TEMPLETON REAL ESTATE SECURITIES FUND
THIS STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1995
IS NOT A PROSPECTUS. IT SHOULD BE READ IN
CONJUNCTION WITH THE PROSPECTUS OF
TEMPLETON REAL ESTATE SECURITIES FUND
DATED MAY 1, 1995, WHICH MAY BE OBTAINED WITHOUT
CHARGE UPON REQUEST TO THE PRINCIPAL UNDERWRITER,
FRANKLIN TEMPLETON DISTRIBUTORS, INC.,
700 CENTRAL AVENUE, P.O. BOX 33030,
ST. PETERSBURG, FLORIDA 33733-8030
TOLL FREE TELEPHONE: (800) 237-0738
TABLE OF CONTENTS
General Information and History
Investment Objectives and Policies
-Investment Policies
-Repurchase Agreements
-Futures Contracts
-Options on Securities and Stock
Indices
-Foreign Currency Hedging Transactions
-Investment Restrictions
-Risk Factors
-Trading Policies
-Personal Securities Transactions
Management of the Fund
Trustee Compensation
Principal Shareholders
Investment Management and Other
Services
-Investment Management Agreement
-Management Fees
-The Investment Manager
-Business Manager
-Custodian and Transfer Agent
-Legal Counsel
-Independent Accountants
-Reports to Shareholders
Brokerage Allocation
Purchase, Redemption and Pricing of
Shares
-Ownership and Authority Disputes
-Tax-Deferred Retirement Plans
-Letter of Intent
-Special Net Asset Value Purchases
Tax Status
Principal Underwriter
Description of Shares
Performance Information
Financial Statements
GENERAL INFORMATION AND HISTORY
Templeton Real Estate Securities Fund (the "Fund"), formerly
Templeton Real Estate Trust, was organized as a Massachusetts
business trust on July 17, 1989, and is registered under the
Investment Company Act of 1940 (the "1940 Act") as an open-end
diversified management investment company.
INVESTMENT OBJECTIVES AND POLICIES
Investment Policies. The investment objectives and policies
of the Fund are described in the Fund's Prospectus under the
heading "General Description--Investment Objectives and
Policies."
Repurchase Agreements. Repurchase agreements are contracts
under which the buyer of a security simultaneously commits to
resell the security to the seller at an agreed-upon price and
date. Under a repurchase agreement, the seller is required to
maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. Templeton,
Galbraith & Hansberger Ltd. (the "Investment Manager") will
monitor the value of such securities daily to determine that the
value equals or exceeds the repurchase price. Repurchase
agreements may involve risks in the event of default or
insolvency of the seller, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying
securities. The Fund will enter into repurchase agreements only
with parties who meet creditworthiness standards approved by the
Board of Trustees, i.e., banks or broker-dealers which have been
determined by the Investment Manager to present no serious risk
of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
Futures Contracts. The Fund may purchase and sell financial
futures contracts. 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.
The Fund may also buy and sell index futures contracts with
respect to any stock or bond index traded on a recognized stock
exchange or board of trade. An index futures contract is a
contract to buy or sell units of an index at a specified future
date at a price agreed upon when the contract is made. 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.
At the time the Fund purchases a futures contract, an amount
of cash, U.S. Government securities, or other highly liquid debt
securities equal to the market value of the futures contract will
be deposited in a segregated account with the Fund's Custodian.
When writing a futures contract, the Fund will maintain with its
Custodian liquid assets that, when added to the amounts deposited
with a futures commission merchant or broker as margin, are equal
to the market value of the instruments underlying the contract.
Alternatively, the Fund may "cover" its position by owning the
instruments underlying the contract (or, in the case of an index
futures contract, a portfolio with a volatility substantially
similar to that of the index on which the futures contract is
based), or holding a call option permitting the Fund to purchase
the same futures contract at a price no higher than the price of
the contract written by the Fund (or at a higher price if the
difference is maintained in liquid assets with the Fund's
Custodian).
Options on Securities and Stock Indices. The 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.
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 receive from the seller cash equal to the difference
between the closing price of the index and the exercise price of
the option.
The 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 (a) is equal to or less than the exercise price of the call
written or (b) 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.
The Fund will cover call options on stock indices by owning
securities whose price changes, in the opinion of the 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 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.
The 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 stock
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 securities or indices 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.
The 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 accuracy of 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.
The 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 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 either 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.
Foreign Currency Hedging Transactions. In order to hedge
against foreign currency exchange rate risks, the Fund may enter
into forward foreign currency exchange contracts and foreign
currency futures contracts, as well as purchase put or call
options on foreign currencies, as described below. The Fund may
also conduct its foreign currency exchange transactions on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market.
The 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. The
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 the
Fund believes that a foreign currency may suffer or enjoy a
substantial movement against another currency, it may enter into
a forward contract to sell an amount of the former foreign
currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. This
second investment practice is generally referred to as "cross-
hedging." Because in connection with the Fund's foreign currency
forward 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, the 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. In addition, the Investment Manager
does not intend to enter into such forward contracts if, as a
result, the Fund will have more than 20% of the value of its
total assets committed to such contracts. 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, the 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 the Fund than if it had
not engaged in such contracts.
The Fund 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
the 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 the 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 the Fund will be traded on U.S. and
foreign exchanges or over-the-counter.
The Fund 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 the
Fund's portfolio securities or adversely affect the prices of
securities that the Fund intends to purchase at a later date.
The successful use of currency futures will usually depend on the
Investment Manager's ability to forecast currency exchange rate
movements correctly. Should exchange rates move in an unexpected
manner, the Fund may not achieve the anticipated benefits of
foreign currency futures or may realize losses.
Investment Restrictions. The Fund has imposed upon itself
certain investment restrictions which, together with its
investment objectives and policies, are fundamental policies
except as otherwise indicated. No changes in the 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 the Fund. For this
purpose, the provisions of the 1940 Act require the affirmative
vote of the lesser of either (1) 67% or more of the Fund's Shares
present at a Shareholders' meeting at which more than 50% of the
outstanding Shares are present or represented by proxy or (2)
more than 50% of the outstanding Shares of the Fund.
In accordance with these restrictions, the Fund will not:
1. Invest more than 5% of its total assets in the
securities of any one issuer (exclusive of U.S.
Government securities).
2. Invest directly in real estate or interests in real
estate (although it may purchase securities secured by
real estate or interests therein, or issued by
companies or investment trusts which invest in real
estate or interests therein); invest in other open-end
investment companies (except in connection with a
merger, consolidation, acquisition or reorganization);
invest in interests (other than publicly issued
debentures or equity stock interests) in oil, gas or
other mineral exploration or development programs; or
purchase or sell commodity contracts (except futures
contracts as described in the Fund's Prospectus).
3. Purchase or retain securities of any company in which
officers of the Fund or of the Investment Manager,
individually owning more than 1/2 of 1% of the
securities of such company, in the aggregate own more
than 5% of the securities of such company.
4. Purchase more than 10% of any class of securities of
any one company, including more than 10% of its
outstanding voting securities, or invest in any company
for the purpose of exercising control or management.
5. Act as an underwriter; issue senior securities;
purchase on margin or sell short, except that the Fund
may make margin payments in connection with futures
contracts.
6. Loan money apart from the purchase of a portion of an
issue of publicly distributed bonds, debentures, notes
and other evidences of indebtedness, although the Fund
may enter into repurchase agreements and lend its
portfolio securities.
7. Invest more than 5% of the value of its total assets in
securities of issuers which have been in continuous
operation less than three years.
8. Invest more than 15% of its total assets in securities
of foreign companies that are not listed on a
recognized United States or foreign securities
exchange, including no more than 10% of its total
assets in restricted securities and other securities
(including repurchase agreements having more than seven
days remaining to maturity and over-the-counter options
purchased by the Fund and the assets used as cover for
over-the-counter options written by the Fund) which are
not restricted but which are not readily marketable
(i.e., trading in the security is suspended or, in the
case of unlisted securities, market makers do not exist
or will not entertain bids or offers).
9. Concentrate its investments in any one industry, except
that the Fund may invest 25% or more of its total
assets in securities of companies principally engaged
in or related to the real estate industry.
10. Borrow money, except that the Fund may borrow money
from banks in an amount not exceeding 30% of the value
of the Fund's total assets (not including the amount
borrowed), or 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 are not deemed to be a
pledge of assets.
11. Participate on a joint or a joint and several basis in
any trading account in securities. (See "Investment
Objectives and Policies--Trading Policies" as to
transactions in the same securities for the Fund and
other Templeton Funds and clients.)
12. Invest more than 5% of its total assets in warrants
whether or not listed on the New York or American Stock
Exchanges, and more than 2% of its total assets in
warrants that are not listed on those exchanges.
Warrants acquired in units or attached to securities
are not included in this restriction.
The Fund has undertaken with a state securities commission
that it will limit investments in illiquid securities to no more
than 5% of its total assets. In addition, the Fund has no
present intention of investing in collateralized mortgage
obligations.
Whenever any investment policy or investment restriction
states a maximum percentage of the Fund's assets which may be
invested in any security or other property, it is intended that
such maximum percentage limitation be determined immediately
after and as a result of the Fund's acquisition of such security
or property. The investment restrictions do not preclude the
Fund from purchasing the securities of any issuer pursuant to the
exercise of subscription rights distributed to the Fund by the
issuer, unless such purchase would result in a violation of
restrictions 8 or 9.
Risk Factors. The Fund has an unlimited right to purchase
securities in any developed foreign country and may invest up to
10% of its assets in developing countries, if such securities are
listed on an exchange, as well as a limited right to purchase
such securities if they are unlisted. Investors should consider
carefully the substantial risks involved in securities of
companies and governments of foreign nations, which are in
addition to the usual risks inherent in domestic investments.
There may be less publicly available information about
foreign companies comparable to the reports and ratings published
about companies in the United States. Foreign companies are not
generally subject to uniform accounting, auditing and financial
reporting standards, and auditing practices and requirements may
not be comparable to those applicable to United States companies.
