TEMPLETON GLOBAL OPPORTUNITIES TRUST
THIS STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1996,
IS NOT A PROSPECTUS. IT SHOULD BE READ IN
CONJUNCTION WITH THE PROSPECTUS OF
TEMPLETON GLOBAL OPPORTUNITIES TRUST DATED MAY 1, 1996,
AS AMENDED FROM TIME TO TIME, 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: 1-800/DIAL BEN
TABLE OF CONTENTS
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GENERAL INFORMATION AND HISTORY......................1 -INDEPENDENT ACCOUNTANTS........................24
INVESTMENT OBJECTIVE AND POLICIES....................1 -REPORTS TO SHAREHOLDERS.......................24
-INVESTMENT POLICIES................................1 BROKERAGE ALLOCATION............................24
-REPURCHASE AGREEMENTS..............................1 PURCHASE, REDEMPTION AND
-DEBT SECURITIES....................................2 PRICING OF SHARES.............................27
-STRUCTURED INVESTMENTS.............................3 -OWNERSHIP AND AUTHORITY DISPUTES..............27
-FUTURES CONTRACTS..................................4 -TAX-DEFERRED RETIREMENT PLANS.................27
-OPTIONS ON SECURITIES OR INDICES...................4 -LETTER OF INTENT..............................29
-FOREIGN CURRENCY HEDGING TRANSACTIONS..............6 -SPECIAL NET ASSET VALUE PURCHASES....... 29
-INVESTMENT RESTRICTIONS............................7 -REDEMPTIONS IN KIND..................... 30
-RISK FACTORS.......................................9 TAX STATUS......................................30
-TRADING POLICIES..................................13 -DISTRIBUTIONS.................................33
-PERSONAL SECURITIES TRANSACTIONS..................13 -OPTIONS AND HEDGING TRANSACTIONS..............34
MANAGEMENT OF THE FUND..............................13 -CURRENCY FLUCTUATIONS--"SECTION
TRUSTEE COMPENSATION................................19 988" GAINS OR LOSSES..........................34
PRINCIPAL SHAREHOLDERS..............................19 -SALE OF SHARES................................35
INVESTMENT MANAGEMENT AND OTHER -FOREIGN TAXES.................................35
SERVICES......................................... 20 -BACKUP WITHHOLDING............................36
-INVESTMENT MANAGEMENT AGREEMENT...................20 -FOREIGN SHAREHOLDERS..........................36
-MANAGEMENT FEES...................................21 -OTHER TAXATION................................36
-TEMPLETON INVESTMENT COUNSEL, INC.................21 PRINCIPAL UNDERWRITER...........................37
-SUB-ADVISORY AGREEMENT............................21 DESCRIPTION OF SHARES...........................38
-BUSINESS MANAGER..................................22 PERFORMANCE INFORMATION.........................39
-CUSTODIAN AND TRANSFER AGENT......................23 FINANCIAL STATEMENTS............................42
-LEGAL COUNSEL.....................................24
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GENERAL INFORMATION AND HISTORY
Templeton Global Opportunities Trust (the "Fund") was organized as a
Massachusetts business trust on October 2, 1989, and is registered under the
Investment Company Act of 1940 (the "1940 Act") as an open-end diversified
management investment company.
INVESTMENT OBJECTIVE AND POLICIES INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT POLICIES. The Fund's investment objective and policies are
described in the Prospectus under the heading "General Description --
Investment Objective and Policies."
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 Investment Counsel, Inc. (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.
DEBT SECURITIES. The Fund may invest in debt securities which are rated
at least Caa by Moody's or CCC by S&P or deemed to be of comparable quality by
the Investment Manager. As an operating policy, the Fund will invest no more
than 5% of its assets in debt securities rated lower than Baa by Moody's or BBB
by S&P. The market value of debt securities generally varies in response to
changes in interest rates and the financial condition of each issuer. During
periods of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the Fund's net asset value.
Bonds rated Caa by Moody's are of poor standing. Such securities may be
in default or there may be present elements of danger with respect to principal
or interest. Bonds rated CCC by S&P are regarded, on balance, as speculative.
Such securities will have some quality and protective characteristics, but these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
Although they may offer higher yields than do higher rated securities,
low rated and unrated debt securities generally involve greater volatility of
price and risk of principal and income, including the possibility of default by,
or bankruptcy of, the issuers of the securities. In addition, the markets in
which low rated and unrated debt securities are traded are more limited than
those in which higher rated securities are traded. The existence of limited
markets for particular securities may diminish the Fund's ability to sell the
securities at fair value either to meet redemption requests or to respond to a
specific economic event such as a deterioration in the creditworthiness of the
issuer. Reduced secondary market liquidity for certain low rated or unrated debt
securities may also make it more difficult for the Fund to obtain accurate
market quotations for the purposes of valuing the Fund's portfolio. Market
quotations are generally available on many low rated or unrated securities only
from a limited number of dealers and may not necessarily represent firm bids of
such dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated debt securities may be more complex
than for issuers of higher rated securities, and the ability of the Fund to
achieve its investment objective may, to the extent of investment in low rated
debt securities, be more dependent upon such creditworthiness analysis than
would be the case if the Fund were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low rated debt securities have been found to be less
sensitive to interest rate changes than higher rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in low rated debt securities prices because the
advent of a recession could lessen the ability of a highly leveraged company to
make principal and interest payments on its debt securities. If the issuer of
low rated debt securities defaults, the Fund may incur additional expenses to
seek recovery.
The Fund may accrue and report interest on high yield bonds structured
as zero coupon bonds or pay-in-kind securities as income even though it receives
no cash interest until the security's maturity or payment date. In order to
qualify for beneficial tax treatment, the Fund must distribute substantially all
of its income to shareholders (see "Tax Status"). Thus, the Fund may have to
dispose of its portfolio securities under disadvantageous circumstances to
generate cash or leverage itself by borrowing cash, so that it may satisfy the
distribution requirement.
Recent legislation, which requires federally insured savings and loan
associations to divest their investments in low rated debt securities, may have
a material adverse effect on the Fund's net asset value and investment
practices.
STRUCTURED INVESTMENTS. Included among the issuers of debt securities
in which the Fund may invest are entities organized and operated solely for the
purpose of restructuring the investment characteristics of various securities.
These entities are typically organized by investment banking firms which receive
fees in connection with establishing each entity and arranging for the placement
of its securities. This type of restructuring involves the deposit with or
purchase by an entity, such as a corporation or trust, of specified instruments
and the issuance by that entity of one or more classes of securities
("Structured Investments") backed by, or representing interests in, the
underlying instruments. The cash flows on the underlying instruments may be
apportioned among the newly issued Structured Investments to create securities
with different investment characteristics such as varying maturities, payment
priorities or interest rate provisions; the extent of the payments made with
respect to Structured Investments is dependent on the extent of the cash flows
on the underlying instruments. Because Structured Investments of the type in
which the Fund anticipates investing typically involve no credit enhancement,
their credit risk will generally be equivalent to that of the underlying
instruments.
The Fund is permitted to invest in a class of Structured Investments
that is either subordinated or unsubordinated to the right of payment of another
class. Subordinated Structured Investments typically have higher yields and
present greater risks than unsubordinated Structured Investments. Although the
Fund's purchase of subordinated Structured Investments would have a similar
economic effect to that of borrowing against the underlying securities, the
purchase will not be deemed to be leveraged for purposes of the limitations
placed on the extent of the Fund's assets that may be used for borrowing
activities.
Certain issuers of Structured Investments may be deemed to be
"investment companies" as defined in the 1940 Act. As a result, a Fund's
investment in these Structured Investments may be limited by the restrictions
contained in the 1940 Act. Structured Investments are typically sold in private
placement transactions, and there currently is no active trading market for
Structured Investments. To the extent such investments are illiquid, they will
be subject to the Fund's restrictions on investments in illiquid securities.
. 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 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 OR 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 that it writes 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 that it
writes by segregating assets equal to the option's exercise price, or in such
other manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations.
