approved by the Trustees pursuant to Rule
17f-5 under the 1940 Act. The Custodian, its branches and sub-custodians,
generally domestically and frequently abroad, do not actually hold certificates
for the securities in their custody, but instead have book records with domestic
and foreign securities depositories, which in turn have book records with the
transfer agents of the issuers of the securities. Compensation for the services
of the Custodian is based on a schedule of charges agreed on from time to time.
LEGAL COUNSEL. Dechert Price & Rhoads, 1500 K Street, N.W.,
Washington, D.C. 20005, is legal counsel for the Trust.
INDEPENDENT ACCOUNTANTS. McGladrey & Pullen, LLP, 555 Fifth Avenue, New
York, New York 10017, serves as independent accountants for the Trust. Its audit
services comprise examination of the Trust's financial statements, review of the
Trust's filings with the Securities and Exchange Commission ("SEC") and
preparation of the Trust's federal and state corporation tax returns.
REPORTS TO SHAREHOLDERS. The Trust's fiscal year ends on December 31.
Shareholders are provided at least semiannually with reports showing the Funds'
portfolios and other information, including an annual report with financial
statements audited by independent accountants. Shareholders who would like to
receive an interim quarterly report may phone the Fund Information Department at
1-800/DIAL BEN.
BROKERAGE ALLOCATION
The Management Agreements provide that the Investment Managers are
responsible for selecting members of securities exchanges, brokers and dealers
(such members, brokers and dealers being hereinafter referred to as "brokers")
for the execution of a Fund's portfolio transactions, and, when applicable, the
negotiation of commissions in connection therewith. All recommendations,
decisions and placements are made in accordance with the following principles:
1. Purchase and sale orders are usually placed with brokers
who are selected by an Investment Manager as able to achieve
"best execution" of such orders. "Best execution" means
prompt and reliable execution at the most favorable
securities price, taking into account the other provisions
hereinafter set forth. The determination of what may
constitute best execution and price in the execution of a
securities transaction by a broker involves a number of
considerations, including, without limitation, the overall
direct net economic result to a Fund (involving both price
paid or received and any commissions and other costs paid),
the efficiency with which the transaction is effected, the
ability to effect the transaction at all where a large block
is involved, availability of the broker to stand ready to
execute possibly difficult transactions in the future, and
the financial strength and stability of the broker. Such
considerations are judgmental and are weighed by an
Investment Manager in determining the overall reasonableness
of brokerage commissions.
2. In selecting brokers for portfolio transactions, the
Investment Managers take into account its past experience as
to brokers qualified to achieve "best execution," including
brokers who specialize in any foreign securities held by a
Fund.
3. The Investment Managers are authorized to allocate brokerage
business to brokers who have provided brokerage and research
services, as such services are defined in Section 28(e) of the
Securities Exchange Act of 1934 (the "1934 Act"), for a Fund
and/or other accounts, if any, for which an Investment Manager
exercises investment discretion (as defined in Section 3(a)
(35) of the 1934 Act) and, as to transactions as to which
fixed minimum commission rates are not applicable, to
cause a Fund to pay a commission for effecting a securities
transaction in excess of the amount another broker would
have charged for effecting that transaction, if an
Investment Manager in making the selection in question
determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and
research services provided by such broker, viewed in terms
of either that particular transaction or the Investment
Manager's overall responsibilities with respect to the Fund
and the other accounts, if any, as to which it exercises
investment discretion. In reaching such determination, an
Investment Manager is not required to place or to attempt to
place a specific dollar value on the research or execution
services of a broker or on the portion of any commission
reflecting either of said services. In demonstrating that
such determinations were made in good faith, the Investment
Manager shall be prepared to show that all commissions were
allocated and paid for purposes contemplated by the Trust's
brokerage policy; that the research services provide
lawful and appropriate assistance to an Investment Manager
in the performance of its investment decision-making
responsibilities; and that the commissions paid were within a
reasonable range. The determination that commissions were
within a reasonable range shall be based on any available
information as to the level of commissions known to be
charged by other brokers on comparable transactions, but
there shall be taken into account the Trust's policies
that (i) obtaining a low commission is deemed secondary to
obtaining a favorable securities price, since it is
recognized that usually it is more beneficial to a Fund to
obtain a favorable price than to pay the lowest commission
and (ii) the quality, comprehensiveness and frequency of
research studies which are provided for an Investment
Manager are useful to the Investment Manager in performing
its management services under its Managementa Agreement
with the Trust. Research services provided by brokers to
an Investment Manager are considered to be in addition to,
and not in lieu of, services required to be performed by
the Investment Manager under its Management Agreement with
the Trust. Research furnished by brokers through whom a
Fund effects securities transactions may be used by an
Investment Manager for any of its accounts, and not all
such research may be used by the Investment Manager for
that Fund. When execution of portfolio transactions is
allocated to brokers trading on exchanges with fixed
brokerage commission rates, account may be taken of various
services provided by the broker, including quotations
outside the United States for daily pricing of foreign
securities held in a Fund's portfolio.