The Fund, therefore, may encounter difficulty in obtaining market
quotations for purposes of valuing its portfolio and calculating
its net asset value. Foreign markets have substantially less
volume than the New York Stock Exchange and securities of some
foreign companies are less liquid and more volatile than
securities of comparable United States companies. Commission
rates in foreign countries, which are generally fixed rather than
subject to negotiation as in the United States, are likely to be
higher. In many foreign countries there is less government
supervision and regulation of stock exchanges, brokers and listed
companies than in the United States.
Investments in companies domiciled in developing countries
may be subject to potentially higher risks than investments in
developed countries. These risks include (i) less social,
political and economic stability; (ii) the small current size of
the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of
liquidity and in greater price volatility; (iii) certain national
policies which may restrict the Fund's investment opportunities,
including restrictions on investment in issuers or industries
deemed sensitive to national interests; (iv) foreign taxation;
(v) the absence of developed legal structures governing private
or foreign investment or allowing for judicial redress for injury
to private property; (vi) the absence, until recently in certain
Eastern European countries, of a capital market structure or
market-oriented economy; and (vii) the possibility that recent
favorable economic developments in Eastern Europe may be slowed
or reversed by unanticipated political or social events in such
countries.
In addition, many countries in which a Fund may invest have
experienced substantial, and in some periods extremely high,
rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have
negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing
countries may differ favorably or unfavorably from the United
States economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments
position.
Investments in Eastern European countries may involve risks
of nationalization, expropriation and confiscatory taxation. The
Communist governments of a number of Eastern European countries
expropriated large amounts of private property in the past, in
many cases without adequate compensation, and there can be no
assurance that such expropriation will not occur in the future.
In the event of such expropriation, the Fund could lose a
substantial portion of any investments it has made in the
affected countries. Further, no accounting standards exist in
Eastern European countries. Finally, even though certain Eastern
European currencies may be convertible into United States
dollars, the conversion rates may be artificial to the actual
market values and may be adverse to Fund Shareholders.
Investing in Russian companies involves a high degree of
risk and special considerations not typically associated with
investing in the United States securities markets, and should be
considered highly speculative. Such risks include: (a) delays
in settling portfolio transactions and risk of loss arising out
of Russia's system of share registration and custody; (b) the
risk that it may be impossible or more difficult than in other
countries to obtain and/or enforce a judgment; (c) pervasiveness
of corruption and crime in the Russian economic system; (d)
currency exchange rate volatility and the lack of available
currency hedging instruments; (e) higher rates of inflation
(including the risk of social unrest associated with periods of
hyper-inflation); (f) controls on foreign investment and local
practices disfavoring foreign investors and limitations on
repatriation of invested capital, profits and dividends, and on
the Fund's ability to exchange local currencies for U.S. dollars;
(g) the risk that the government of Russia or other executive or
legislative bodies may decide not to continue to support the
economic reform programs implemented since the dissolution of the
Soviet Union and could follow radically different political
and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain
industries at the expense of other sectors or investors, or a
return to the centrally planned economy that existed prior to the
dissolution of the Soviet Union; (h) the financial condition of
Russian companies, including large amounts of inter-company debt
which may create a payments crisis on a national scale; (i)
dependency on exports and the corresponding importance of
international trade; (j) the risk that the Russian tax system
will not be reformed to prevent inconsistent, retroactive and/or
exorbitant taxation; and (k) possible difficulty in identifying a
purchaser of securities held by the Fund due to the
underdeveloped nature of the securities markets.
There is little historical data on Russian securities
markets because they are relatively new and a substantial
proportion of securities transactions in Russia are privately
negotiated outside of stock exchanges. Because of the recent
formation of the securities markets as well as the underdeveloped
state of the banking and telecommunications systems, settlement,
clearing and registration of securities transactions are subject
to significant risks. Ownership of shares (except where shares
are held through depositories that meet the requirements of the
1940 Act) is defined according to entries in the company's share
register and normally evidenced by extracts from the register or
by formal share certificates. However, there is no central
registration system for shareholders and these services are
carried out by the companies themselves or by registrars located
throughout Russia. These registrars are not necessarily subject
to effective state supervision and it is possible for the Fund to
lose its registration through fraud, negligence or even mere
oversight. While the Fund will endeavor to ensure that its
interest continues to be appropriately recorded either itself or
through a custodian or other agent inspecting the share register
and by obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability and it
is possible that subsequent illegal amendment or other fraudulent
act may deprive the Fund of its ownership rights or improperly
dilute its interests. In addition, while applicable Russian
regulations impose liability on registrars for losses resulting
from their errors, it may be difficult for the Fund to enforce
any rights it may have against the registrar or issuer of the
securities in the event of loss of share registration.
Furthermore, although a Russian public enterprise with more than
1,000 shareholders is required by law to contract out the
maintenance of its shareholder register to an independent entity
that meets certain criteria, in practice this regulation has not
always been strictly enforced. Because of this lack of
independence, management of a company may be able to exert
considerable influence over who can purchase and sell the
company's shares by illegally instructing the registrar to refuse
to record transactions in the share register. This practice may
prevent the Fund from investing in the securities of certain
Russian companies deemed suitable by the Investment Manager.
Further, this also could cause a delay in the sale of Russian
company securities by the Fund if a potential purchaser is deemed
unsuitable, which may expose the Fund to potential loss on the
investment.
The Fund endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency
exchange (to cover service charges) may be incurred, particularly
when the Fund changes investments from one country to another or
when proceeds of the sale of Shares in U.S. dollars are used for
the purchase of securities in foreign countries. Also, some
countries may adopt policies which would prevent the Fund from
transferring cash out of the country or withhold portions of
interest and dividends at the source. There is the possibility
of cessation of trading on national exchanges, expropriation,
nationalization or confiscatory taxation, withholding and other
foreign taxes on income or other amounts, foreign exchange
controls (which may include suspension of the ability to transfer
currency from a given country), default in foreign government
securities, political or social instability, or diplomatic
developments which could affect investments in securities of
issuers in foreign nations.
The Fund may be affected either unfavorably or favorably by
fluctuations in the relative rates of exchange between the
currencies of different nations, by exchange control regulations
and by indigenous economic and political developments. Some
countries in which the Fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S.
dollar. Further, certain currencies have experienced a steady
devaluation relative to the U.S. dollar. Any devaluations in the
currencies in which the Fund's portfolio securities are
denominated may have a detrimental impact on the Fund. Through
the Fund's flexible policy, management endeavors to avoid
unfavorable consequences and to take advantage of favorable
developments in particular nations where from time to time it
places the Fund's investments.
The exercise of this flexible policy may include decisions
to purchase securities with substantial risk characteristics and
other decisions such as changing the emphasis on investments from
one nation to another and from one type of security to another.
Some of these decisions may later prove profitable and others may
not. No assurance can be given that profits, if any, will exceed
losses.
The 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 Fund's
assets maintained with custodians in foreign countries, as well
as the degree of risk from political acts of foreign governments
to which such assets may be exposed. The 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 and Transfer
Agent"). However, in the absence of willful misfeasance, bad
faith or gross negligence on the part of the Investment Manager,
any losses resulting from the holding of the Fund's portfolio
securities in foreign countries and/or with securities
depositories will be at the risk of the Shareholders. No
assurance can be given that the Fund's appraisal of the risks
will always be correct or that such exchange control restrictions
or political acts of foreign governments might not occur.
Additional risks may be involved with the Fund's special
investment techniques, including loans of portfolio securities
and borrowing for investment purposes. These risks are described
under the heading "Investment Techniques" in the Prospectus.
Trading Policies. The Investment Manager and its affiliated
companies serve as investment adviser to other investment
companies and private clients. Accordingly, the respective
portfolios of these funds and clients may contain many or some of
the same securities. When any two or more of these funds or
clients are engaged simultaneously in the purchase or sale of the
same security, the transactions are placed for execution in a
manner designed to be equitable to each party. The larger size
of the transaction may affect the price of the security and/or
the quantity which may be bought or sold for each party. If the
transaction is large enough, brokerage commissions in certain
countries may be negotiated below those otherwise chargeable.
Sale or purchase of securities, without payment of brokerage
commissions, fees (except customary transfer fees) or other
remuneration in connection therewith, may be effected between any
of these funds, or between funds and private clients, under
procedures adopted pursuant to Rule 17a-7 under the 1940 Act.
Personal Securities Transactions. Access persons of the
Franklin Templeton Group, as defined in SEC Rule 17(j) under the
1940 Act, who are employees of Franklin Resources, Inc. or their
subsidiaries, are permitted to engage in personal securities
transactions subject to the following general restrictions and
procedures: (1) The trade must receive advance clearance from a
Compliance Officer and must be completed within 24 hours after
this clearance; (2) Copies of all brokerage confirmations must be
sent to the Compliance Officer and within 10 days after the end
of each calendar quarter, a report of all securities transactions
must be provided to the Compliance Officer; (3) In addition to
items (1) and (2), access persons involved in preparing and
making investment decisions must file annual reports of their
securities holdings each January and also inform the Compliance
Officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction
or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other
client.
MANAGEMENT OF THE FUND
The name, address, principal occupation during the past five
years and other information with respect to each of the Trustees
and Principal Executive Officers of the Fund are as follows:
Name, Address and Principal Occupation
Offices with Fund During Past Five Years
F. BRUCE CLARKE Retired; former credit advisor,
19 Vista View Blvd. National Bank of Canada, Toronto;
Thornhill, Ontario and a director or trustee of
Trustee other Templeton Funds.
HASSO-G VON DIERGARDT-NAGLO Farmer; president of Clairhaven
R.R. 3 Investments, Ltd. and other
Stouffville, Ontario private investment companies; and
Trustee a director or trustee of other
Templeton Funds.
BETTY P. KRAHMER Director or trustee of various
2201 Kentmere Parkway civic associations; and former
Wilmington, Delaware economic analyst, U.S.
Trustee Government.
FRED R. MILLSAPS Manager of personal investments
2665 NE 37th Drive (1978-present); chairman and
Fort Lauderdale, Florida chief executive officer of
Trustee Landmark Banking Corporation
(1969-1978); financial vice
president of Florida Power and
Light (1965-1969); vice president
of Federal Reserve Bank of
Atlanta (1958-1965); and director
of various other business and
nonprofit organizations.