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
investments. By writing a put option, the Fund assumes the risk of a decline in
the underlying security or index. To the extent that the price changes of the
portfolio securities being hedged correlate with changes in the value of the
underlying security or index, writing covered put options on indices or
securities will increase the Fund's losses in the event of a market decline,
although such losses will be offset in part by the premium received for writing
the option.
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 on a
securities index to attempt to reduce the risk of missing a broad market
advance, or an advance in an industry or market segment, at a time when the Fund
holds uninvested cash or short-term debt securities awaiting investment. When
purchasing call options, the Fund will bear the risk of losing all or a portion
of the premium paid if the value of the underlying security or index does not
rise.
There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. Trading could be interrupted, for
example, because of supply and demand imbalances arising from a lack of 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 forward foreign currency transactions an amount of
the Fund's assets equal to the amount of the purchase will be held aside or
segregated to be used to pay for the commitment, 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. 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 in 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 foreign
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.
. The Fund has imposed upon itself certain investment restrictions, which
together with the investment policies are fundamental policies except as
otherwise indicated. No changes in the Fund's investment policies or investment
restrictions (except those which are not fundamental policies) can be made
without approval of the Shareholders. For this purpose, the provisions in the
1940 Act require the affirmative vote of the lesser of either (a) 67% or more of
the Shares present at a Shareholders' meeting at which more than 50% of the
outstanding Shares are present or represented by proxy or (b) more than 50% of
the outstanding Shares of the Fund.
In accordance with these restrictions, the Fund will not:
1. Invest in real estate or mortgages on real estate (although
the Fund may invest in marketable securities secured by real
estate or interests therein or issued by companies or
investment trusts which invest in real estate or interest
therein); invest in interests (other than debentures or equity
stock interests) in oil, gas or other mineral exploration or
development programs; purchase or sell commodity contracts
except stock index futures contracts; invest in other open-end
investment companies or, as an operating policy approved by
the Board of Trustees, invest in closed-end investment
companies.
2. Purchase or retain securities of any company in which Trustees
or Officers of the Fund or of its Investment Manager,
individually own more than 1/2 of 1% of the securities of such
company or, in the aggregate, own more than 5% of the
securities of such company.
3. Invest more than 5% of its total assets in the securities of
any one issuer (exclusive of U.S. Government securities).
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 except as set
forth in investment restriction 7 below; or purchase on margin
or sell short (but the Fund may make margin payments in
connection with options on securities or securities indices,
foreign currencies, futures contracts and related options, and
forward contracts and related options).
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. Borrow money, except that the Fund may borrow money from banks
in an amount not exceeding 10% 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, forward contracts and related
options are not deemed to be a pledge of assets.
8. Invest more than 5% of the value of the Fund's total assets in
securities of issuers which have been in continuous operation
less than three years.
9. Invest more than 5% of the Fund's total assets in warrants,
whether or not listed on the New York or American Stock
Exchange, including no more than 2% of its total assets which
may be invested in warrants that are not listed on those
exchanges. Warrants acquired by the Fund in units or attached
to securities are not included in this restriction.
10. Invest more than 15% of the Fund's total assets in securities
of foreign issuers that are not listed on a recognized United
States or foreign securities exchange, including no more than
10% of its total assets in restricted securities, securities
that are not readily marketable, repurchase agreements having
more than seven days to maturity, and over-the-counter options
purchased by the Fund. Assets used as cover for
over-the-counter options written by the Fund are considered
not readily marketable.
11. Invest more than 25% of the Fund's total assets in a single
industry.
12. Participate on a joint or a joint and several basis in any
trading account in securities. (See "Investment Objective and
Policies--Trading Policies" as to transactions in the same
securities for the Fund and other Templeton Funds and
clients.)
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. Assets are calculated as described in the Prospectus under
the heading "How to Buy Shares of the Fund." If the Fund receives from an issuer
of securities held by the Fund subscription rights to purchase securities of
that issuer, and if the Fund exercises such subscription rights at a time when
the Fund's portfolio holdings of securities of that issuer would otherwise
exceed the limits set forth in investment restrictions 3 or 11 above, it will
not constitute a violation if, prior to receipt of securities upon exercise of
such rights, and after announcement of such rights, the Fund has sold at least
as many securities of the same class and value as it would receive on exercise
of such rights.
RISK FACTORS. The Fund has an unlimited right to purchase securities in any
developed foreign country, and may invest up to 25% of its total assets in
securities in developing countries. 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 ("NYSE") 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 structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the absence,
until recently in certain Eastern European countries, of a capital market
structure or market-oriented economy; and (vii) the possibility that recent
favorable economic developments in Eastern Europe may be slowed or reversed by
unanticipated political or social events in such countries.
In addition, many countries in which the Fund may invest have
experienced substantial, and in some periods extremely high, rates of inflation
for many years. Inflation and rapid fluctuations in inflation rates have had and
may continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the United States economy in such respects
as growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
Investments in Eastern European countries may involve risks of
nationalization, expropriation and confiscatory taxation. The communist
governments of a number of Eastern European countries expropriated large amounts
of private property in the past, in many cases without adequate compensation,
and there can be no assurance that such expropriation will not occur in the
future. In the event of such expropriation, the Fund could lose a substantial
portion of any investments it has made in the affected countries. Further, no
accounting standards exist in Eastern European countries. Finally, even though
certain Eastern European currencies may be convertible into U.S. dollars, the
conversion rates may be artificial to the actual market values and may be
adverse to Fund Shareholders.
Investing in Russian securities 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 issuers deemed suitable by the
Investment Manager. Further, this also could cause a delay in the sale of
Russian 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, withhold portions of interest and dividends at the source,
or impose other taxes, with respect to the Fund's investments in securities of
issuers of that country. Although the management places the Fund's investments
only in foreign nations which it considers as having relatively stable and
friendly governments, there is the possibility of cessation of trading on
national exchanges, expropriation, nationalization, confiscatory or other
taxation, foreign exchange controls (which may include suspension of the ability
to transfer currency from a given country), default in foreign government
securities, political or social instability, or diplomatic developments that
could affect investments in securities of issuers in foreign nations.
The Fund may be affected either unfavorably or favorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, by exchange control regulations and by indigenous economic
and political developments. Some countries in which the Fund may invest may also
have fixed or managed currencies that are not free-floating against the U.S.
dollar. Further, certain currencies may not be internationally traded. Certain
of these currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which the Fund's portfolio
securities are denominated may have a detrimental impact on the Fund. Through
the Fund's flexible policy, management endeavors to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where from time to time it places the Fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove profitable
and others may not. No assurance can be given that profits, if any, will exceed
losses.
The 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 Trustees'
appraisal of the risks will always be correct or that such exchange control
restrictions or political acts of foreign governments might not occur.
The Fund's ability to reduce or eliminate its futures and related
options positions will depend upon the liquidity of the secondary markets for
such futures and options. The Fund intends to purchase or sell futures and
related options only on exchanges or boards of trade where there appears to be
an active secondary market, but there is no assurance that a liquid secondary
market will exist for any particular contract or at any particular time. Use of
stock index futures and related options for hedging may involve risks because of
imperfect correlations between movements in the prices of the futures or related
options and movements in the prices of the securities being hedged. Successful
use of futures and related options by the Fund for hedging purposes also depends
upon the Investment Manager's ability to predict correctly movements in the
direction of the market, as to which no assurance can be given.
TRADING POLICIES. The Investment Manager and its affiliated companies
serve as investment manager to other investment companies and private clients.
Accordingly, the respective portfolios of certain of these funds and clients may
contain many or some of the same securities. When certain funds or clients are
engaged simultaneously in the purchase or sale of the same security, the trades
may be aggregated for execution and then allocated in a manner designed to be
equitable to each party. The larger size of the transaction may affect the price
of the security and/or the quantity which may be bought or sold for each party.
If the transaction is large enough, brokerage commissions may be negotiated
below those otherwise chargeable.
Sale or purchase of securities, without payment of brokerage
commissions, fees (except customary transfer fees) or other remuneration in
connection therewith, may be effected between any of these funds, or between
funds and private clients, under procedures adopted pursuant to Rule 17a-7 under
the 1940 Act.