4. Purchases and sales of portfolio securities within the United
States other than on a securities exchange are executed with
primary market makers acting as principal, except where, in
the judgement of an Investment Manager, better prices and
execution may be obtained on a commission basis or from other
sources.
5. Sales of shares of investment companies registered under the
1940 Act which have either the same investment adviser, or an
investment adviser affiliated with an Investment Manager,
made by a broker is one factor among others to be taken
into account in deciding to allocate portfolio transactions
(including agency transactions, principal transactions,
purchases in underwritings or tenders in response to tender
offers) for the account of a Fund to that broker; provided
that the broker shall furnish "best execution," as defined
in paragraph 1 above, and that such allocation shall be
within the scope of the Fund's other policies as stated above;
and provided further, that in every allocation made to a
broker in which such sale of shares is taken into account
there shall be no increase in the amount of the commissions
or other compensation paid to such broker beyond a reasonable
commission or other compensation determined, as set forth in
paragraph 3 above, on the basis of best execution alone or
best execution plus research services, without taking
account of or placing any value upon such sale of shares.
Insofar as known to management, no Trustee or officer of the Trust, nor
the Investment Manager or Principal Underwriter or any person affiliated with
any of them, has any material direct or indirect interest in any broker employed
by or on behalf of the Trust. Franklin Templeton Distributors, Inc., the Trust's
Principal Underwriter, is a registered broker-dealer, but it has never executed
any purchase or sale transactions for the Funds' portfolios or participated in
any commissions on any such transactions, and has no intention of doing so in
the future. The total brokerage commissions on the Trust's portfolio
transactions (not including any spreads or concessions on principal
transactions) during the fiscal years ended December 31, 1995, 1994, and 1993
were $1,525,000,$672,000 and $340,552, respectively. All portfolio transactions
are allocated to broker-dealers only when their prices and execution, in the
good faith judgment of management, are equal to the best available within the
scope of the Trust's policies. There is no fixed method used in determining
which broker-dealers receive which order or how many orders.
PORTFOLIO TURNOVER. For reporting purposes, each Fund's portfolio
turnover rate is calculated by dividing the value of the lesser of purchases or
sales of portfolio securities for the fiscal year by the monthly average of the
value of the portfolio securities owned by the Fund during the fiscal year. In
determining such portfolio turnover, short-term U.S. Government securities and
all other securities whose maturities at the time of acquisition were one year
or less are excluded. A 100% portfolio turnover rate would occur, for example,
if all of the securities in the portfolio (other than short-term securities)
were replaced once during the fiscal year. The portfolio turnover rate for each
of the Funds will vary from year to year, depending on market conditions.
It is anticipated that the rate of portfolio turnover as defined above
for Templeton Stock, Asset Allocation, International and Developing Markets
Funds will be less than 50%, and for Templeton Bond Fund, less than 100%, under
normal market conditions. Portfolio turnover could be greater in periods of
unusual market movement and volatility. Templeton Bond Fund's portfolio turnover
rates for the fiscal years ended December 31, 1995 and 1994 were 188.11% and
203.91%, respectively. These rates exceed the anticipated portfolio turnover
rate for Templeton Bond Fund as a result of changing interest rates and currency
exposure considerations.