JOHN G. BENNETT, JR. Founder, chairman of the board,
3 Radnor Corporate Center and president of the Foundation
Suite 150 for New Era Philanthropy;
100 Matsonford Road president and chairman of the
Radnor, Pennsylvania boards of the Evelyn M. Bennett
Trustee Memorial Foundation and NEP
International Trust; chairman of
the board and chief executive
officer of The Bennett Group
International, LTD; chairman of
the boards of Human Service
Systems, Inc. and Multi-Media
Communications, Inc.; director or
trustee of many national and
international organizations,
universities, and grantmaking
foundations serving in various
executive board capacities; and
member of the Public Policy
Committee of the Advertising
Council.
Name, Address and Principal Occupation
Offices with Fund During Past Five Years
ANDREW H. HINES, JR. Consultant, Triangle Consulting
150 2nd Avenue N. Group; chairman of the board and
St. Petersburg, Florida chief executive officer of
Trustee Florida Progress Corporation
(1982-February 1990) and director
of various of its subsidiaries;
chairman and director of Precise
Power Corporation; executive-in-
residence of Eckerd College
(1991-present); director of
Checkers Drive-In Restaurants,
Inc.; and director or trustee of
other Templeton Funds.
RUPERT H. JOHNSON, JR.* Executive vice president and
777 Mariners Island Blvd. director of Franklin Resources,
San Mateo, California Inc.; president and director of
Trustee Franklin Advisers, Inc.;
executive vice president and
director of Franklin Templeton
Distributors, Inc.; director of
Franklin Administrative Services,
Inc.; and officer and/or
director, trustee or managing
general partner, as the case may
be, of most other subsidiaries of
Franklin Resources, Inc., and of
42 of the investment companies in
the Franklin Templeton Group.
HARRIS J. ASHTON Chairman of the Board, president
Metro Center, 1 Station and chief executive officer of
Place General Host Corporation (nursery
Stamford, Connecticut and craft centers); director of
Trustee RBC Holdings Inc. (a bank holding
company) and Bar-S Foods; and
director, trustee or managing
general partner, as the case may
be, for most of the investment
companies in the Franklin
Templeton Group.
S. JOSEPH FORTUNATO Member of the law firm of Pitney,
200 Campus Drive Hardin, Kipp & Szuch; director of
Florham Park, New Jersey General Host Corporation; and
Trustee director, trustee or managing
general partner, as the case may
be, for most of the investment
companies in the Franklin
Templeton Group.
Name, Address and Principal Occupation
Offices with Fund During Past Five Years
GORDON S. MACKLIN Chairman of White River
8212 Burning Tree Road Corporation (information
Bethesda, Maryland services); director of Fund
Trustee America Enterprises Holdings,
Inc., Lockheed Martin
Corporation, MCI Communications
Corporation, Fusion Systems
Corporation, Infovest
Corporation, and Medimmune, Inc.;
formerly, chairman of Hambrecht
and Quist Group; director of H&Q
Healthcare Investors; president
of the National Association of
Securities Dealers, Inc.; and
director, trustee, or managing
general partner, as the case may
be, of most of the investment
companies in the Franklin
Templeton Group.
NICHOLAS F. BRADY* Chairman, Templeton Emerging
The Bullitt House Markets Investment Trust PLC;
102 East Dover Street chairman, Templeton Latin America
Easton, Maryland Investment Trust PLC; chairman of
Trustee Darby Overseas Investments, Ltd.
(an investment firm), (1994-
present); director of the Amerada
Hess Corporation, Capital
Cities/ABC, Inc., Christiana
Companies, and the H.J. Heinz
Company; Secretary of the United
States Department of the Treasury
(1988-January 1993); chairman of
the board of Dillon, Read & Co.
Inc. (investment banking) prior
thereto; and director or trustee
of other Templeton Funds.
MARK G. HOLOWESKO President and director of
Lyford Cay Templeton, Galbraith & Hansberger
Nassau, Bahamas Ltd.; director of global equity
President research for Templeton Worldwide,
Inc.; president or vice president
of other Templeton Funds; and
investment administrator with Roy
West Trust Corporation (Bahamas)
Limited (1984-1985).
Name, Address and Principal Occupation
Offices with Fund During Past Five Years
CHARLES B. JOHNSON President, chief executive
777 Mariners Island Blvd. officer, and director of Franklin
San Mateo, California Resources, Inc.; chairman of the
Vice President board and director of Franklin
Advisers, Inc. and Franklin
Templeton Distributors, Inc.;
director of Franklin
Administrative Services, Inc.,
General Host Corporation and
Templeton Global Investors, Inc.;
and officer and director, trustee
or managing general partner, as
the case may be, of most other
subsidiaries of Franklin
Resources, Inc. and of most of
the investment companies in the
Franklin Templeton Group.
MARTIN L. FLANAGAN Senior vice president, treasurer,
777 Mariners Island Blvd. and chief financial officer of
San Mateo, California Franklin Resources, Inc.;
Vice President director, chief executive
officer, and executive vice
president of Templeton Investment
Counsel, Inc.; director, chief
executive officer, and president
of Templeton Global Investors,
Inc.; president or vice president
of the Templeton Funds;
accountant, Arthur Andersen &
Company (1982-1983); and member
of the International Society of
Financial Analysts and the
American Institute of Certified
Public Accounts.
JEFFREY A. EVERETT Vice president, Portfolio
Lyford Cay Management/Research, Templeton,
Nassau, Bahamas Galbraith & Hansberger Ltd.;
Vice President formerly, investment officer,
First Pennsylvania Investment
Research (until 1989).
Name, Address and Principal Occupation
Offices with Fund During Past Five Years
JOHN R. KAY Vice president of the Templeton
500 East Broward Blvd. Funds; vice president and
Fort Lauderdale, Florida treasurer of Templeton Global
Vice President Investors, Inc. and Templeton
Worldwide, Inc.; assistant vice
president of Franklin Templeton
Distributors, Inc.; formerly,
vice president and controller of
the Keystone Group, Inc.
THOMAS M. MISTELE Senior vice president of
700 Central Avenue Templeton Global Investors, Inc.;
St. Petersburg, Florida vice president of Franklin
Secretary Templeton Distributors, Inc.;
secretary of the Templeton Funds;
attorney, Dechert Price & Rhoads
(1985-1988) and Freehill,
Hollingdale & Page (1988); and
judicial clerk, U.S. District
Court (Eastern District of
Virginia) (1984-1985).
JAMES R. BAIO Certified public accountant;
500 East Broward Blvd. treasurer of the Templeton Funds;
Fort Lauderdale, Florida senior vice president of
Treasurer Templeton Worldwide, Inc.,
Templeton Global Investors, Inc.,
and Templeton Funds Trust
Company; formerly, senior tax
manager of Ernst & Young
(certified public accountants)
(1977-1989).
JACK L. COLLINS Assistant treasurer of the
700 Central Avenue Templeton Funds; assistant vice
St. Petersburg, Florida president of Franklin Templeton
Assistant Treasurer Investor Services, Inc.; former
partner of Grant Thornton,
independent public accountants.
JEFFREY L. STEELE Partner, Dechert Price & Rhoads.
1500 K Street, N.W.
Washington, D.C.
Assistant Secretary
__________________
* Messrs. Johnson and Brady are Trustees who are "interested
persons" of the Fund as that term is defined in the 1940
Act. Mr. Brady and Franklin Resources, Inc. are limited
partners of Darby Overseas Partners, L.P. ("Darby
Overseas"). Mr. Brady established Darby Overseas in
February, 1994, and is Chairman and a shareholder of the
corporate general partner of Darby Overseas. In addition,
Darby Overseas and Templeton, Galbraith & Hansberger, Ltd.
are limited partners of Darby Emerging Markets Fund, L.P.
Messrs. von Diergardt, Bennett, Millsaps, Hines, Clarke,
Ashton, Macklin and Fortunato and Ms. Krahmer are Trustees
who are not "interested persons" of the Fund.
TRUSTEE COMPENSATION
All of the Fund's Officers and Trustees also hold positions
with other investment companies in the Franklin Templeton Group.
No compensation is paid by the Fund to any officer or Trustee who
is an officer, trustee or employee of the Investment Manager or
its affiliates. Each Templeton Fund pays its independent
directors and trustees and Mr. Brady an annual retainer and/or
fees for attendance at Board and Committee meetings, the amount
of which is based on the level of assets in each fund.
Accordingly, based upon the assets of the Fund as of December 31,
1994, the Fund currently pays the independent Trustees and Mr.
Brady an annual retainer of $1,000 and a fee of $100 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 Fund expenses.
The following table shows the total compensation paid to the
Trustees by the Fund and by all investment,companies in the
Franklin Templeton Group for the fiscal year ended December 31,
1994:
Number of Total
Aggregate Franklin Compensation
Compensation Templeton from all
Name of Trustee from Fund Boards on Funds in
the Fund Which Franklin
Trustee Serves Templeton
Group
Hasso-G von $1,850 19 $ 75,275
Diergardt-Naglo
F. Bruce Clarke 2,850 19 95,275
Harris J. Ashton 1,850 54 319,925
John G. Bennett, Jr. 2,850 23 105,625
Nicholas F. Brady 1,850 23 86,125
S. Joseph Fortunato 1,850 56 336,065
Andrew H. Hines, Jr. 2,850 23 106,125
Betty P. Krahmer 1,850 19 75,275
Gordon S. Macklin 1,850 51 303,685
Fred R. Millsaps 2,850 23 106,125
PRINCIPAL SHAREHOLDERS
As of March 31, 1995 there were 10,181,156 Shares of the
Fund outstanding, of which 7,269 Shares (0.0714%) were owned
beneficially, directly or indirectly, by all the Trustees and
officers of the Fund as a group. As of March 31, 1995, to the
knowledge of management, no person owned beneficially 5% or more
of the outstanding Shares, except Merrill Lynch, Pierce, Fenner &
Smith, Inc., owned 527,373 Shares (5% of the outstanding Shares).