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:
<TABLE>
<CAPTION>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING THE PAST FIVE YEARS
<S> <C>
HARRIS J. ASHTON Chairman of the Board, President and Chief Executive
Metro Center Officer of General Host Corporation (nursery and craft
1 Station Place centers); and a Director of RBC Holdings (U.S.A.) Inc.
Stamford, Connecticut (a bank holding company) and Bar-S Foods.
Trustee Age 63.
</TABLE>
<TABLE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING THE PAST FIVE YEARS
<S> <C>
NICHOLAS F. BRADY* Chairman of Templeton Emerging Markets Investment
The Bullitt House Trust PLC; Chairman of Templeton Latin America
102 East Dover Street Investment Trust PLC; Chairman of Darby Overseas
Easton, Maryland Investments, Ltd. (an investment firm) (1994-present);
Trustee Director of the Amerada Hess Corporation, Capital
Cities/ABC, Inc., Christiana Companies, and the H.J.
Heinz Company; Secretary of the United States
Department of the Treasury (1988-January, 1993); and
Chairman of the Board of Dillon, Read & Co. Inc.
(investment banking) prior thereto. Age 66.
FRANK J. CROTHERS President and Chief Executive Officer of Atlantic
P.O. Box N-3238 Equipment & Power Ltd.; Vice Chairman of
Nassau, Bahamas Caribbean Utilities Co., Ltd.; President of Provo
Trustee Power Corporation;
and a Director of
various other
business and
nonprofit
organizations. Age
51.
S. JOSEPH FORTUNATO Member of the law firm of Pitney, Hardin, Kipp &
200 Campus Drive Szuch; and a director of General Host Corporation. Age
Florham Park, New Jersey 63.
Trustee
JOHN Wm. GALBRAITH President of Galbraith Properties, Inc. (personal
360 Central Avenue investment company); Director of Gulfwest Banks, Inc.
Suite 1300 (bank holding company) (1995-present) and Mercantile
St. Petersburg, Florida Bank (1991-present); Vice Chairman of Templeton,
Trustee Galbraith & Hansberger Ltd. (1986-1992); and Chairman
of Templeton Funds Management, Inc. (1974-1991). Age
74.
</TABLE>
<TABLE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING THE PAST FIVE YEARS
<S> <C>
ANDREW H. HINES, JR. Consultant for the Triangle Consulting Group; Chairman
150 2nd Avenue N. of the Board and Chief Executive Officer of Florida
St. Petersburg, Florida Progress Corporation (1982-February, 1990) and
Trustee Director of various
of its
subsidiaries;
Chairman and
Director of Precise
Power Corporation;
executive-in-residence
of Eckerd College
(1991-present); and
a director of
Checkers Drive-In
Restaurants, Inc.
Age 73.
CHARLES B. JOHNSON* President, Chief Executive Officer, and Director of
777 Mariners Island Blvd. Franklin Resources, Inc.; Chairman of the Board and
San Mateo, California Director of Franklin Advisers, Inc. and Franklin
Trustee, Chairman of the Board Templeton Distributors, Inc.; Director of General Host
and Vice President Corporation, and Templeton Global Investors, Inc.; and
officer and
director, trustee
or managing general
partner, as the
case may be, of
most other
subsidiaries of
Franklin and of 55
of the investment
companies in the
Franklin Templeton
Group. Age 63.
RUPERT H. JOHNSON, JR.* Executive Vice President and Director of Franklin
777 Mariners Island Blvd. Resources, Inc.; President and Director of Franklin
San Mateo, California Advisers, Inc.; Executive Vice President and Director
Trustee and Vice President
of Franklin
Templeton
Distributors, 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 61 of
the investment
companies in the
Franklin Templeton
Group. Age 55.
BETTY P. KRAHMER Director or trustee of various civic associations;
2201 Kentmere Parkway formerly, economic analyst, U.S. Government. Age 66.
Wilmington, Delaware
Trustee
</TABLE>
<TABLE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING THE PAST FIVE YEARS
<S> <C>
GORDON S. MACKLIN Chairman of White River Corporation (information
8212 Burning Tree Road services); Director of Fund America Enterprises
Bethesda, Maryland Holdings, Inc., Lockheed Martin Corporation, MCI
Trustee Communications
Corporation, Fusion
Systems
Corporation,
Infovest
Corporation, and
Medimmune, Inc.;
formerly, Chairman
of Hambrecht and
Quist Group;
Director of H&Q
Healthcare
Investors; and
President of the
National
Association of
Securities Dealers,
Inc. Age 67.
FRED R. MILLSAPS Manager of personal investments (1978-present);
2665 N.E. 37th Drive Chairman and Chief Executive Officer of Landmark
Fort Lauderdale, Florida Banking Corporation (1969-1978); financial Vice
Trustee President of
Florida Power and
Light (1965-1969);
Vice President of
The Federal Reserve
Bank of Atlanta
(1958-1965); and a
director of various
other business and
nonprofit
organizations. Age
67.
CONSTANTINE DEAN TSERETOPOULOS Physician, Lyford Cay Hospital (July 1987-present);
Lyford Cay Hospital cardiology fellow, University of Maryland
P.O. Box N-7776 (July 1985-July 1987); internal medicine intern, Greater
Nassau, Bahamas Baltimore Medical Center (July 1982-July 1985). Age 42.
Trustee
MARTIN L. FLANAGAN Senior Vice President, Treasurer and Chief Financial
777 Mariners Island Blvd. Officer of Franklin Resources, Inc.; director and
San Mateo, California Executive Vice President of Templeton Investment
President Counsel, Inc.; Director, President, and Chief
Executive Officer of Templeton Global Investors, Inc.;
director or trustee and president or vice president of
various Templeton Funds; accountant with Arthur
Andersen & Company (1982-1983); and a member of the
International Society of Financial Analysts and the
American Institute of Certified Public Accountants.
Age 35.
</TABLE>
<TABLE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING THE PAST FIVE YEARS
<S> <C>
HARMON E. BURNS Executive Vice President, Secretary and Director of
777 Mariners Island Blvd. Franklin Resources, Inc.; Executive Vice President and
San Mateo, California Director of Franklin Templeton Distributors, Inc.;
Vice President Executive Vice President of Franklin Advisers, Inc.;
Director of Franklin Templeton Investor Services,
Inc.; officers and/or director, as the case may be of
other subsidiaries of Franklin Resources, Inc.; and
officer and/or director or trustee of 61 of the
investment companies in the Franklin Templeton Group
of Funds. Age 51.
CHARLES E. JOHNSON Senior Vice President and Director of Franklin
500 East Broward Blvd. Resources, Inc.; Senior Vice President of Franklin
Ft. Lauderdale, Florida Templeton Distributors, Inc.; President and Director
Vice President of Templeton Worldwide, inc. And Franklin
Institutional Service Corporation; Chairman of the
Board of Templeton Investment Counsel, Inc.; Vice
President and/or Director, as the case may be, for
some of the subsidiaries of Franklin Resources, Inc.;
and an officer and/or director, as the case may be, of
24 of the investment companies in the Franklin
Templeton Group. Age 39.
DEBORAH R. GATZEK Senior Vice President and General Counsel of Franklin
777 Mariners Island Blvd. Resources, Inc.; Senior Vice President of Franklin
San Mateo, California Templeton Distributors, Inc.; Vice President of
Vice President Franklin Advisers, Inc. and officer of 61 of the
investment companies in the Franklin Templeton Group
of Funds. Age 47.
HOWARD J. LEONARD Vice President, Portfolio Management/Research, of
500 East Broward Blvd. Templeton Investment Counsel, Inc. (1989-present);
Fort Lauderdale, Florida formerly, Director, investment research for First
Vice President Pennsylvania Bank (1986-1989) and security analyst for
Provident National Bank (1981-1985). Age 36.