PURCHASE, REDEMPTION AND PRICING OF SHARES
The Prospectus describes the manner in which a Fund's Shares may be
purchased and redeemed. See "How to Buy Shares of the Funds" and "How to Sell
Shares of the Funds."
Net asset value per Share is calculated separately for each Fund. Net
asset value per Share is determined as of the scheduled closing time of the NYSE
(generally 4:00 p.m., New York time) every Monday through Friday (exclusive of
national business holidays). The Trust's offices will be closed, and net asset
value will not be calculated, on those days on which the NYSE is closed, which
currently are: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Templeton Money Market Fund uses the amortized cost method to determine
the value of its portfolio securities pursuant to Rule 2a-7 under the 1940 Act.
The amortized cost method involves valuing a security at its cost and amortizing
any discount or premium over the period until maturity, regardless of the impact
of fluctuating interest rates on the market value of the security. While this
method provides certainty in valuation, it may result in periods during which
the value, as determined by amortized cost, is higher or lower than the price
which Templeton Money Market Fund would receive if the security were sold.
During these periods the yield to a shareholder may differ somewhat from that
which could be obtained from a similar fund which utilizes a method of valuation
based upon market prices. Thus, during periods of declining interest rates, if
the use of the amortized cost method resulted in a lower value of the Fund's
portfolio on a particular day, a prospective investor in the Fund would be able
to obtain a somewhat higher yield than would result from investment in a fund
utilizing solely market values, and existing Shareholders would receive
corresponding less income. The converse would apply during periods of rising
interest rates.
In accordance with Rule 2a-7, the Fund is required to (i) maintain a
dollar-weighted average portfolio maturity of 90 days or less; (ii) purchase
only instruments having remaining maturities of 397 days or less; and (iii)
invest only in U.S. dollar denominated securities determined in accordance with
procedures established by the Board of Trustees to present minimal credit risks
and which are rated in one of the two highest rating categories for debt
obligations by at least two nationally recognized statistical rating
organizations (or one rating organization if the instrument was rated by only
one such organization, subject to ratification of the investment by the Board of
Trustees). If a security is unrated, it must be of comparable quality as
determined in accordance with procedures established by the Board of Trustees,
including approval or ratification of the security by the Board except in the
case of U.S. Government securities. Pursuant to the Rule, the Board is required
to establish procedures designed to stabilize, to the extent reasonably
possible, the Fund's price per Share as computed for the purpose of sales and
redemptions at $1.00. Such procedures will include review of the Fund's
portfolio holdings by the Board of Trustees, at such intervals as it may deem
appropriate, to determine whether the Fund's net asset value calculated by using
available market quotations deviates from $1.00 per Share based on amortized
cost. The extent of any deviation will be examined by the Board of Trustees. If
such deviation exceeds 1/2 of 1%, the Board will promptly consider what action,
if any, will be initiated. In the event the Board determines that a deviation
exists which may result in material dilution or other unfair results to
investors or existing Shareholders, the Board will take such corrective action
as it regards as necessary and appropriate, including the sale of portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity, withholding dividends or establishing a net asset
value per Share by using available market quotations.
The Board of Trustees may establish procedures under which a Fund may
suspend the determination of net asset value for the whole or any part of any
period during which (1) the NYSE is closed other than for customary weekend and
holiday closings, (2) trading on the NYSE is restricted, (3) an emergency
exists, as determined by the SEC, as a result of which disposal of securities
owned by the Fund is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or (4)
for such other period as the SEC may by order permit for the protection of the
holders of a Fund's Shares.
REDEMPTIONS IN KIND. Redemption proceeds are normally paid in cash;
however each Fund may pay the redemption price in whole or in part by a
distribution in kind of securities from the portfolio of the Fund, in lieu of
cash, in conformity with rules of the SEC. In such circumstances, the securities
distributed would be valued at the price used to compute the Fund's net asset
value. If Shares are redeemed in kind, the redeeming Shareholder might incur
brokerage costs in converting the assets into cash. Each Fund is obligated to
redeem Shares solely in cash up to the lesser of $250,000 or 1% of its net
assets during any 90-day period for any one Shareholder.