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Agreement. The Investment Manager of
the Fund is Templeton, Galbraith & Hansberger Ltd., a Bahamian
corporation with offices in Nassau, Bahamas. On April 15, 1994,
the Investment Manager assumed the investment management duties
of Templeton Investment Counsel, Inc., a Florida corporation,
with respect to the Fund under the Investment Management
Agreement. The Investment Management Agreement dated October 30,
1992 (the "Agreement") was approved by the Shareholders of the
Fund on October 30, 1992, was last approved 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 on December 6, 1994, and will run through
December 31, 1995. The Agreement continues from year to year
subject to approval annually by the Board of Trustees or by vote
of a majority of the outstanding Shares of the Fund (as defined
in the 1940 Act) and also, in either event, with the approval of
a majority of those Trustees who are not parties to the Agreement
or interested persons of any such party in person at a meeting
called for the purpose of voting on such approval.
The Agreement requires the Investment Manager to manage the
investment and reinvestment of the Fund's assets. The Investment
Manager is not required to furnish any personnel, overhead items
or facilities for the Fund, including daily pricing or trading
desk facilities, although such expenses are paid by investment
advisers of some other investment companies.
The Agreement provides that the Investment Manager will
select brokers and dealers for execution of the Fund's portfolio
transactions consistent with the Fund's brokerage policies (see
"Brokerage Allocation"). Although the services provided by
broker-dealers in accordance with the brokerage policies
incidentally may help reduce the expenses of or otherwise benefit
the Investment Manager and other investment advisory clients of
the Investment Manager and of its affiliates, as well as the
Fund, the value of such services is indeterminable and the
Investment Manager's fee is not reduced by any offset arrangement
by reason thereof.
When the Investment Manager determines to buy or sell the
same security for the Fund that the Investment Manager or one or
more of its affiliates has selected for one or more of its other
clients or for clients of its affiliates, the orders for all such
securities transactions are placed for execution by methods
determined by the Investment Manager, with approval by the Board
of Trustees, to be impartial and fair, in order to seek good
results for all parties (see "Investment Objectives and Policies
-- Trading Policies"). Records of securities transactions of
persons who know when orders are placed by the Fund are available
for inspection at least four times annually by the Compliance
Officer of the Fund 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 Agreement provides that the Investment Manager shall
have no liability to the Fund or any Shareholder of the Fund for
any error of judgment, mistake of law, or any loss arising out of
any investment or other act or omission in the performance by the
Investment Manager of its duties under the Agreement, except
liability resulting from willful misfeasance, bad faith or gross
negligence on the Investment Manager's part or reckless disregard
of its duties under the Agreement. The Agreement will terminate
automatically in the event of its assignment, and may be
terminated by the Fund at any time without payment of any penalty
on 60 days' written notice, with the approval of a majority of
the Trustees in office at the time or by vote of a majority of
the outstanding voting securities of the Fund (as defined in the
1940 Act).
Management Fees. For its services, the Fund pays the
Investment Manager a monthly fee equal on an annual basis to
0.75% of its average daily net assets during the year. Each
class of Shares pays a portion of the fee, determined by the
proportion of the Fund that it represents. During the fiscal
years ended August 31, 1994, 1993, and 1992, the Investment
Manager (and, prior to October 30, 1992, TGH, the Fund's previous
investment manager) received from the Fund under the Agreement
and under agreements in effect prior to October 30, 1992 fees of
$733,198, $341,213, and $265,021, respectively. The Investment
Manager will comply with any applicable state regulations which
may require the Investment Manager to make reimbursements to the
Fund in the event that the Fund's aggregate operating expenses,
including the management fee, but generally excluding interest,
taxes, brokerage commissions and extraordinary expenses, are in
excess of specific applicable limitations. The strictest rule
currently applicable to the Fund is 2.5% of the first $30,000,000
of net assets, 2% of the next $70,000,000 of net assets and 1.5%
of the remainder.
The Investment Manager. The Investment Manager is an
indirect wholly owned subsidiary of Franklin, a publicly traded
company whose shares are listed on the New York Stock Exchange.
Charles B. Johnson (a vice president of the Fund) and Rupert H.
Johnson, Jr. (a Trustee of the Fund) are principal shareholders
of Franklin and own, respectively, approximately 20% and 16% of
its outstanding shares. Messrs. Charles B. Johnson and Rupert H.
Johnson, Jr. are brothers.
Business Manager. Templeton Global Investors, Inc. performs
certain administrative functions as Business Manager for the
Fund, including:
providing office space, telephone, office equipment and
supplies for the Fund;
paying compensation of the Fund's officers for services
rendered as such;
authorizing expenditures and approving bills for
payment on behalf of the Fund;
supervising preparation of annual and semiannual
reports to Shareholders, notices of dividends, capital
gain distributions and tax credits, and attending to
routine correspondence and other communications with
individual Shareholders;
daily pricing of the Fund's investment portfolio and
preparing and supervising publication of daily
quotations of the bid and asked prices of the Fund's
Shares, earnings reports and other financial data;
monitoring relationships with organizations serving the
Fund, including the custodian and printers;
providing trading desk facilities for the Fund;
supervising compliance by the Fund with recordkeeping
requirements under the 1940 Act and the rules and
regulations thereunder, with state regulatory
requirements, maintaining books and records for the
Fund (other than those maintained by the custodian and
transfer agent), and preparing and filing tax reports
other than the Fund's income tax returns;
monitoring the qualifications of tax-deferred
retirement plans providing for investment in Shares of
the Fund; and
providing executive, clerical and secretarial help
needed to carry out these responsibilities.
For its services, the Business Manager receives a monthly
fee equal on an annual basis to 0.15% of the first $200,000,000
of the Fund's average daily net assets, reduced to 0.135%
annually of such net assets in excess of $200,000,000, further
reduced to 0.1% annually of such net assets in excess of
$700,000,000, and further reduced to 0.075% annually of such net
assets in excess of $1,200,000,000. Each class of Shares pays a
portion of the fee, determined by the proportion of the Fund that
it represents. Since the Business Manager's fee covers services
often provided by investment advisers to other funds, the Fund's
combined expenses for advisory and administrative services
together may be higher than those of some other investment
companies. During the fiscal years ended August 31, 1994, 1993,
and 1992, the Business Manager (and, prior to April 1, 1993,
Templeton Funds Management, Inc., the previous business manager)
received business management fees of $146,640, $68,243, and
$53,004, respectively.
The Business Manager is relieved of liability to the Fund
for any act or omission in the course of its performance under
the Business Management Agreement, in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of
its duties and obligations under the Agreement. The Business
Management Agreement may be terminated by the Fund at any time on
60 days' written notice without payment of penalty, provided that
such termination by the Fund shall be directed or approved by
vote of a majority of the Trustees of the Fund in office at the
time or by vote of a majority of the outstanding voting
securities of the Fund, and shall terminate automatically and
immediately in the event of its assignment.
Templeton Global Investors, Inc. is an indirect wholly owned
subsidiary of Franklin.
Custodian and Transfer Agent. The Chase Manhattan Bank,
N.A., serves as Custodian of the Fund's assets, which are
maintained at the Custodian's principal office, MetroTech Center,
Brooklyn, New York 11245, and at the offices of its branches and
agencies throughout the world. The Custodian has entered into
agreements with foreign sub-custodians approved by the 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.
Franklin Templeton Investor Services, Inc. serves as the
Fund's Transfer Agent. Services performed by the Transfer Agent
include processing purchase, transfer and redemption orders;
making dividend payments, capital gain distributions and
reinvestments; and handling routine communications with
Shareholders. The Transfer Agent receives from the Fund an
annual fee of $13.74 per Shareholder account plus out-of-pocket
expenses. This fee is adjusted each year to reflect changes in
the Department of Labor Consumer Price Index.
Legal Counsel. Dechert Price & Rhoads, 1500 K Street, N.W.,
Washington, D.C. 20005, is legal counsel for the Fund.
Independent Accountants. The firm of McGladrey & Pullen,
LLP, 555 Fifth Avenue, New York, New York 10017, serves as
independent accountants for the Fund. Its audit services
comprise examination of the Fund's financial statements and
review of the Fund's filings with the Securities and Exchange
Commission and the Internal Revenue Service.
Reports to Shareholders. The Fund's fiscal year ends on
August 31. Shareholders are provided at least semiannually with
reports showing the Fund's portfolio and other information,
including an annual report with financial statements audited by
independent accountants.
BROKERAGE ALLOCATION
The Investment Management Agreement provides that the
Investment Manager is responsible for selecting members of
securities exchanges, brokers and dealers (such members, brokers
and dealers being hereinafter referred to as "brokers") for the
execution of the Fund's portfolio transactions and, when
applicable, the negotiation of commissions in connection
therewith. All decisions and placements are made in accordance
with the following principles:
1. Purchase and sale orders are usually placed with
brokers who are selected by the Investment Manager as
able to achieve "best execution" of such orders. "Best
execution" 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 the Fund (involving both price paid or
received and any commissions and other costs paid), the
efficiency with which the transaction is effected, the
ability to effect the transaction at all where a large
block is involved, availability of the broker to stand
ready to execute possibly difficult transactions in the
future, and the financial strength and stability of the
broker. Such considerations are judgmental and are
weighed by the Investment Manager in determining the
overall reasonableness of brokerage commissions.
2. In selecting brokers for portfolio transactions, the
Investment Manager takes into account its past
experience as to brokers qualified to achieve "best
execution," including brokers who specialize in any
foreign securities held by the Fund.