</TABLE>
<TABLE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING THE PAST FIVE YEARS
<S> <C>
JOHN R. KAY Vice President of the Templeton Funds; Vice President
500 East Broward Blvd. and Treasurer of Templeton Global Investors, Inc. and
Fort Lauderdale, Florida Templeton Worldwide, Inc.; Assistant Vice President of
Vice President Franklin Templeton Distributors, Inc.; formerly, Vice
President and Controller of the Keystone Group, Inc.
Age 55.
MARK G. HOLOWESKO President and director of Templeton Global Advisors
Lyford Cay Limited.; Chief Investment Officer of global equity
Nassau, Bahamas research for Templeton Worldwide, Inc.; president or
Vice President vice
president of the
Templeton Funds;
formerly,
investment
administrator with
Roy West Trust
Corporation
(Bahamas) Limited
(1984-1985). Age
36.
JAMES R. BAIO Certified Public Accountant; Treasurer of the
500 East Broward Blvd. Templeton Funds; Senior Vice President of Templeton
Fort Lauderdale, Florida Worldwide, Inc., Templeton Global Investors, Inc., and
Treasurer Templeton Funds
Trust Company;
formerly, Senior
Tax Manager with
Ernst & Young
(certified public
accountants)
(1977-1989).
Age 41.
THOMAS M. MISTELE Senior Vice President of Templeton Global Investors,
700 Central Avenue Inc.; Vice President of Franklin Templeton
St. Petersburg, Florida Distributors, Inc.; Secretary of the Templeton Funds;
Secretary formerly, attorney,
Dechert Price &
Rhoads (1985-1988)
and Freehill,
Hollingdale & Page
(1988); and
judicial clerk,
U.S. District Court
(Eastern District
of Virginia)
(1984-1985). Age
42.
</TABLE>
- ----------------------
* These 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 Global Advisors Limited are limited partners of Darby
Emerging Markets Fund, L.P.
There are no family relationships between any of the Trustees, except
that Messrs. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
TRUSTEE COMPENSATION
All of the Trust's Officers and Trustees also hold positions with other
investment companies in the Franklin Templeton Group. No compensation is paid by
the Trust to any officer or Trustee who is an officer, trustee or employee of
the Investment Manager or its affiliates. Each Templeton Fund pays its
independent directors and trustees and Mr. Brady an annual retainer and/or fees
for attendance at Board and Committee meetings, the amount of which is based on
the level of assets in each fund. Accordingly, the Trust currently pays the
independent Trustees and Mr. Brady an annual retainer of $4,000 and a fee of
$350 per meeting attended of the Board and its Committees. The independent
Trustees and Mr. Brady are reimbursed for any expenses incurred in attending
meetings, paid pro rata by each Franklin Templeton Fund in which they serve. No
pension or retirement benefits are accrued as part of Trust expenses.
The following table shows the total compensation paid to the Trustees
by the Trust and by all investment companies in the Franklin Templeton Group:
<TABLE>
<CAPTION>
Number of Total Compensation
Aggregate Franklin Templeton from all Funds in
Name of Compensation Fund Boards on which Franklin Templeton
TRUSTEE FROM THE TRUST* TRUSTEE SERVES GROUP
<S> <C> <C> <C>
Harris J. Ashton $ 4,875 56 $ 327,925
Nicholas F. Brady 4,875 24 98,225
Frank J. Crothers 5,092 4 22,975
S. Joseph Fortunato 4,875 58 344,745
John Wm. Galbraith 4,050 23 70,100
Andrew H. Hines, Jr. 4,875 24 106,325
Betty P. Krahmer 4,050 24 93,475
Gordon S. Macklin 4,875 53 321,525
Fred R. Millsaps 5,054 24 104,325
Constantine Dean Tseretopoulos 5,092 4 22,975
</TABLE>
- --------------------------------
* For the fiscal year ended December 31, 1995
PRINCIPAL SHAREHOLDERS
As of March 29, 1996, there were 41,325,698 Shares of the Fund
outstanding, of which 14,472 Shares (0.035%) were owned beneficially, directly
or indirectly, by all the Trustees and officers of the Fund as a group. As of
that date, to the knowledge of management, no person owned beneficially or of
record 5% or more of the outstanding Class I Shares and no person owned
beneficially or of record 5% or more of the outstanding Class II Shares, except
Merrill Lynch Pierce Fenner & Smith, Inc., Mutual Funds Operations, 4800 Deer
Lake Drive, East, Jacksonville, Florida 32246-6484 owned 37,647 shares (10% of
the outstanding Shares).
INVESTMENT MANAGEMENT AND OTHER SERVICES
. The Investment Manager of the Fund is Templeton Investment Counsel, Inc., a
Florida corporation with offices in Fort Lauderdale, Florida. The Investment
Management Agreement, dated October 30, 1992, was approved by Shareholders of
the Fund on October 30, 1992, as amended and restated February 25, 1994 was last
approved by the Board of Trustees at a meeting held on February 23, 1996, and
will continue through April 30, 1997. The Investment Management Agreement will
continue from year to year thereafter, subject to approval annually by the Board
of Trustees or by vote of the holders 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 Investment
Management Agreement or interested persons of any such party in person at a
meeting called for the purpose of voting on such approval.
The Agreement requires the Investment Manager to manage the investment
and reinvestment of the Fund's assets. The Investment Manager is not required to
furnish any personnel, overhead items or facilities for the Fund, including
daily pricing or trading desk facilities, although such expenses are paid by
investment advisers of some other investment companies.
The Investment Management Agreement provides that the Investment
Manager will select brokers and dealers for execution of the Fund's portfolio
transactions consistent with the Fund's brokerage policies (see "Brokerage
Allocation"). Although the services provided by broker-dealers in accordance
with the brokerage policies incidentally may help reduce the expenses of or
otherwise benefit the Investment Manager and other investment advisory clients
of the Investment Manager and of its affiliates, as well as the Fund, the value
of such services is indeterminable and the Investment Manager's fee is not
reduced by any offset arrangement by reason thereof.
When the Investment Manager determines to buy or sell the same security
for the Fund that the Investment Manager or certain of its affiliates have
selected for one or more of the Investment Manager's other clients or for
clients of its affiliates, the orders for all such securities trades may be
placed for execution by methods determined by the Investment Manager, with
approval by the Board of Trustees, to be impartial and fair, in order to seek
good results for all parties. See "Investment Objective 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 Investment Manager also provides management services to numerous
other investment companies or funds and accounts pursuant to management
agreements with each fund or account. The Investment Manager may give advice and
take action with respect to any of the other funds and accounts it manages, or
for its own account, which may differ from action taken by the Manager on behalf
of the Fund. Similarly, with respect to the Fund, the Investment Manager is not
obligated to recommend, purchase or sell, or to refrain from recommending,
purchasing or selling any security that the Investment Manager and access
persons, as defined by the 1940 Act, may purchase or sell for its or their own
account or for the accounts of any other fund or account. Furthermore, the
Investment Manager is not obligated to refrain from investing in securities held
by the Fund or other funds or accounts which it manages or administers. Any
transactions of the accounts of the Investment Manager and other access persons
will be made in compliance with the Fund's Code of Ethics as described in the
section "Investment Objectives and Policies -- Personal Securities
Transactions."
The Investment Management Agreement provides that the Investment
Manager shall have no liability to the Fund or any Shareholder of the Fund for
any error of judgment, mistake of law, or any loss arising out of any investment
or other act or omission in the performance by the Investment Manager of its
duties under the 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 FEESMANAGEMENT FEES. For its services, the Fund pays the
Investment Manager a monthly fee equal on an annual basis to 0.80% of its
average daily net assets during the year. Each class of Shares of the Fund pays
a portion of the fee, determined by the proportion of the Fund that it
represents. During the fiscal years ended December 31, 1995, 1994, and 1993, the
Investment Manager received from the Fund fees of $4,042,935, $3,794,011, and
$2,483,650, 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 advisory fee, but generally excluding distribution expenses, 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, 2.0% of the next
$70,000,000 of net assets and 1.5% of the remainder.