TAX STATUS
Templeton Money Market Fund intends to declare dividends daily and to pay
dividends monthly. Templeton Stock, Bond, Asset Allocation, Developing Markets
and International Funds normally intend to pay an annual dividend representing
substantially all of their net investment income and to distribute annually any
net realized capital gains. By so doing and meeting certain diversification of
assets and other requirements of the Internal Revenue Code of 1986, as amended
(the "Code"), and as described in the Prospectus, each Fund intends to qualify
as a regulated investment company under the Code. The status of the Funds as
regulated investment companies does not involve government supervision or
management of their investment practices or policies. As a regulated investment
company, each Fund will be relieved of liability for United States federal
income tax on that portion of its net investment income and net realized capital
gains which it distributes to its Separate Account Shareholders.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are also subject to a nondeductible 4% excise tax
unless the exception described below applies. To avoid the tax if it otherwise
applies, a Fund must distribute during each calendar year, (i) at least 98% of
its ordinary income (not taking into account any capital gains or losses) for
the calendar year, (ii) at least 98% of its capital gains in excess of its
capital losses for the twelve-month period ending on October 31 of the calendar
year (adjusted for certain ordinary losses), and (iii) all ordinary income and
capital gains for previous years that were not distributed during such years. To
avoid application of the excise tax, each Fund intends to make its distributions
in accordance with the calendar year distribution requirement. A distribution
will be treated as paid on December 31 of the calendar if it is declared by a
Fund during October, November, or December of that year to Shareholders of
record on a date in such a month and paid by the Fund during January of the
following calendar year. Such distributions will be taxable to Shareholders (a
Separate Account) in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received. The
excise tax provisions described above will not apply in a given calendar year to
a Fund if all of its shareholders at all times during the calendar year are
segregated asset accounts of life insurance companies where the shares are held
in connection with variable contracts. (For this purpose, any shares of a
regulated investment company attributable to an investment not exceeding
$250,000 made in connection with the organization of the company is not taken
into account.) Accordingly, if this condition regarding the ownership of Shares
of each of the Funds is met, the excise tax will be inapplicable to that Fund
even if the calendar year distribution requirement is not met.
The Funds 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 a Fund receives a so-called "excess distribution"
with respect to PFIC stock, the Fund itself may be subject to tax on a portion
of the excess distribution, whether or not the corresponding income is
distributed by the Fund to Shareholders. In general, under the PFIC rules, an
excess distribution is treated as having been realized ratably over the period
during which a Fund held the PFIC shares. A 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. 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.
The Funds may be eligible to elect alternative tax treatment with respect
to PFIC shares. Under an election that currently is available in some
circumstances, a 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 in a given year. If this election were
made, the special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, another election may be available
that would involve marking to market the Fund's PFIC shares at the end of each
taxable year (and on certain other dates prescribed in the Code), with the
result that unrealized gains are treated as though they were realized. If this
election were made, tax at the Fund level under the PFIC rules would generally
be eliminated, but the Fund could, in limited circumstances, incur nondeductible
interest charges. The Fund's intention to qualify annually as a regulated
investment company may limit its elections with respect to PFIC shares.
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject a Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to Shareholders, and which will be taxed to Shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC shares.
Income received by a Fund from sources within a foreign country may be
subject to withholding taxes and other taxes imposed by that country. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Fund accrues income or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and the
time that Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss. Similarly, on
disposition of debt securities denominated in a foreign currency and on
disposition of certain financial contracts and forward contracts, gains or
losses attributable to fluctuations in the value of foreign currency between the
date of acquisition of the security or contract and the date of disposition also
are treated as ordinary gain or loss. These gains or losses, referred to under
the Code as "Section 988" gains or losses, may increase or decrease the amount
of a Fund's net investment income to be distributed to its Shareholders as
ordinary income.
Debt securities purchased by a Fund may be treated for federal income tax
purposes as having original issue discount. Original issue discount essentially
represents interest for federal income tax purposes and can be defined generally
as the excess of the stated redemption price at maturity over the issue price.
Original issue discount, whether or not any income is actually received by a
Fund, is treated for U.S. federal income tax purposes as ordinary income earned
by the Fund, and therefore is subject to the distribution requirements of the
Code. Generally, the amount of original issue discount included in the income of
a Fund each year is determined on the basis of a constant yield to maturity
which takes into account the compounding of accrued but unpaid interest.