3. The Investment Manager is authorized to allocate
brokerage business to brokers who have provided
brokerage and research services, as such services are
defined in Section 28(e) of the Securities Exchange Act
of 1934 (the "1934 Act"), for the Fund and/or other
accounts, if any, for which the Investment Manager
exercises investment discretion (as defined in Section
3(a)(35) of the 1934 Act) and, as to transactions to
which fixed minimum commission rates are not
applicable, to cause the Fund to pay a commission for
effecting a securities transaction in excess of the
amount another broker would have charged for effecting
that transaction, if the Investment Manager 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,
the Investment Manager is not required to place or
attempt to place a specific dollar value on the
research or execution services of a broker or on the
portion of any commission reflecting either of said
services. In demonstrating that such determinations
were made in good faith, the Investment Manager shall
be prepared to show that all commissions were allocated
and paid for purposes contemplated by the Fund's
brokerage policy; that the research services provide
lawful and appropriate assistance to the Investment
Manager in the performance of its investment
decision-making responsibilities; and that the
commissions paid were within a reasonable range. The
determination that commissions were within a reasonable
range shall be based on any available information as to
the level of commissions known to be charged by other
brokers on comparable transactions, but there shall be
taken into account the Fund's policies that (i)
obtaining a low commission is deemed secondary to
obtaining a favorable securities price, since it is
recognized that usually it is more beneficial to the
Fund to obtain a favorable price than to pay the lowest
commission; and (ii) the quality, comprehensiveness and
frequency of research studies which are provided for
the Investment Manager are useful to the Investment
Manager in performing its advisory services under its
Agreement with the Fund. Research services provided by
brokers to the 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
Investment Management Agreement with the Fund.
Research furnished by brokers through whom the Fund
effects securities transactions may be used by the
Investment Manager for any of its accounts, and not all
such research may be used by the Investment Manager for
the Fund. When execution of portfolio transactions is
allocated to brokers trading on exchanges with fixed
brokerage commission rates, account may be taken of
various services provided by the broker, including
quotations outside the United States for daily pricing
of foreign securities held in the 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 judgment of the
Investment Manager, better prices and execution may be
obtained on a commission basis or from other sources.
5. Sales of the Fund's Shares (which shall be deemed to
include Shares of other companies registered under the
1940 Act which have either the same investment adviser
or an investment adviser affiliated with the Fund's
Investment Manager) made by a broker are 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 the Fund to that broker; provided
that the broker shall furnish "best execution," as
defined in paragraph 1 above, and that such allocation
shall be within the scope of the Fund's other policies
as stated above; and provided further, that in every
allocation made to a broker in which the sale of Shares
is taken into account there shall be no increase in the
amount of the commissions or other compensation paid to
such broker beyond a reasonable commission or other
compensation determined, as set forth in paragraph 3
above, on the basis of best execution alone or best
execution plus research services, without taking
account of or placing any value upon such sale of
Shares.
Insofar as known to management, no Trustee or officer of the
Fund, nor the Investment Manager or Principal Underwriter or any
person affiliated with either of them, has any material direct or
indirect interest in any broker employed by or on behalf of the
Fund. Franklin Templeton Distributors, Inc., the Fund's
Principal Underwriter, is a registered broker-dealer, but has
never executed any purchase or sale transactions for the Fund's
portfolio 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 portfolio transactions for
the Fund during the fiscal years ended August 31, 1994, 1993, and
1992, (not including any spreads or concessions on principal
transactions) were $412,000, $156,000, and $64,989, respectively.
All portfolio transactions are allocated to broker-dealers only
when their prices and execution, in the judgment of the
Investment Manager, are equal to the best available within the
scope of the Fund's policies. There is no fixed method used in
determining which broker-dealers receive which order or how many
orders.
PURCHASE, REDEMPTION AND PRICING OF SHARES
The Prospectus describes the manner in which the Fund's
Shares may be purchased and redeemed. See "How to Buy Shares of
the Fund" and "How to Sell Shares of the Fund" in the Prospectus.
Net asset value per Share is determined as of the scheduled
closing of the New York Stock Exchange (generally 4:00 p.m., New
York time) every Monday through Friday (exclusive of national
business holidays). The Fund's offices will be closed, and net
asset value will not be calculated, on those days on which the
New York Stock Exchange is closed, which currently are: New
Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Trading in securities on European and Far Eastern securities
exchanges and over-the-counter markets is normally completed well
before the close of business in New York on each day on which the
New York Stock Exchange is open. Trading of European or Far
Eastern securities generally, or in a particular country or
countries, may not take place on every New York business day.
Furthermore, trading takes place in various foreign markets on
days which are not business days in New York and on which the
Fund's net asset value is not calculated. The Fund calculates
net asset value per Share, and therefore effects sales,
redemptions and repurchases of its Shares, as of the close of the
New York Stock Exchange once on each day on which that Exchange
is open. Such calculation does not take place contemporaneously
with the determination of the prices of many of the portfolio
securities used in such calculation and if events occur which
materially affect the value of those foreign securities, they
will be valued at fair market value as determined by the
management and approved in good faith by the Board of Trustees.
The Board of Trustees may establish procedures under which
the Fund may suspend the determination of net asset value for the
whole or any part of any period during which (1) the New York
Stock Exchange is closed other than for customary weekend and
holiday closings, (2) trading on the New York Stock Exchange is
restricted, (3) an emergency exists as a result of which disposal
of securities owned by the Fund is not reasonably practicable or
it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (4) for such other period as the
Securities and Exchange Commission may by order permit for the
protection of the holders of the Fund's Shares.
Ownership and Authority Disputes. In the event of disputes
involving multiple claims of ownership or authority to control a
Shareholder's account, the Fund has the right (but has no
obligation) to: (a) freeze the account and require the written
agreement of all persons deemed by the Fund to have a potential
property interest in the account, prior to executing instructions
regarding the account; or (b) interplead disputed funds or
accounts with a court of competent jurisdiction. Moreover, the
Fund may surrender ownership of all or a portion of an account to
the Internal Revenue Service in response to a Notice of Levy.
In addition to the special purchase plans described in the
Prospectus, other special purchase plans also are available:
Tax-Deferred Retirement Plans. The Fund offers its
Shareholders the opportunity to participate in the following
types of retirement plans:
For individuals whether or not covered by other
qualified plans;
For simplified employee pensions;
For employees of tax-exempt organizations; and
For corporations, self-employed individuals and
partnerships.
Capital gains and income received by the foregoing plans
generally are exempt from taxation until distribution from the
plans. Investors considering participation in any such plan
should review specific tax laws relating thereto and should
consult their attorneys or tax advisers with respect to the
establishment and maintenance of any such plan. Additional
information, including the fees and charges with respect to all
of these plans, is available upon request to the Principal
Underwriter. No distribution under a retirement plan will be
made until Franklin Templeton Trust Company receives the
participant's election on IRS Form W-4P (available on request
from the Transfer Agent) and such other documentation as it deems
necessary, as to whether or not U.S. income tax is to be withheld
from such distribution.
Individual Retirement Account (IRA). All individuals
(whether or not covered by qualified private or governmental
retirement plans) may purchase Shares of the Fund pursuant to an
Individual Retirement Account. However, contributions to an IRA
by an individual who is covered by a qualified private or
governmental plan may not be tax-deductible depending on the
individual's income. Custodial services for Individual
Retirement Accounts are available through Franklin Templeton
Trust Company. Disclosure statements summarizing certain aspects
of Individual Retirement Accounts are furnished to all persons
investing in such accounts, in accordance with Internal Revenue
Service regulations.
Simplified Employee Pensions (SEP-IRA). For employers who
wish to establish a simplified form of employee retirement
program investing in Shares of the Fund, there are available
Simplified Employee Pensions invested in IRA plans. Details and
materials relating to these plans will be furnished upon request
to the Principal Underwriter.
Retirement Plan for Employees of Tax-Exempt Organizations
(403(b)). Employees of public school systems and certain types
of charitable organizations may enter into a deferred
compensation arrangement for the purchase of Shares of the Fund
without being taxed currently on the investment. Contributions
which are made by the employer through salary reduction are
excludable from the gross income of the employee. Such deferred
compensation plans, which are intended to qualify under Section
403(b) of the Internal Revenue Code of 1986, as amended (the
"Code"), are available through the Principal Underwriter.
Custodial services are provided by Franklin Templeton Trust
Company.
Qualified Plan for Corporations, Self-Employed Individuals
and Partnerships. For employers who wish to purchase Shares of
the Fund in conjunction with employee retirement plans, there is
a prototype master plan which has been approved by the Internal
Revenue Service. A "Section 401(k) plan" is also available.
Franklin Templeton Trust Company furnishes custodial services for
these plans. For further details, including custodian fees and
plan administration services, see the master plan and related
material which is available from the Principal Underwriter.
Letter of Intent. Purchasers who intend to invest $50,000 or
more in Class I Shares of the Fund or any other fund in the
Franklin Templeton Group (except Templeton Capital Accumulator
Fund, Inc., Templeton Variable Annuity Fund, Templeton Variable
Products Series Fund, Franklin Valuemark Funds and Franklin
Government Securities Trust) within 13 months (whether in one
lump sum or in installments, the first of which may not be less
than 5% of the total intended amount and each subsequent
installment not less than $25 unless the investor is a qualifying
employee benefit plan (the "Benefit Plan"), including automatic
investment and payroll deduction plans), and to beneficially hold
the total amount of such Class I Shares fully paid for and
outstanding simultaneously for at least one full business day
before the expiration of that period, should execute a Letter of
Intent ("LOI") on the form provided in the Shareholder
Application in the Prospectus. Payment for not less than 5% of
the total intended amount must accompany the executed LOI unless
the investor is a Benefit Plan. Except for purchases of Shares
by a Benefit Plan, those Class I Shares purchased with the first
5% of the intended amount stated in the LOI will be held as
"Escrowed Shares" for as long as the LOI remains unfulfilled.
Although the Escrowed Shares are registered in the investor's
name, his full ownership of them is conditional upon fulfillment
of the LOI. No Escrowed Shares can be redeemed by the investor
for any purpose until the LOI is fulfilled or terminated. If the
LOI is terminated for any reason other than fulfillment, the
Transfer Agent will redeem that portion of the Escrowed Shares
required and apply the proceeds to pay any adjustment that may be
appropriate to the sales commission on all Class I Shares
(including the Escrowed Shares) already purchased under the LOI
and apply any unused balance to the investor's account. The LOI
is not a binding obligation to purchase any amount of Shares, but
its execution will result in the purchaser paying a lower sales
charge at the appropriate quantity purchase level. A purchase
not originally made pursuant to an LOI may be included under a
subsequent LOI executed within 90 days of such purchase. In this
case, an adjustment will be made at the end of 13 months from the
effective date of the LOI at the net asset value per Share then
in effect, unless the investor makes an earlier written request
to the Principal Underwriter upon fulfilling the purchase of
Shares under the LOI. In addition, the aggregate value of any
Shares, including Class II Shares, purchased prior to the 90-day
period referred to above may be applied to purchases under a
current LOI in fulfilling the total intended purchases under the
LOI. However, no adjustment of sales charges previously paid on
purchases prior to the 90-day period will be made.