TEMPLETON INVESTMENT COUNSEL, INC. The Investment Manager is an indirect wholly
owned subsidiary of Franklin Resources, Inc. ("Franklin"), a publicly traded
company whose shares are listed on the NYSE. Charles B. Johnson (a Trustee and
officer of the Fund), and Rupert H. Johnson, Jr., (a Trustee and officer 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.
SUB-ADVISORY AGREEMENT. Under a Sub-Advisory Agreement between the
Investment Manager and Dean Witter InterCapital Inc. ("Dean Witter
InterCapital"), Dean Witter InterCapital provides the Investment Manager with
investment advisory assistance and portfolio management advice with respect to
the Fund's portfolio. Dean Witter InterCapital provides the Investment Manager
on an ongoing basis with analyses regarding economic and market conditions,
asset allocation, foreign currency matters and the advisability of entering into
foreign exchange contracts. For its services, the Investment Manager pays to
Dean Witter InterCapital a fee in U.S. dollars at an annual rate of 0.25% of the
Fund's average daily net assets. During the fiscal years ended December 31,
1995, 1994, and 1993, Dean Witter InterCapital received under the Sub-Advisory
Agreement fees of $1,263,417, $1,185,628, and $776,141, respectively.
The Sub-Advisory Agreement provides that it will terminate
automatically in the event of its assignment and that it may be terminated by
the Fund on 60 days' written notice to the Investment Manager and to Dean Witter
InterCapital, without penalty, provided that such termination by the Fund is
approved by the vote of a majority of the Fund's Board of Trustees or by vote of
a majority of the Fund's outstanding Shares. The Agreement also provides that it
may be terminated by either the Investment Manager or Dean Witter InterCapital
upon not less than 60 days' written notice to the other party. The Sub-Advisory
Agreement, dated October 30, 1992, was approved by the Fund's Shareholders on
October 30, 1992, was last approved by the Board of Trustees at a meeting held
on February 23, 1996, and will run through April 30, 1997. The Agreement will
continue from year to year thereafter, subject to approval annually by the Board
of Trustees or by vote of a majority of the outstanding Shares of 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. Dean Witter InterCapital is relieved of liability to
the Fund for any act or omission in the course of its performance under the
Sub-Advisory Agreement, in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations under the Agreement.
BUSINESS MANAGER. Templeton Global Investors, Inc. performs certain
dministrative functions as Business Manager for the Fund, including:
o providing office space, telephone, office equipment and
supplies for the Fund;
o paying compensation of the Fund's officers for services
rendered as such;
o authorizing expenditures and approving bills for payment on
behalf of the Fund;
o supervising preparation of annual and semi-annual reports to
Shareholders, notices of dividends, capital gains
distributions and tax credits, and attending to correspondence
and other special communications with individual Shareholders;
o daily pricing of the Fund's investment portfolio and
supervising publication of daily quotations of the bid and
asked prices of the Fund's Shares, earnings reports and other
financial data;
o providing trading desk facilities for the Fund;
o monitoring relationships with organizations serving the
Fund, including custodians, transfer agents and printers;
o supervising compliance by the Fund with recordkeeping
requirements under the 1940 Act and regulations thereunder,
with state regulatory requirements, maintaining books and
records for the Fund (other than those maintained by the
Custodian and Transfer Agent), preparing and filing tax
reports other than the Fund's income tax returns;
o monitoring the qualifications of tax-deferred retirement
plans providing for investment in Shares of the Fund; and
o providing executive, clerical and secretarial help needed to
carry out these responsibilities.
For its services, the Business Manager receives a monthly fee equal on
an annual basis to 0.15% of the first $200,000,000 of the Fund's average daily
net assets, reduced to 0.135% annually of the Fund's 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 are
higher than those paid by most other investment companies. During the fiscal
years ended December 31, 1995, 1994, and 1993, the Business Manager (and, prior
to April 1, 1993, Templeton Funds Management, Inc., the Fund's previous business
manager) received business management fees of $712,244, $670,170, and $449,118,
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
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 a 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 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 $14.08
per Shareholder account plus out-of-pocket expenses. These fees are 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. McGladrey & Pullen, LLP, 555 Fifth Avenue, New York,
New York 10017, serve as independent accountants for the Fund. Their audit
services comprise examination of the Fund's financial statements and review of
the Fund's filings with the Securities and Exchange Commission ("SEC") and the
Internal Revenue Service ("IRS").
REPORTS TO SHAREHOLDERS. The Fund's fiscal year ends on December 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. Shareholders who would like to
receive an interim quarterly report may phone the Fund Information Department at
1-800/DIAL BEN.
BROKERAGE ALLOCATION 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 as
to which fixed minimum commission rates are not applicable,
to cause the Fund to pay a commission for effecting a
securities transaction in excess of the amount another broker
would have charged for effecting that transaction, if the
Investment Manager 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 Contract 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
also shares of other companies registered under the 1940
Act which have either the same investment manager or an
investment manager affiliated with the 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 has
any material direct or indirect interest in any broker employed by or on behalf
of the Fund. Dean Witter Reynolds, Inc. ("Dean Witter"), an affiliate of the
Fund's Sub-Adviser, may act as broker on behalf of the Fund and receive
commissions on such transactions. 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 December 31, 1995, 1994,
and 1993, and the amount of such commissions on transactions allocated to Dean
Witter on the basis of best execution, investment information and trading desk
services, were as follows: total commissions (not including any spreads or
concessions on principal transactions) were $946,788, $1,482,497, and $711,144,
respectively; allocated to Dean Witter $0, $0, and $0, respectively. All
portfolio transactions are allocated to broker-dealers only when their prices
and execution, in the good faith judgment of the Investment Manager, are equal
or superior to the best available within the scope of the Fund's policies. The
Fund will not purchase or sell any securities on the over-the-counter market
from or to Dean Witter acting as principal for its own account. There is no
fixed method used in determining which broker-dealers receive which order or how
many orders.
<PAGE>
PURCHASE, REDEMPTION AND PRICING OF SHARES
The Prospectus describes the manner in which the Fund's Shares may be
purchased and redeemed. See "How to Buy Shares of the Fund" and "How to Sell
Shares of the Fund."
Net asset value per Share is determined as of the scheduled closing of
the NYSE (generally 4:00 p.m., New York time), every Monday through Friday
(exclusive of national business holidays). The Fund's offices will be closed,
and net asset value will not be calculated, on those days on which the NYSE is
closed, which currently are: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Trading in securities on European and Far Eastern exchanges and
over-the-counter markets is normally completed well before the close of business
in New York on each day on which the NYSE is open. Trading of European or Far
Eastern securities generally, or in a particular country or countries, may not
take place on every New York business day. Furthermore, trading takes place in
various foreign markets on days which are not business days in New York and on
which the Fund's net asset value is not calculated. The Fund calculates net
asset value per Share, and therefore effects sales, redemptions and repurchases
of its Shares, as of the close of the NYSE once on each day on which that
Exchange is open. Such calculation does not take place contemporaneously with
the determination of the prices of many of the portfolio securities used in such
calculation and if events occur which materially affect the value of those
foreign securities, they will be valued at fair market value as determined by
the management and approved in good faith by the Board of 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 NYSE is closed other than for customary weekend and
holiday closings, (2) trading on the NYSE is restricted, (3) an emergency exists
as a result of which disposal of securities owned by the Fund is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (4) for such other period as the SEC may by
order permit for the protection of the holders of the Fund's Shares.
The Fund will not effect redemptions of its Shares in assets other than
cash, except in accordance with applicable provisions of the 1940 Act.
OWNERSHIP AND AUTHORITY DISPUTES. In the event of disputes involving
multiple claims of ownership or authority to control a Shareholder's account,
the Fund has the right (but has no obligation) to: (1) freeze the account and
require the written agreement of all persons deemed by the Fund to have a
potential property interest in the account, prior to executing instructions
regarding the account; or (2) interplead disputed funds or accounts with a court
of competent jurisdiction. Moreover, the Fund may surrender ownership of all or
a portion of an account to the IRS in response to a Notice of Levy.