Some of the debt securities may be purchased by the Fund at a discount
which exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for Federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount will be treated as ordinary income to the extent it does not exceed the
accrued market discount on such debt security. Generally, market discount
accrues on a daily basis for each day the debt security is held by the Fund at a
constant rate over the time remaining to the debt security's maturity or, at the
election of the Fund, at a constant yield to maturity which takes into account
the semiannual compounding of interest.
Certain options, futures contracts and forward contracts in which the
Templeton Stock, Bond, Asset Allocation, Developing Markets and International
Funds may invest are "section 1256 contracts." Gains or losses on section 1256
contracts generally are considered 60% long-term and 40% short-term capital
gains or losses ("60-40"), except for certain foreign currency gains and losses
which will be treated as ordinary in character. Also, section 1256 contracts
held by a Fund at the end of each taxable year (and, in some cases, for purposes
of the 4% excise tax, on October 31 of each year) are "marked-to-market" with
the result that unrealized gains or losses are treated as though they were
realized.
The hedging transactions undertaken by certain of the Funds may result in
"straddles" for federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by a Fund. In addition, losses realized
by a Fund on positions that are part of a straddle may be deferred under the
straddle rules, rather than being taken into account in calculating the taxable
income for the taxable year in which such losses are realized. Because only a
few regulations implementing the straddle rules have been promulgated, the tax
consequences to the Funds of hedging transactions are not entirely clear. The
hedging transactions may increase the amount of short-term capital gain realized
by the Funds which is taxed as ordinary income when distributed to Shareholders.
Each Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the elections made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not engage in such hedging transactions.
The requirements under the Code relating to the qualification of a Fund
as a regulated investment company may limit the extent to which a Fund may
engage in futures and forward currency contracts.
Distributions of any net investment income and of any net realized short
term capital gains are treated as ordinary income for tax purposes in the hands
of the Separate Account Shareholder. The excess of any net long-term capital
gains over net short-term capital losses will, to the extent distributed and
designated by the distributing Fund as a capital gain dividend, be treated as
long-term capital gains in the hands of the Shareholder regardless of the length
of time a Separate Account may have held the Shares.
Reference is made to the Prospectus for the applicable Contract for
information regarding the federal income tax treatment of distributions to
owners of contracts.
DESCRIPTION OF SHARES
The Shares of each Fund have the same preferences, conversion and other
rights, voting powers, restrictions and limitations as to dividends,
qualifications, and terms and conditions of redemption, except as follows: all
consideration received from the sale of Shares of a Fund, together with all
income, earnings, profits and proceeds thereof, belongs to that Fund and is
charged with liabilities in respect to that Fund and of that Fund's part of
general liabilities of the Trust in the proportion that the total net assets of
the Fund bear to the total net assets of all Funds. The net asset value of a
Share of a Fund is based on the assets belonging to that Fund less the
liabilities charged to that Fund, and dividends are paid on Shares of a Fund
only out of lawfully available assets belonging to that Fund. In the event of
liquidation or dissolution of the Trust, the Shareholders of each Fund will be
entitled, out of assets of the Fund available for distributions, to the assets
belonging to that particular Fund.
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims liability of the Shareholders, Trustees or
officers of the Trust for acts or obligations of the Trust, which, under the
terms of the Declaration of Trust, are binding only on the property of the
Trust, which, under the terms of the Declaration of Trust, are binding only on
the property of the Trust. The Declaration of the Trust provides for
indemnification out of Trust property for all loss and expense of any
Shareholder held personally liable for the obligations of the Trust. The risk of
a Shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations and, thus, should be considered remote.
YIELD AND PERFORMANCE INFORMATION
The Trust may, from time to time, include the yield and effective yield
of Templeton Money Market Fund or the total return of all Funds in
advertisements or reports to Shareholders or prospective investors. Performance
information for the Funds will not be advertised unless accompanied by
comparable performance information for a separate account to which the Funds
offer their Shares.