If an LOI is executed on behalf of a benefit plan (such
plans are described under "How to Buy Shares of the Fund -- Net
Asset Value Purchases (Both Classes)" in the Prospectus), the
level and any reduction in sales charge for these employee
benefit plans will be based on actual plan participation and the
projected investments in the Franklin Templeton Funds (except
Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, Templeton Variable Products Series Fund, Franklin
Valuemark Funds and Franklin Government Securities Trust) under
the LOI. Benefit Plans are not subject to the requirement to
reserve 5% of the total intended purchase, or to any penalty as a
result of the early termination of a plan, nor are Benefit Plans
entitled to receive retroactive adjustments in price for
investments made before executing LOIs.
Special Net Asset Value Purchases. As discussed in the
Prospectus under "How to Buy Shares of the Fund - Description of
Special Net Asset Value Purchases," certain categories of
investors may purchase Class I Shares of the Fund at net asset
value (without a front-end or contingent deferred sales charge).
Franklin Templeton Distributors, Inc. ("FTD") or one of its
affiliates may make payments, out of its own resources, to
securities dealers who initiate and are responsible for such
purchases, as indicated below. FTD may make these payments in
the form of contingent advance payments, which may require
reimbursement from the securities dealers with respect to certain
redemptions made within 12 months of the calendar month following
purchase, as well as other conditions, all of which may be
imposed by an agreement between FTD, or its affiliates, and the
securities dealer.
The following amounts will be paid by FTD or one of its
affiliates, out of its own resources, to securities dealers who
initiate and are responsible for (i) purchases of most equity and
fixed-income Franklin Templeton Funds made at net asset value by
certain designated retirement plans (excluding IRA and IRA
rollovers): 1.00% on sales of $1 million but less than $2
millon, plus 0.80% on sales of $2 million but less than $3
million, plus 0.50% on sales of $3 million but less than $50
million, plus 0.25% on sales of $50 million but less than $100
million, plus 0.15% on sales of $100 million or more; and (ii)
purchases of most fixed-income Franklin Templeton Funds made at
net asset value by non-designated retirement plans: 0.75% on
sales of $1 million but less than $2 million, plus 0.60% on sales
of $2 million but less than $3 million, plus 0.50% on sales of $3
million but less than $50 million, plus 0.25% on sales of $50
million but less than $100 million, plus 0.15% on sales of $100
million or more. These payment breakpoints are reset every 12
months for purposes of additional purchases. With respect to
purchases made at net asset value by certain trust companies and
trust departments of banks and certain retirement plans of
organizations with collective retirement plan assets of $10
million or more, FTD, or one of its affiliates, out of its own
resources, may pay up to 1% of the amount invested.
TAX STATUS
The Fund intends normally to pay a dividend at least once
annually representing substantially all of its net investment
income and to distribute at least annually any realized capital
gains. By so doing and meeting certain diversification of assets
and other requirements of the Code, the Fund intends to qualify
annually as a regulated investment company under the Code. The
status of the Fund as a regulated investment company does not
involve government supervision of management or of its investment
practices or policies. As a regulated investment company, the
Fund generally will be relieved of liability for United States
Federal income tax on that portion of its net investment income
(which includes, among other items, dividends and interest) and
net realized capital gains which it distributes to its
Shareholders. Amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement also are
subject to a nondeductible 4% excise tax. To prevent application
of the excise tax, the Fund intends to make distributions in
accordance with the calendar year distribution requirement.
Among other things, in order for the Fund to qualify as a
regulated investment company, at least 90% of its income for each
taxable year must be so-called "qualifying income" (e.g.,
interest, dividends, gains from the sale or other disposition of
stocks and securities, and other income (including gains from
options, futures, and forward contracts) derived with respect to
the business of investing in stocks or securities). Certain of
the debt securities acquired by the Fund may be secured in whole
or in part by interests in real estate. If the Fund were to
acquire real estate (by foreclosure, for example), income, if
any, generated by that real estate (including rental income and
gain on its disposition) may not be regarded as qualifying
income. If the Fund's non-qualifying income for a taxable year
exceeded 10% of its gross income, it would fail to qualify as a
regulated investment company and it would be taxed in the same
manner as an ordinary corporation. In that case, the Fund would
be ineligible to deduct its distributions to its Shareholders and
those distributions, to the extent derived from the Fund's
current and accumulated earnings and profits, would constitute
dividends (which may be eligible for the corporate dividends-
received deduction) which are taxable to Shareholders as ordinary
income, even though those distributions might otherwise, at least
in part, have been treated in the Shareholder's hands as
long-term capital gain. If the Fund fails to qualify as a
regulated investment company in a given taxable year, it must
distribute its earnings and profits accumulated in that year in
order to qualify again as a regulated investment company.
Amounts not distributed on a timely basis in accordance with
a calendar year distribution requirement are subject to a
nondeductible 4% excise tax. To prevent application of the tax,
the Fund must distribute or be deemed to have distributed with
respect to each calendar year an amount equal to the sum of: (1)
at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year; (2) at least 98%
of its capital gains in excess of its capital losses (adjusted
for certain ordinary losses) for the 12-month period ending on
October 31 of the calendar year; and (3) all taxable ordinary
income and capital gains for previous years that were not
distributed during such years. A distribution will be treated as
paid on December 31 of the calendar year if it is declared by the
Fund in 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 treated as received by Shareholders in the
calendar year in which the distributions are declared, rather
than the calendar year in which the distributions are received.
Dividends of net investment income and net short-term
capital gains are taxable to Shareholders as ordinary income.
Distributions of net investment income may be eligible for the
corporate dividends-received deduction to the extent attributable
to the Fund's qualifying dividend income. However, the
alternative minimum tax applicable to corporations may reduce the
benefit of the dividends-received deduction. Distributions of
net capital gains (the excess of net long-term capital gains over
net short-term capital losses) designated by the Fund as capital
gain dividends are taxable to Shareholders as long-term capital
gains, regardless of the length of time the Fund's Shares have
been held by a Shareholder, and are not eligible for the
dividends-received deduction. Generally, dividends and
distributions are taxable to Shareholders, whether received in
cash or reinvested in Shares of the Fund. Any distributions that
are not from the Fund's investment company taxable income or net
capital gain may be characterized as a return of capital to
Shareholders or, in some cases, as capital gain. Shareholders
will be notified annually as to the Federal tax status of
dividends and distributions they receive and any tax withheld
thereon.
Distributions by the Fund reduce the net asset value of the
Fund Shares. Should a distribution reduce the net asset value
below a Shareholder's cost basis, the distribution nevertheless
would be taxable to the Shareholder as ordinary income or capital
gain as described above, even though, from an investment
standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax
implications of buying Shares just prior to a distribution by the
Fund. The price of Shares purchased at that time includes the
amount of the forthcoming distribution, but the distribution will
generally be taxable to them.
The Fund may invest in real estate investment trusts
("REITs") that hold residual interests in real estate mortgage
investment conduits ("REMICs"). Under Treasury regulations that
have not yet been issued, but may apply retroactively, a portion
of the Fund's income from a REIT that is attributable to the
REITs residual interest in a REMIC (referred to in the Code as an
"excess inclusion") will be subject to Federal income tax in all
events. These regulations are also expected to provide that
excess inclusion income of a regulated investment company, such
as the Fund, will be allocated to shareholders of the regulated
investment company in proportion to the dividends received by
such shareholders, with the same consequences as if the
shareholders held the related REMIC residual interest directly.
In general, excess inclusion income allocated to shareholders (i)
cannot be offset by net operating losses (subject to a limited
exception for certain thrift institutions), (ii) will constitute
unrelated business taxable income to entities (including a
qualified pension plan, an individual retirement account, a
401(k) plan, a Keogh plan or other tax-exempt entity) subject to
tax on unrelated business income, thereby potentially requiring
such an entity that is allocated excess inclusion income, and
otherwise might not be required to file a tax return, to file a
tax return and pay tax on such income, and (iii) in the case of a
foreign shareholder, will not qualify for any reduction in U.S.
federal withholding tax. In addition, if at any time during any
taxable year a "disqualified organization" (as defined in the
Code) is a record holder of a share in a regulated investment
company, then the regulated investment company will be subject to
a tax equal to that portion of its excess inclusion income for
the taxable year that is allocable to the disqualified
organization, multiplied by the highest federal income tax rate
imposed on corporations. The Investment Manager does not intend
on behalf of the Fund to invest in REITs, a substantial portion
of the assets of which consists of residual interests in REMICs.
The Fund may invest in stocks of foreign companies that are
classified under the Code as passive foreign investment companies
("PFICs"). In general, a foreign company is classified as a PFIC
if at least one-half of its assets constitute investment-type
assets or 75% or more of its gross income is investment-type
income. Under the PFIC rules, an "excess distribution" received
with respect to PFIC stock is treated as having been realized
ratably over the period during which the Fund held the PFIC
stock. The Fund itself will be subject to tax on the portion, if
any, of the excess distribution that is allocated to the Fund's
holding period in prior taxable years (and an interest factor
will be added to the tax, as if the tax had actually been payable
in such prior taxable years) even though the Fund distributes the
corresponding income to Shareholders. Excess distributions
include any gain from the sale of PFIC stock as well as certain
distributions from a PFIC. All excess distributions are taxable
as ordinary income.
The Fund may be able to elect alternative tax treatment with
respect to PFIC stock. Under an election that currently may be
available, the Fund generally would be required to include in its
gross income its share of the earnings of a PFIC on a current
basis, regardless of whether any distributions are received from
the PFIC. If this election were made, the special rules,
discussed above, relating to the taxation of excess
distributions, would not apply. In addition, another election
may be available that would involve marking to market the Fund's
PFIC shares at the end of each taxable year (and on certain other
dates prescribed in the Code), with the result that unrealized
gains are treated as though they were realized. If this election
were made, tax at the fund level under the PFIC rules would
generally be eliminated, but the Fund could, in limited
circumstances, incur nondeductible interest charges. The Fund's
intention to qualify annually as a regulated investment company
may limit its elections with respect to PFIC shares.