In addition to the special purchase plans described in the Prospectus,
other special purchase plans also are available:
TAX-DEFERRED RETIREMENT PLANS. The Fund offers its Shareholders the opportunity
to participate in the following types of retirement plans:
o For individuals whether or not covered by other qualified
plans;
o For simplified employee pensions;
o For employees of tax-exempt organizations; and
o For corporations, self-employed individuals and partnerships.
Capital gains and income received by the foregoing plans generally are
exempt from taxation until distribution from the plans. Investors considering
participation in any such plan should review specific tax laws relating thereto
and should consult their attorneys or tax advisers with respect to the
establishment and maintenance of any such plan. Additional information,
including the fees and charges with respect to all of these plans, is available
upon request to the Principal Underwriter. No distribution under a retirement
plan will be made until Franklin Templeton Trust Company ("FTTC") receives the
participant's election on IRS Form W-4P (available on request from FTTC) and
such other documentation as it deems necessary as to whether or not U.S.
income tax is to be withheld from such distribution.
INDIVIDUAL RETIREMENT ACCOUNT (IRA). All individuals (whether or not covered by
qualified private or governmental retirement plans) may purchase Shares of the
Fund pursuant to an IRA. However, contributions to an IRA by an individual who
is covered by a qualified private or governmental plan may not be tax-deductible
depending on the individual's income. Custodial services for IRAs are available
through FTTC. Disclosure statements summarizing certain aspects of IRAs are
furnished to all persons investing in such accounts, in accordance with IRS
regulations.
SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRA). For employers who wish to
establish a simplified form of employee retirement program investing in Shares
of the Fund, there are available Simplified Employee Pensions invested in IRA
Plans. Details and materials relating to these Plans will be furnished upon
request to the Principal Underwriter.
RETIREMENT PLAN FOR EMPLOYEES OF TAX-EXEMPT ORGANIZATIONS (403(B)). Employees of
public school systems and certain types of charitable organizations may enter
into a deferred compensation arrangement for the purchase of Shares of the Fund
without being taxed currently on the investment. Contributions which are made by
the employer through salary reduction are excludable from the gross income of
the employee. Such deferred compensation plans, which are intended to qualify
under Section 403(b) of the Internal Revenue Code of 1986, as amended (the
"Code"), are available through the Principal Underwriter. Custodial services are
provided by FTTC.
QUALIFIED PLAN FOR CORPORATIONS, SELF-EMPLOYED INDIVIDUALS AND
PARTNERSHIPS. For employers who wish to purchase Shares of the Fund in
conjunction with employee retirement plans, there is a prototype master plan
which has been approved by the IRS. A "Section 401(k) plan" is also available.
FTTC furnishes custodial services for these Plans. For further details,
including custodian fees and Plan administration services, see the master plan
and related material which is available from the Principal Underwriter.
LETTER OF INTENT. Purchasers who intend to invest $50,000 or more in Class I
Shares of the Fund or any other fund in the Franklin Group of Funds and the
Templeton Family of Funds, except Templeton Capital Accumulator Fund, Inc.,
Templeton Variable Annuity Fund, Templeton Variable Products Series Fund,
Franklin Valuemark Funds and Franklin Government Securities Trust (the "Franklin
Templeton Funds") within 13 months (whether in one lump sum or in installments,
the first of which may not be less than 5% of the total intended amount and each
subsequent installment not less than $25 unless the investor is a qualifying
employee benefit plan (the "Benefit Plan"), including automatic investment and
payroll deduction plans), and to beneficially hold the total amount of such
Class I Shares fully paid for and outstanding simultaneously for at least one
full business day before the expiration of that period, should execute a Letter
of Intent ("LOI") on the form provided in the Shareholder Application in the
Prospectus. Payment for not less than 5% of the total intended amount must
accompany the executed LOI unless the investor is a Benefit Plan. Except for
purchases of Shares by a Benefit Plan, those Class I Shares purchased with the
first 5% of the intended amount stated in the LOI will be held as "Escrowed
Shares" for as long as the LOI remains unfulfilled. Although the Escrowed Shares
are registered in the investor's name, his full ownership of them is conditional
upon fulfillment of the LOI. No Escrowed Shares can be redeemed by the investor
for any purpose until the LOI is fulfilled or terminated. If the LOI is
terminated for any reason other than fulfillment, the Transfer Agent will redeem
that portion of the Escrowed Shares required and apply the proceeds to pay any
adjustment that may be appropriate to the sales commission on all Class I Shares
(including the Escrowed Shares) already purchased under the LOI and apply any
unused balance to the investor's account. The LOI is not a binding obligation to
purchase any amount of Shares, but its execution will result in the purchaser
paying a lower sales charge at the appropriate quantity purchase level. A
purchase not originally made pursuant to an LOI may be included under a
subsequent LOI executed within 90 days of such purchase. In this case, an
adjustment will be made at the end of 13 months from the effective date of the
LOI at the net asset value per Share then in effect, unless the investor makes
an earlier written request to the Principal Underwriter upon fulfilling the
purchase of Shares under the LOI. In addition, the aggregate value of any
Shares, including Class II Shares, purchased prior to the 90-day period referred
to above may be applied to purchases under a current LOI in fulfilling the total
intended purchases under the LOI. However, no adjustment of sales charges
previously paid on purchases prior to the 90-day period will be made.
If an LOI is executed on behalf of a benefit plan (such plans are
described under "How to Buy Shares of the Fund -- Net Asset Value Purchases
(Both Classes)" in the Prospectus), the level and any reduction in sales charge
for these employee benefit plans will be based on actual plan participation and
the projected investments in the Franklin Templeton Funds under the LOI. Benefit
Plans are not subject to the requirement to reserve 5% of the total intended
purchase, or to any penalty as a result of the early termination of a plan, nor
are Benefit Plans entitled to receive retroactive adjustments in price for
investments made before executing LOIs.
SPECIAL NET ASSET VALUE PURCHASES. As discussed in the Prospectus under
"How to Buy Shares of the Fund - Description of Special Net Asset Value
Purchases," certain categories of investors may purchase Class I Shares of the
Fund at net asset value (without a front-end or contingent deferred sales
charge). Franklin Templeton Distributors, Inc. ("FTD") or one of its 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% on sales of $1 million but less than $2 million, plus 0.80% on
sales of $2 million but less than $3 million, plus 0.50% on sales of $3 million
but less than $50 million, plus 0.25% on sales of $50 million but less than $100
million, plus 0.15% on sales of $100 million or more; and (ii) purchases of most
fixed-income Franklin Templeton Funds made at net asset value by non-designated
retirement plans: 0.75% on sales of $1 million but less than $2 million, plus
0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales of $3
million but less than $50 million, plus 0.25% on sales of $50 million but less
than $100 million, plus 0.15% on sales of $100 million or more. These payment
breakpoints are reset every 12 months for purposes of additional purchases. With
respect to purchases made at net asset value by certain trust companies and
trust departments of banks and certain retirement plans of organizations with
collective retirement plan assets of $1 million or more, FTD, or one of its
affiliates, out of its own resources, may pay up to 1% of the amount invested.
Under agreements with certain banks in Taiwan, Republic of China, the
Fund's Shares are available to such banks' discretionary trust funds at net
asset value. The banks may charge service fees to their customers who
participate in the discretionary trusts. Pursuant to agreements, a portion of
such service fees may be paid to FTD, or an affiliate of FTD to help defray
expenses of maintaining a service office in Taiwan, including expenses related
to local literature fulfillment and communication facilities.
REDEMPTIONS IN KIND. Redemption proceeds are normally paid in cash;
however, the Fund may pay the redemption price in whole or in part by a
distribution in kind of securities from the portfolio of the Fund, in lieu of
cash, in conformity with applicable rules of the SEC. In such circumstances, the
securities distributed would be valued at the price used to compute the Fund's
net asset value. If Shares are redeemed in kind, the redeeming Shareholder might
incur brokerage costs in converting the assets into cash. The Fund is obligated
to redeem Shares solely in cash up to the lesser of $250,000 or 1% of its net
assets during any 90-day period for any one Shareholder.
TAX STATUS
The Fund intends to qualify annually and to elect to be treated as a
regulated investment company under the Code.