Current yield for Templeton Money Market Fund will be based on the change
in the value of a hypothetical investment (exclusive of capital changes) over a
particular seven-day period, less a pro-rata share of Templeton Money Market
Fund expenses accrued over that period (the "base period"), and stated as a
percentage of the investment at the start of the base period (the "base period
return"). The base period return is then annualized by multiplying by 365/7,
with the resulting yield figure carried to at least the nearest hundredth of one
percent. "Effective Yield" for Templeton Money Market Fund assumes that all
dividends received during an annual period have been reinvested. Calculation of
"effective yield" begins with the same "base period return" used in the
calculation of yield, which is then annualized to reflect weekly compounding
pursuant to the following formula:
EFFECTIVE YIELD = (1 + Base Period Return) 365/7 - 1
YIELD = 2[(1 + A-B)6 - 1]
cd
WHERE a = dividend and interest earned during the period,
b = expenses accrued for the period (net of
reimbursements),
c = the average daily number of Shares outstanding during
the period that were entitled to receive dividends, and
d = the maximum offering price per Share on the last day
of the period.
For the seven-day period ending December 31, 1995, the 7-day annualized
yield of Money Market Fund was 5.29% and the effective yield of Money Market
Fund was 5.36%.
Quotations of average annual total return for the Funds will be expressed
in terms of the average annual compounded rate of return for periods in excess
of one year or the total return for periods less than one year of a hypothetical
investment in the Funds over periods of one, five, or ten years (up to the life
of a Fund) calculated pursuant to the following formula: P(1 + T)n = ERV (where
P = a hypothetical initial payment of $1,000, T = the average annual total
return for periods of one year or more or the total return for periods of less
than one year, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All total
return figures reflect the deduction of the maximum initial sales charge and
deduction of a proportional share of Fund expenses on an annual basis, and
assume that all dividends and distributions are reinvested when paid. The
following table shows the average annual total returns for each Fund for the
periods indicated:
<TABLE>
<CAPTION>
FUND 1 YEAR PERIOD(1) 5 YEAR PERIOD(1) SINCE INCEPTION
- ---- ------------- ------------- ---------------
<S> <C> <C> <C>
Money Market Fund 5.35% 3.98% 5.03%(2)
Bond Fund 14.92% 8.30% 7.81%(2)
Stock Fund 25.24% 17.48% 12.31%(2)
Asset Allocation Fund 22.48% 15.66% 11.44%(2)
International Fund 15.78% 13.00%(3)
</TABLE>
- --------------------------------------
(1) For period ended December 31, 1995
(2) Since inception on August 31, 1988
(3) Since inception on May 1, 1992
Performance information for a Fund may be compared, in reports and
promotional literature, to: (i) unmanaged indices so that investors may compare
the Fund's results with those of a group of unmanaged securities widely regarded
by investors as representative of the securities market in general; (ii) other
groups of mutual funds tracked by Lipper Analytical Services, Inc., a widely
used independent research firm which ranks mutual funds by overall performance,
investment objectives and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from an investment in a Fund. Unmanaged indices may
assume the reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.
Quotations of yield or total return for a Fund will not take into account
charges and deductions against any separate account to which the Funds' Shares
are sold or charges and deductions against variable insurance contracts,
although comparable performance information for a separate account will take
such charges into account. Performance information for a Fund reflects only the
performance of a hypothetical investment in a Fund during the particular time
period on which the calculations are based. Performance information should be
considered in light of a Fund's investment objective and policies,
characteristics and quality of the portfolio and the market conditions during
the given time period, and should not be considered as a representation of what
may be achieved in the future.
From time to time, each Fund and the Investment Managers may also refer
to the following information:
(1) The Investment Managers' and their affiliates' market share of
international equities managed in mutual funds prepared or
published by Strategic Insight or a similar statistical
organization.
(2) The performance of U.S. equity and debt markets relative to
foreign markets prepared or published by Morgan Stanley Capital
International or a similar financial organization.
(3) The capitalization of U.S. and foreign stock markets as
prepared or published by the International Finance
Corporation, Morgan Stanley Capital International or a
similar financial organization.
(4) The geographic distribution of the Fund's portfolio and the
Fund's top ten holdings.