Because the application of the PFIC rules may affect, among
other things, the character of gains, the amount of gain or loss
and the timing of the recognition of income with respect to PFIC
stock, as well as subject the Fund itself to tax on certain
income from PFIC stock, the amount that must be distributed to
Shareholders, and which will be taxed to Shareholders as ordinary
income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not invest in PFIC
stock.
Income received by the Fund from sources within foreign
countries may be subject to withholding and other income or
similar taxes imposed by such countries. If more than 50% of the
value of the Fund's total assets at the close of its taxable year
consists of securities of foreign corporations, the Fund will be
eligible and intends to elect to "pass through" to the Fund's
Shareholders the amount of foreign taxes paid by the Fund.
Pursuant to this election, a Shareholder will be required to
include in gross income (in addition to taxable dividends
actually received) his pro rata share of the foreign taxes paid
by the Fund, and will be entitled either to deduct (as an
itemized deduction) his pro rata share of foreign income and
similar taxes in computing his taxable income or to use it as a
foreign tax credit against his U.S. Federal income tax liability,
subject to limitations. No deduction for foreign taxes may be
claimed by a Shareholder who does not itemize deductions, but
such a Shareholder may be eligible to claim the foreign tax
credit (see below). Each Shareholder will be notified within 60
days after the close of the Fund's taxable year whether the
foreign taxes paid by the Fund will "pass through" for that year.
Generally, a credit for foreign taxes is subject to the
limitation that it may not exceed the Shareholder's U.S. tax
attributable to his foreign source taxable income. For this
purpose, if the pass-through election is made, the source of the
Fund's income flows through to its Shareholders. With respect to
the Fund, gains from the sale of securities will be treated as
derived from U.S. sources and certain currency fluctuation gains,
including fluctuation gains from foreign currency-denominated
debt securities, receivables and payables, will be treated as
ordinary income derived from U.S. sources. The limitation on the
foreign tax credit is applied separately to foreign source
passive income (as defined for purposes of the foreign tax
credit), including the foreign source passive income passed
through by the Fund. Shareholders may be unable to claim a
credit for the full amount of their proportionate share of the
foreign taxes paid by the Fund. Foreign taxes may not be
deducted in computing alternative minimum taxable income and the
foreign tax credit can be used to offset only 90% of the
alternative minimum tax (as computed under the Code for purposes
of this limitation) imposed on corporations and individuals. If
the Fund is not eligible to make the election to "pass through"
to its Shareholders its foreign taxes, the foreign income taxes
it pays generally will reduce investment company taxable income
and the distributions by the Fund will be treated as United
States source income.
Certain options, futures contracts and forward contracts in
which the Fund may invest are "section 1256 contracts." Gains or
losses on section 1256 contracts generally are considered 60%
long-term and 40% short-term capital gains or losses ("60/40");
however, foreign currency gains or losses (as discussed below)
arising from certain section 1256 contracts may be treated as
ordinary income or loss. Also, section 1256 contracts held by
the Fund at the end of each taxable year (and at certain other
times prescribed pursuant to the Code) are "marked-to-market"
with the result that unrealized gains or losses are treated as
though they were realized.
Generally, the hedging transactions undertaken by the Fund
may result in "straddles" for U.S. Federal income tax purposes.
The straddle rules may affect the character of gains (or losses)
realized by the Fund. In addition, losses realized by the 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 the
losses are realized. Because only a few regulations implementing
the straddle rules have been promulgated, the tax consequences to
the Fund of hedging transactions are not entirely clear. The
hedging transactions may increase the amount of short-term
capital gain realized by the Fund which is taxed as ordinary
income when distributed to Shareholders.
The Fund may make one or more of the elections available
under the Code which are applicable to straddles. If the Fund
makes any of the elections, the amount, character, and timing of
the recognition of gains or losses from the affected straddle
positions will be determined under rules that vary according to
the election(s) made. The rules applied under certain of the
elections may operate to accelerate the recognition of gains or
losses from the affected straddle positions.
Because application of the straddle rules may affect the
character of gains or losses, defer losses and/or accelerate the
recognition of gains or losses from the affected straddle
positions, the amount which must be distributed to Shareholders
and which will be taxed to Shareholders as ordinary income or
long-term capital gain may be increased or decreased as compared
to a fund that did not engage in such hedging transactions.
Requirements relating to the Fund's tax status as a
regulated investment company may limit the extent to which the
Fund will be able to engage in transactions in options, futures
contracts and forward contracts.
Under the Code, gains or losses attributable to fluctuations
in foreign currency exchange rates which occur between the time
the Fund accrues income or other receivables or accrues expenses
or other liabilities denominated in a foreign currency and the
time the Fund actually collects such receivables or pays such
liabilities generally are treated as ordinary income or ordinary
loss. Similarly, on disposition of debt securities denominated
in a foreign currency and on disposition of certain financial
contracts, forward contracts, and options, gains or losses
attributable to fluctuations in the value of foreign currency
between the date of acquisition of the security or contract and
the date of disposition also are treated as ordinary gain or
loss. These gains and losses, referred to under the Code as
"section 988" gains and losses, may increase or decrease the
amount of the Fund's net investment income to be distributed to
its Shareholders as ordinary income. For example, fluctuations
in exchange rates may increase the amount of income that the Fund
must distribute in order to qualify for treatment as a regulated
investment company and to prevent application of an excise tax on
undistributed income. Alternatively, fluctuations in exchange
rates may decrease or eliminate income available for
distribution. If section 988 losses exceed other net investment
income during a taxable year, the Fund would not be able to make
ordinary dividend distributions, or distributions made before the
losses were realized would be recharacterized as a return of
capital to Shareholders for Federal income tax purposes, rather
than as an ordinary dividend, reducing each Shareholder's basis
in his Fund Shares, or as a capital gain.
Upon the sale or exchange of his Shares, a Shareholder will
realize a taxable gain or loss depending upon his basis in the
Shares. Such gain or loss will be treated as capital gain or
loss if the Shares are capital assets in the Shareholder's hands,
and generally will be long-term if the Shareholder's holding
period for the Shares is more than one year and generally
otherwise will be short-term. Any loss realized on a sale or
exchange will be disallowed to the extent that the Shares
disposed of are replaced (including replacement through the
reinvesting of dividends and capital gain distributions in the
Fund) within a period of 61 days beginning 30 days before and
ending 30 days after the disposition of the Shares. In such a
case, the basis of the Shares acquired will be adjusted to
reflect the disallowed loss. Any loss realized by a Shareholder
on the sale of Fund Shares held by the Shareholder for six months
or less will be treated for Federal income tax purposes as a
long-term capital loss to the extent of any distributions of
long-term capital gains received by the Shareholder with respect
to such Shares.
Under certain circumstances, the sales charge incurred in
acquiring Shares of the Fund may not be taken into account in
determining the gain or loss on the disposition of those Shares.
This rule applies where Shares of the Fund are exchanged within
90 days after the date they were purchased and new Shares of the
Fund or another eligible regulated investment company are
acquired without a sales charge or at a reduced sales charge. In
that case, the gain or loss recognized on the exchange will be
determined by excluding from the tax basis of the Shares
exchanged all or a portion of the sales charge incurred in
acquiring those Shares. This exclusion applies to the extent
that the otherwise applicable sales charge with respect to the
newly acquired Shares is reduced as a result of having incurred a
sales charge initially. The portion of the sales charge affected
by this rule will be treated as a sales charge paid for the new
Shares.
The Fund generally will be required to withhold Federal
income tax at a rate of 31% ("backup withholding") from dividends
paid, capital gain distributions, and redemption proceeds to
Shareholders if (1) the Shareholder fails to furnish the Fund
with the Shareholder's correct taxpayer identification number or
social security number and to make such certifications as the
Fund may require, (2) the Internal Revenue Service notifies the
Shareholder or the Fund that the Shareholder has failed to report
properly certain interest and dividend income to the Internal
Revenue Service and to respond to notices to that effect, or (3)
when required to do so, the Shareholder fails to certify that he
is not subject to backup withholding. Any amounts withheld may
be credited against the Shareholder's Federal income tax
liability.
Distributions also may be subject to state, local and
foreign taxes. U.S. tax rules applicable to foreign investors
may differ significantly from those outlined above. Shareholders
are advised to consult their own tax advisers for details with
respect to the particular tax consequences to them of an
investment in the Fund.
PRINCIPAL UNDERWRITER
Franklin Templeton Distributors, Inc. ("FTD" or the
"Principal Underwriter"), P.O. Box 33030, St. Petersburg, Florida
33733-8030, toll free telephone (800) 237-0738, is the Principal
Underwriter of the Fund's Shares. FTD is a wholly owned
subsidiary of Franklin.
The Fund, pursuant to Rule 12b-1 under the 1940 Act, has
adopted a Distribution Plan with respect to each class of Shares
(the "Plans"). Under the Plan adopted with respect to Class I
Shares, the Fund may reimburse the Principal Underwriter or
others quarterly (subject to a limit of 0.25% per annum of the
Fund's average daily net assets attributable to Class I Shares)
for costs and expenses incurred by FTD or others in connection
with any activity which is primarily intended to result in the
sale of Fund Shares. Under the Plan adopted with respect to
Class II Shares, the Fund will pay FTD or others quarterly
(subject to a limit of $1.00% per annum of the Fund's average
daily assets attributable to Class II Shares of which up to 0.25%
of such net assets may be paid to dealers for personal service
and/or maintenance of Shareholder accounts) for costs and
expenses incurred by FTD or others in connection with any
activity which is primarily intended to result in the sale of the
Fund's Shares. Payments to FTD or others could be for various
types of activities, including (1) payments to broker-dealers who
provide certain services of value to the Fund's Shareholders
(sometimes referred to as a "trail fee"); (2) reimbursement of
expenses relating to selling and servicing efforts or of
organizing and conducting sales seminars; (3) payments to
employees or agents of the Principal Underwriter who engage in or
support distribution of Shares; (4) payments of the costs of
preparing, printing and distributing Prospectuses and reports to
prospective investors and of printing and advertising expenses;
(5) payment of dealer commissions and wholesaler compensation in
connection with sales of Fund Shares and interest or carrying
charges in connection therewith; and (6) such other similar
services as the Fund's Board of Trustees determines to be
reasonably calculated to result in the sale of Shares. Under the
Plan adopted with respect to Class I Shares, the costs and
expenses not reimbursed in any one given quarter (including costs
and expenses not reimbursed because they exceed 0.25% of the
Fund's average daily net assets attributable to Class I Shares)
may be reimbursed in subsequent quarters or years.