To qualify as a regulated investment company, the Fund must, among
other things, (a) derive in each taxable year at least 90% of its gross income
from dividends, interest, payments with respect to securities loans and gains
from the sale or other disposition of stock, securities or foreign currencies,
or other income (including gains from options, futures contracts, and forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies; (b) derive less than 30% of its gross income from the
sale or other disposition of certain assets (namely, (i) stock or securities,
(ii) options, futures, and forward contracts (other than those on foreign
currencies), and (iii) foreign currencies (including options, futures, and
forward contracts on such currencies) not directly related to the Fund's
principal business of investing in stocks or securities (or options and futures
with respect to stocks and securities)) held less than three months (the "30%
Limitation"); (c) diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other securities
of any one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Fund's total assets and not greater than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities or the securities of other regulated
investment companies) or of any two or more issuers that the Fund controls and
that are determined to be engaged in the same business or similar or related
business; and (d) distribute at least 90% of its investment company taxable
income (which includes, among other items, dividends, interest and net
short-term capital gains in excess of net long-term capital losses, but does not
include net long-term capital gains in excess of net short-term capital losses)
each taxable year.
As a regulated investment company, the Fund generally will not be
subject to U.S. Federal income tax on its investment company taxable income
(which includes, among other items, dividends, and the excess of net short-term
capital gains over net long-term capital losses) and net capital gains (net
long-term capital gains in excess of net short-term capital losses), if any,
that it distributes to Shareholders. The Fund intends to distribute to its
Shareholders, at least annually, substantially all of its investment company
taxable income and net capital gains. 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 imposition of the tax, the Fund must
distribute during 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 twelve-month
period ending on October 31 of the calendar year, and (3) any ordinary income
and capital gains for previous years that was not distributed during those
years. A distribution will be treated as having been received on December 31 of
the current calendar year if it is declared by the Fund in October, November or
December with a record date in such a month and paid by the Fund during January
of the following calendar year. Such distributions will be taxable to
Shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received. To
prevent application of the excise tax, the Fund intends to make its
distributions in accordance with the calendar year distribution requirement.
Some of the debt securities that may be acquired by a Fund may be
treated as debt securities that are originally issued at a discount. Original
issue discount can generally be defined as the difference between the price at
which a security was issued and its stated redemption price at maturity.
Although no cash income is actually received by the Fund in a given year,
original issue discount on a taxable debt security earned in that given year
generally is treated for Federal income tax purposes as interest and, therefore,
such income would be subject to the distribution requirements of the Code.
Some of the debt securities may be purchased by the Fund at a discount
which exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for Federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount will be treated as ordinary income to the extent it does not exceed the
accrued market discount on such debt security. Generally, market discount
accrues on a daily basis for each day the debt security is held by the Fund at a
constant rate over the time remaining to the debt security's maturity or, at the
election of the Fund, at a constant yield to maturity which takes into account
the semiannual compounding of interest.
Exchange control regulations that may restrict repatriation of
investment income, capital, or the proceeds of securities sales by foreign
investors may limit the Fund's ability to make sufficient distributions to
satisfy the 90% and calendar year distribution requirements. See "Risk Factors"
section of the SAI.
The Fund may invest in shares of foreign corporations which may be
classified under the Code as passive foreign investment companies (PFICs"). In
general, a foreign corporation is classified as a PFIC if at least one-half of
its assets constitute investment-type assets or 75% or more of its gross income
is investment-type income. If the Fund receives a so-called "excess
distribution" with respect to PFIC stock, the Fund itself may be subject to tax
on a portion of the excess distribution, whether or not the corresponding income
is distributed by the Fund to Shareholders. In general, under the PFIC rules, an
excess distribution is treated as having been realized ratably over the period
during which the Fund held the PFIC shares. The Fund itself will be subject to
tax on the portion, if any, of an excess distribution that is so allocated to
prior Fund taxable years and an interest factor will be added to the tax, as if
the tax had been payable in such prior taxable years. Certain distributions from
a PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with
respect to PFIC shares. Under an election that currently may be available in
some circumstances, the Fund generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC in a given year. If this
election were made, the special rules, discussed above, relating to the taxation
of excess distributions, would not apply. In addition, another election may be
available that would involve marking to market the Fund's PFIC shares at the end
of each taxable year (and on certain other dates prescribed in the Code), with
the result that unrealized gains are treated as though they were realized. If
this election were made, tax at the Fund level under the PFIC rules would
generally be eliminated, but the Fund could, in limited circumstances, incur
nondeductible interest charges. The Fund's intention to qualify annually as a
regulated investment company may limit its elections with respect to PFIC
shares.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject the Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to Shareholders, and which will be taxed to Shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC shares.
DISTRIBUTIONS. Dividends paid out of the Fund's investment company taxable
income will be taxable to a Shareholder as ordinary income. Because a portion of
the Fund's income may consist of dividends paid by U.S. corporations, a portion
of the dividends paid by the Fund may be eligible for the corporate
dividends-received deduction. However, the alternative minimum tax applicable to
corporations may reduce the benefit of the dividends-received deduction.
Distributions of net capital gains, if any, designated by the Fund as capital
gain dividends are taxable as long-term capital gains, regardless of how long
the Shareholder has held the Fund's Shares, 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, capital gain. Shareholders receiving distributions in the
form of newly-issued Shares generally will have a cost basis in each Share
received equal to the net asset value of a Share of the Fund on the distribution
date. Shareholders will be notified annually as to the U.S. federal tax status
of distributions, and Shareholders receiving distributions in the form of
newly-issued Shares will receive a report as to the net asset value of the
Shares received.
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 may be taxable to the Shareholder as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implication of
buying Shares just prior to a distribution by the Fund. The price of Shares
purchased at that time includes the amount of the forthcoming distribution, but
the distribution will generally be taxable to them.
If the Fund retains net capital gains for reinvestment, the Fund may
elect to treat such amounts as having been distributed to Shareholders. As a
result, the Shareholders would be subject to tax on undistributed net capital
gains, would be able to claim their proportionate share of the Federal income
taxes paid by the Fund on such gains as a credit against their own Federal
income tax liabilities, and would be entitled to an increase in their basis in
their Fund Shares.
OPTIONS AND HEDGING TRANSACTIONS. 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, in some cases, for purposes of the 4%
excise tax, on October 31 of each year) are "marked-to-market" with the result
that unrealized gains or losses are treated as though they were realized.
Generally, the hedging transactions undertaken by the Fund may result
in "straddles" for 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 applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to Shareholders and which will be taxed to Shareholders as ordinary
income or long-term capital gain, may be increased or decreased as compared to a
fund that did not engage in such hedging transactions.
Requirements relating to the Fund's tax status as a regulated
investment company may limit the extent to which the Fund will be able to engage
in transactions in options, futures contracts and forward contracts.
CURRENCY FLUCTUATIONS--"SECTION 988" GAINS OR LOSSES. Under the Code, gains or
losses attributable to fluctuations in 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 or losses, referred to under the Code as
"section 988" gains or loses, may increase, decrease or eliminate the amount of
the Fund's investment company taxable income to be distributed to its
Shareholders as ordinary income. If section 988 losses exceed other net
investment income during a taxable year, the Fund generally would not be able to
make ordinary dividend distributions, or distributions made before the losses
were realized would be recharacterized as 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.
SALE OF SHARES. Upon the sale, exchange or other taxable disposition of Shares
of the Fund, a Shareholder may realize a capital gain or loss which will be
long-term or short-term, generally depending upon the Shareholder's holding
period for the Shares. Any loss realized on a sale or exchange will be
disallowed to the extent the Shares disposed of are replaced (including
replacement through the reinvestment of dividends and capital gain distributions
in a Fund) within a period of 61 days beginning 30 days before and ending 30
days after 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 a disposition of Fund Shares held by the Shareholder for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of capital gain dividends 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 if (1) the Shareholder
incurs a sales charge in acquiring stock of a regulated investment company, (2)
Shares of the Fund are exchanged within 90 days after the date they were
purchased, and (3) the new Shares are acquired without a sales charge or at a
reduced sales charge under a "reinvestment right" received upon the initial
purchase of Shares of stock. 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 amount of sales charge incurred in acquiring
the 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 the sales charge initially. Instead, the portion of the sales
charge affected by this rule will be treated as an amount paid for the new
Shares.