(5) The gross national product and populations, including age
characteristics, literacy rates, foreign investment improvements
due to a liberalization of securities laws and a reduction of
foreign exchange controls, and improving communication
technology, of various countries as published by various
statistical organizations.
(6) To assist investors in understanding the different returns and
risk characteristics of various investments, the Fund may show
historical returns of various investments and published indices
(E.G., Ibbotson Associates, Inc. Charts and Morgan Stanley EAFE
- Index).
(7) The major industries located in various jurisdictions as
published by the Morgan Stanley Index.
(8) Rankings by DALBAR Surveys, Inc. with respect to mutual fund
shareholder services.
(9) Allegorical stories illustrating the importance of persistent
long-term investing.
(10) The Fund's portfolio turnover rate and its ranking relative to
industry standards as published by Lipper Analytical Services,
Inc. or Morningstar, Inc.
(11) A description of the Templeton organization's investment
management philosophy and approach, including its worldwide
search for undervalued or "bargain" securities and its
diversification by industry, nation and type of stocks or other
securities.
(12) The number of Shareholders in the Fund or the aggregate number
of shareholders of the Franklin Templeton Funds or the dollar
amount of fund and private account assets under management in
advertising materials.
(13) Quotations from the Templeton organization's founder, Sir John
Templeton,** advocating the virtues of diversification and
long-term investing, including the following:
o "Never follow the crowd. Superior performance is
possible only if you invest differently from the
crowd."
o "Diversify by company, by industry and by country."
o "Always maintain a long-term perspective."
o "Invest for maximum total real return."
o "Invest - don't trade or speculate."
o "Remain flexible and open-minded about types of
investment."
o "Buy low."
o "When buying stocks, search for bargains among
quality stocks."
o "Buy value, not market trends or the economic
outlook."
o "Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
o "Do your homework or hire wise experts to help you."
o "Aggressively monitor your investments."
o "Don't panic."
o "Learn from your mistakes."
o "Outperforming the market is a difficult task."
o "An investor who has all the answers doesn't even
understand all the questions."
o "There's no free lunch."
o "And now the last principle: Do not be fearful or
negative too often."
FINANCIAL STATEMENTS
The financial statements contained in the Trust's Annual Report to
Shareholders dated December 31, 1995 are incorporated herein by reference.
APPENDIX
DESCRIPTION OF BOND RATINGS
MOODY'S INVESTORS SERVICE
Aaa: Bonds which are rated Aaa by Moody's Investors Service Inc.
("Moody's") are judged to be of the best quality. They carry the smallest degree
of investment risk and are generally referred to as "gilt edge." Interest
payments are protected by a large or by an 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 which are rated Aa are judged to be of high quality by all
standards. Together with a 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 as in Aaa securities or fluctuation of protective
elements may be of greater amplitude, or there may be other elements present
which make the long-term risks appear somewhat greater than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade
obligations, (I.E., 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. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and, thereby, not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the security over any long period of time may
be small.
Caa: Bonds which are rated Caa are of poor standing. Such securities
may be in default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds are
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Absence of Rating: Where no rating has been assigned or where a rating
has been suspended or withdrawn, it may be for reasons unrelated to the quality
of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are
not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
ratings classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
STANDARD & POOR'S CORPORATION
AAA: Debt rated "AAA" by Standard & Poor's Corporation ("S&P") has
the highest rating assigned by S&P. Capacity to pay interest and repay
principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in a small degree.
A: Debt rated "A" has a very strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in the highest rated
categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C: Debt rated "BBB", "B", "CCC", "CC" and
"C" are regarded, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of
this obligation. "BB" indicates that the lowest degree of speculation and "C"
the highest degree of speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
BB: Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
CCC: Debt rated "CCC" has a currently indefinable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have to capacity to pay interest and repay principal. The "CCC" rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
CC: The rating "CC" is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
C: The rating "C" is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
CI: The rating "CI" is reserved for income bonds on which no
nterest is being paid.
D: Debt rated "D" is in payment default. The "D" rating is used when
interest payments are not made on the date due even if the applicable grace
periods has not expired, unless S&P believe that such payments will be made
during such grace period. The "D" rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
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.