During the fiscal year ended August 31, 1994, FTD incurred
costs and expenses of $245,069 in connection with distribution of
Class I Shares of the Fund. During the same period, the Fund
made reimbursements pursuant to the Plan in the amount of
$244,400. As indicated above, unreimbursed expenses, which
amount to $669 for Class I Shares of the Fund, may be reimbursed
by the Fund during the fiscal year ending August 31, 1995 or in
subsequent years. In the event that the Plan is terminated, the
Fund will not be liable to FTD for any unreimbursed expenses that
had been carried forward from previous months or years. During
the fiscal year ended August 31, 1994, FTD spent, pursuant to the
Plan, the following amounts on: compensation to dealers,
$189,177; sales promotion, $1,949; printing, $42,525;
advertising, $66; and wholesale costs and expenses, $11,352.
The Underwriting Agreement provides that the Principal
Underwriter will use its best efforts to maintain a broad
distribution of the Fund's Shares among bona fide investors and
may sign selling agreements with responsible dealers, as well as
sell to individual investors. The Shares are sold only at the
Offering Price in effect at the time of sale, and the Fund
receives not less than the full net asset value of the Shares
sold. The discount between the Offering Price and the net asset
value may be retained by the Principal Underwriter or it may
reallow all or any part of such discount to dealers. During the
fiscal years ended August 31, 1994, 1993, and 1992, FTD (and,
prior to June 1, 1993, Templeton Funds Distributor, Inc.)
retained of such discount $422,672, $141,190, and $51,868, or
approximately 15.52%, 16%, and 11.42%, respectively. The
Principal Underwriter in all cases buys Shares from the Fund
acting as principal for its own account. Dealers generally act
as principal for their own account in buying Shares from the
Principal Underwriter. No agency relationship exists between any
dealer and the Fund or the Principal Underwriter.
The Underwriting Agreement provides that the Fund shall pay
the costs and expenses incident to registering and qualifying its
Shares for sale under the Securities Act of 1933 and under the
applicable Blue Sky laws of the jurisdictions in which the
Principal Underwriter desires to distribute such Shares, and for
preparing, printing and distributing prospectuses and reports to
Shareholders. The Principal Underwriter pays the cost of
printing additional copies of prospectuses and reports to
Shareholders used for selling purposes. (The Fund pays costs of
preparation, set-up and initial supply of the Fund's prospectus
for existing Shareholders.)
The Underwriting Agreement is subject to renewal from year
to year in accordance with the provisions of the 1940 Act and
terminates automatically in the event of its assignment. The
Underwriting Agreement may be terminated without penalty by
either party upon 60 days' written notice to the other, provided
termination by the Fund shall be approved by the Board of
Trustees or a majority (as defined in the 1940 Act) of the
Shareholders. The Principal Underwriter is relieved of liability
for any act or omission in the course of its performance of the
Underwriting Agreement, in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of its
obligations.
FTD is the principal underwriter for the other Templeton
Funds.
DESCRIPTION OF SHARES
The Shares have non-cumulative voting rights so that the
holders of a plurality of the Shares voting for the election of
Trustees at a meeting at which 50% of the outstanding Shares are
present can elect all the Trustees and, in such event, the
holders of the remaining Shares voting for the election of
Trustees will not be able to elect any person or persons to the
Board of Trustees.
The Declaration of Trust provides that the holders of not
less than two-thirds of the outstanding Shares of the Fund may
remove a person serving as Trustee either by declaration in
writing or at a meeting called for such purpose. The Trustees
are required to call a meeting for the purpose of considering the
removal of a person serving as Trustee if requested in writing to
do so by the holders of not less than 10% of the outstanding
Shares of the Fund. In addition, the Fund is required to assist
Shareholder communication in connection with the calling of a
Shareholder meeting to consider the removal of a Trustee.
Under Massachusetts law, Shareholders could, under certain
circumstances, be held personally liable for the obligations of
the Fund. However, the Declaration of Trust disclaims liability
of the Shareholders, Trustees or officers of the Fund for acts or
obligations of the Fund, which are binding only on the assets and
property of the Fund. The Declaration of Trust provides for
indemnification out of Fund property for all loss and expenses of
any Shareholder held personally liable for the obligations of the
Fund. The risk of a Shareholder incurring financial loss on
account of Shareholder liability is limited to circumstances in
which the Fund itself would be unable to meet its obligations
and, thus, should be considered remote.
PERFORMANCE INFORMATION
The Fund may, from time to time, include its total return in
advertisements or reports to Shareholders or prospective
investors. Quotations of average annual total return for the
Fund will be expressed in terms of the average annual compounded
rate of return for periods in excess of one year or the total
return for periods less than one year of a hypothetical
investment in the Fund over a period of one, five and ten years
(or, if less, up to the life of the Fund) calculated pursuant to
the following formula: P(1 + T)n = ERV (where P = a hypothetical
initial payment of $1,000, T = the average annual total return
for periods of one year or more or the total return for periods
of less than one year, n = the number of years, and ERV = the
ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the period). All total return figures reflect
the deduction of the maximum initial sales charge and deduction
of a proportional share of Fund expenses on an annual basis, and
assume that all dividends and distributions are reinvested when
paid. The average annualized total return for the one-year
period ended August 31, 1994 and for the period from commencement
of operations on September 12, 1989 to August 31, 1994 was 3.33%
and 8.73%, respectively.
Performance information for the Fund may be compared, in
reports and promotional literature, to: (i) the Standard & Poor's
500 Stock Index, Dow Jones Industrial Average, or other unmanaged
indices so that investors may compare the Fund's results with
those of a group of unmanaged securities widely regarded by
investors as representative of the securities market in general;
(ii) other groups of mutual funds tracked by Lipper Analytical
Services, Inc., a widely used independent research firm which
ranks mutual funds by overall performance, investment objectives
and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall
performance or other criteria; and (iii) the Consumer Price Index
(measure for inflation) to assess the real rate of return from an
investment in the Fund. Unmanaged indices may assume the
reinvestment of dividends but generally do not reflect deductions
for administrative and management costs and expenses.
Performance information for the Fund reflects only the
performance of a hypothetical investment in the Fund during the
particular time period on which the calculations are based.
Performance information should be considered in light of the
Fund's investment objectives and policies, characteristics and
quality of the portfolio and the market conditions during the
given time period, and should not be considered as a
representation of what may be achieved in the future.
From time to time, the Fund and the Investment Manager may
also refer to the following information:
1. The Investment Manager's and its affiliates' market
share of international equities managed in mutual funds
prepared or published by Strategic Insight or a similar
statistical organization.
2. The performance of U.S. equity and debt markets
relative to foreign markets prepared or published by
Morgan Stanley Capital International or a similar
financial organization.
3. The capitalization of U.S. and foreign stock markets as
prepared or published by the International Finance
Corporation, Morgan Stanley Capital International or a
similar financial organization.
4. The geographic distribution of the Fund's portfolio.
5. The gross national product and populations, including
age characteristics, literacy rates, foreign investment
improvements due to a liberalization of securities laws
and a reduction of foreign exchange controls, and
improving communication technology, of various
countries as published by various statistical
organizations.
6. To assist investors in understanding the different
returns and risk characteristics of various
investments, the Fund may show historical returns of
various investments and published indices (e.g.,
Ibbotson Associates, Inc. Charts and Morgan Stanley
EAFE - Index).
7. The major industries located in various jurisdictions
as published by the Morgan Stanley Index.
8. Rankings by DALBAR Surveys, Inc. with respect to mutual
fund shareholder services.
9. Allegorical stories illustrating the importance of
persistent long-term investing.
10. The Fund's portfolio turnover rate and its ranking
relative to industry standards as published by Lipper
Analytical Services, Inc. or Morningstar, Inc.
11. A description of the Templeton organization's
investment management philosophy and approach,
including its worldwide search for undervalued or
"bargain" securities and its diversification by
industry, nation and type of stocks or other
securities.
12. Quotations from the Templeton organization's founder,
Sir John Templeton*, advocating the virtues of
diversification and long-term investing, including the
following:
"Never follow the crowd. Superior
performance is possible only if you invest
differently from the crowd."
"Diversify by company, by industry and by
country."
"Always maintain a long-term perspective."
"Invest for maximum total real return."
"Invest - don't trade or speculate."
"Remain flexible and open-minded about types
of investment."
"Buy low."
"When buying stocks, search for bargains
among quality stocks."
______________________
* Sir John Templeton sold the Templeton organization to
Franklin Resources, Inc. in October, 1992 and resigned from
the Fund's Board on April 16, 1995. He is no longer
involved with the investment management process.
"Buy value, not market trends or the economic
outlook."
"Diversify. In stocks and bonds, as in much
else, there is safety in numbers."
"Do your homework or hire wise experts to
help you."
"Aggressively monitor your investments."
"Don't panic."
"Learn from your mistakes."
"Outperforming the market is a difficult
task."
"An investor who has all the answers doesn't
even understand all the questions."
"There's no free lunch."
"And now the last principle: Do not be
fearful or negative too often."
In addition, the Fund and the Investment Manager may also
refer to the number of shareholders in the Fund or the aggregate
number of Shareholders of the Franklin Templeton Funds or the
dollar amount of fund and private account assets under management
in advertising materials.
FINANCIAL STATEMENTS
The financial statements contained in the Annual Report to
Shareholders of Templeton Real Estate Securities Fund dated
August 31, 1994 are incorporated herein by reference.