FOREIGN TAXES. 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 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 or her 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. Because of changes made by the
Tax Reform Act of 1986, 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 taxes it pays will reduce investment company taxable income and the
distributions by the Fund will be treated as United States source income.
BACKUP WITHHOLDING. The Fund may be required to withhold U.S. Federal income tax
at the rate of 31% ("backup withholding") of all taxable distributions payable
to Shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, where the Fund or
Shareholder has been notified by the IRS that they are subject to backup
withholding, or when required to do so, the Shareholder fails to certify that he
is not subject to backup withholding. Corporate Shareholders and certain other
Shareholders specified in the Code generally are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the Shareholder's U.S. Federal income tax liability.
FOREIGN SHAREHOLDERS. The tax consequences to a foreign Shareholder of an
investment in the Fund may differ from those described herein. Foreign
Shareholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Fund.
OTHER TAXATION. The foregoing discussion relates only to U.S. Federal income
tax law as applicable to U.S. persons (I.E., U.S. citizens and residents and
U.S. domestic corporations, partnerships, trusts and estates). Distributions by
the Fund also may be subject to state, local and foreign taxes, and their
treatment under state and local income tax laws may differ from U.S. Federal
income tax treatment. Shareholders should consult their tax advisors with
respect to particular questions of U.S. Federal, state and local taxation.
Shareholders who are not U.S. persons should consult their tax advisors
regarding U.S. and foreign tax consequences of ownership of Shares of the Fund,
including the likelihood that distributions to them would be subject to
withholding of U.S. Federal income tax at a rate of 30% (or at a lower rate
under a tax treaty).
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 FTD 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%
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 Funds' Shares. Payments to FTD or others could be for
various types of activities, including (1) printing and advertising expenses,
(2) payments to employees or agents of FTD who engage in or support distribution
of Shares, (3) the costs of preparing, printing and distributing prospectuses
and reports to prospective investors, (4) expenses of organizing and conducting
sales seminars, (5) expenses relating to selling and servicing efforts, (6)
payments to broker-dealers who provide certain services of value to the Fund's
Shareholders (sometimes referred to as a "trail fee"), and (7) 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 December 31, 1995, FTD incurred in
connection with the distribution of Shares costs and expenses of $1,477,962 for
Class I Shares of the Fund and $21,030 for Class II Shares of the Fund. During
the same period, the Fund made reimbursements pursuant to the Class I Plan in
the amount of $1,259,580 and pursuant to the Class II Plan in the amount of
$8,135. In the event that a 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 December 31, 1995, FTD spent,
pursuant to the Plan, with respect to Class I Shares of the Fund, the following
amounts on: compensation to dealers, $1,223,429; wholesaler costs and expenses,
$20,207; sales promotion, $163,343; printing, $66,483; and advertising, $4,500;
and with respect to Class II Shares of the Fund, the following amounts on:
compensation to dealers, $2,292; wholesaler costs and expenses, $18,594; sales
promotion, $71; printing, $56; and advertising, $17.
The Distribution Agreement provides that the Principal Underwriter will
use its best efforts to maintain a broad and continuous 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 December 31, 1995, 1994, and 1993, FTD
(and, prior to June 1, 1993, Templeton Funds Distributor, Inc.) retained of such
discount $223,955, $771,208, and $414,599, or approximately 13.82%, 16.13%, and
15%, respectively, of the gross sales commissions.
The Distribution Agreement provides that the Fund shall pay the costs
and expenses incident to registering and qualifying its Shares for sale under
the Securities Act of 1933 and under the applicable 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,
although the Principal Underwriter may recoup these costs from payments it
receives under the Distribution Plan. (The Fund pays costs of preparation,
set-up and initial supply of its prospectus for existing Shareholders.)
The Distribution Agreement is subject to renewal from year to year in
accordance with the provisions of the 1940 Act and terminates automatically in
the event of its assignment. The 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
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 Shareholder meetings to consider 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 expense 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 year (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 a proportional share of Fund expenses on
an annual basis, and assume that all dividends and distributions are reinvested
when paid. With respect to the Class I Shares, the Fund's average annual total
return for the one-and five-year periods ended December 31, 1995 and for the
period from February 28, 1990 (commencement of operations) through December 31,
1995 was 6.31%, 14.95%, and 10.81%, respectively. With respect to the Class II
Shares, the Fund's total return for the period May 1, 1995 (commencement of
sales) through December 31, 1995 was 5.27%.
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 of 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 deduction for
administrative and management costs and expenses.
Performance information for the Fund reflects only the performance of a
hypothetical investment in the Fund during the particular time period on which
the calculations are based. Performance information should be considered in
light of the Fund's investment objective and policies, characteristics and
quality of the portfolio and the market conditions during the given time period,
and should not be considered as a representation of what may be achieved in the
future.
From time to time, the Fund and the Investment Manager may also refer
to the following information:
(1) The Investment Manager's and its affiliates' market share of
international equities managed in mutual funds prepared or
published by Strategic Insight or a similar statistical
organization.
(2) The performance of U.S. equity and debt markets relative
to foreign markets prepared or published by Morgan Stanley
Capital International or a similar financial organization.
(3) The capitalization of U.S. and foreign stock markets
as prepared or published by the International Finance
Corporation, Morgan Stanley Capital International or a
similar financial organization.
(4) The geographic and industry distribution of the Fund's
portfolio and the Fund's top ten holdings.
(5) The gross national product and populations, including age
characteristics, literacy rates, foreign investment
improvements due to a liberalization of securities laws and a
reduction of foreign exchange controls, and improving
communication technology, of various countries as published by
various statistical organizations.
(6) To assist investors in understanding the different returns and
risk characteristics of various investments, the Fund may show
historical returns of various investments and published
indices (E.G., Ibbotson Associates, Inc. Charts and Morgan
Stanley EAFE - Index).
(7) The major industries located in various jurisdictions as
published by the Morgan Stanley Index.
(8) Rankings by DALBAR Surveys, Inc. with respect to mutual fund
shareholder services.
(9) Allegorical stories illustrating the importance of persistent
long-term investing.
(10) The Fund's portfolio turnover rate and its ranking relative
to industry standards as published by Lipper Analytical
Services, Inc. or Morningstar, Inc.
(11) A description of the Templeton organization's investment
management philosophy and approach, including its worldwide
search for undervalued or "bargain" securities and its
diversification by industry, nation and type of stocks or
other securities.
(12) The number of Shareholders in the Fund or the aggregate number
of shareholders in the Franklin Templeton Group of Funds or
the dollar amount of Fund and private account assets under
management.
(13) Comparison of the characteristics of various emerging
markets, including population, financial and economic
conditions.
(14) Quotations from the Templeton organization's founder, Sir John
Templeton/*/ advocating the virtues of diversification and
long-term investing, including the following:
o "Never follow the crowd. superior performance is
possible only if you invest differently from the
crowd."
o "Diversify by company, by industry and by country."
o "Always maintain a long-term perspective."
o "Invest for maximum total real return."
o "Invest - don't trade or speculate."
o "Remain flexible and open-minded about types of
investment."
o "Buy low."
o "When buying stocks, search for bargains among
quality stocks."
o "Buy value, not market trends or the economic
outlook."
o "Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
o "Do your homework or hire wise experts to help you."
o "Aggressively monitor your investments."
o "Don't panic."
o "Learn from your mistakes."
o "Outperforming the market is a difficult task."
o "An investor who has all the answers doesn't even
understand all the questions."
o "There's no free lunch."
o "And now the last principle: Do not be fearful or
negative too often."
FINANCIAL STATEMENTS
The financial statements contained in the Fund's Annual Report to
Shareholders dated December 31, 1995 are incorporated herein by reference.
TL415 STMT 05/96
- --------
/*/ 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.