NR: Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
DESCRIPTION OF PREFERRED STOCK RATINGS
MOODY'S INVESTORS SERVICE
aaa: considered to be a top-quality preferred stock. This rating
indicates good asset protection and the least risk of dividend impairment
within the universe of preferred stocks.
aa: considered a high-grade preferred stock. This rating
indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
a: considered to be an upper-medium-grade preferred stock.
While risks are judged to be somewhat greater than in the aaa and aa
classifications, earnings and asset protection are, nevertheless, expected to
be maintained at adequate levels.
baa: considered to be medium-grade, neither highly protected nor
poorly secured. Earnings and asset protection appear adequate at present but
may be questionable over any great length of time.
ba: considered to have speculative elements and its future
cannot be considered well assured. Earnings and asset protection may be
very moderate and not well safeguarded during adverse periods. Uncertainty
of position characterizes preferred stocks in this class.
b: generally lacks the characteristics of a desirable investment.
Assurance of dividend payments and maintenance of other terms of the issue
over any long period of time may be small.
caa: likely to be in arrears on dividend payments. This rating
designation does not purport to indicate the future status of payments.
ca: speculative in a high degree and is likely to be in arrears on
dividends with little likelihood of eventual payments.
c: lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
STANDARD & POOR'S CORPORATION
"AAA": This is the highest rating that may be assigned by S&P to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
"AA": A preferred stock issue rated "AA" also qualifies as a
high-quality fixed-income security. The capacity to pay preferred stock
obligations is very strong, although not as overwhelming as for issues rated
"AAA."
"A": An issue rated "A" is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
"BBB": An issue rated "BBB" is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for preferred stock
in this category than for issues in the "A" category.
"BB", "B", "CCC": Preferred stock rated "BB", "B", and "CCC" are
regarded, on balance, as predominantly speculative with respect to the issuer's
capacity to pay preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such issues will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
"CC": The rating "CC" is reserved for a preferred stock issue in
arrears on dividends or sinking fund payments but that is currently paying.
"C": The preferred stock rated "C" is a non-paying issue.
"D": A preferred stock rated "D" is a non-paying issue with the issuer
in default on debt instruments.
NR indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Plus (+) or Minus(-): To provide more detailed indications of preferred
stock quality, 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.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated PRIME-3 (or supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
STANDARD & POOR'S CORPORATION
S&P's commercial paper rating is 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. The four categories are as follows:
A: Commercial paper rated "A" is regarded as having the
greatest capacity for timely payment. Issues in this category
are delineated with the numbers 1, 2 and 3 to indicate the
relative degree of safety.
A-1: Commercial paper rated "A-1" is regarded as having a very strong
degree of safety regarding timely payment. A "+" designation is
applied to those issues rated "A-1" which possess an
overwhelming degree of safety.
A-2: Commercial paper rated "A-2" is regarded as having a strong
capacity for timely payment; however, the relative degree of
safety is not as high as for issues designated "A-1".
A-3: Commercial paper rated "A-3" is regarded as having 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.
B: Commercial paper rated "B" is regarded as having only an
adequate capacity for timely payment and such capacity may be
damaged by changing conditions or short-term adversities.
C: Commercial paper rated "C" is regarded as having a doubtful
capacity for repayment.
D: Commercial paper rated "D" is for a payment default. The "D"
rating is used when interest payments or principal payments are
not made on the date due even if the applicable grace period has
not expired, unless S&P believes that such payments will be made
during such grace period.
1. ALL OPTION TRANSACTIONS ENTERED INTO BY THE FUND WILL BE TRADED ON A
RECOGNIZED EXCHANGE, OR WILL BE CLEARED THROUGH A RECOGNIZED FORMAL
CLEARING ARRANGEMENT.
* SIR JOHN TEMPLETON SOLD THE TEMPLETON ORGANIZATION TO FRANKLIN
RESOURCES, INC. IN OCTOBER, 1992 AND RESIGNED FROM THE TRUST'S BOARD
ON APRIL 16, 1995. HE IS NO LONGER INVOLVED WITH THE INVESTMENT
MANAGEMENT PROCESS.
