TEMPLETON CAPITAL ACCUMULATOR FUND, INC.
THIS STATEMENT OF ADDITIONAL INFORMATION DATED JANUARY 1, 1995,
AS SUPPLEMENTED JUNE 1, 1995,
IS NOT A PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH
THE PROSPECTUS OF TEMPLETON CAPITAL ACCUMULATOR FUND, INC.
DATED JANUARY 1, 1995,
WHICH CAN BE OBTAINED WITHOUT COST UPON
REQUEST TO THE PRINCIPAL UNDERWRITER,
FRANKLIN TEMPLETON DISTRIBUTORS, INC.
700 CENTRAL AVENUE, P.O. BOX 33030
ST. PETERSBURG, FLORIDA 33733-8030
TOLL FREE TELEPHONE: (800) 237-0738
TABLE OF CONTENTS
General Information and History
Investment Objective and Policies
-Investment Policies
-Repurchase Agreements
-Loans of Portfolio Securities
-Debt Securities
-Futures Contracts
-Stock Index Options
-Foreign Currency Hedging Transactions
-Investment Restrictions
-Risk Factors
-Trading Policies
-Personal Securities Transactions
Management of the Fund
Director Compensation
Principal Shareholders
Investment Management and Other Services
-Investment Management Agreement
-Management Fees
-Templeton Investment Counsel, Inc.
-Business Manager
-Custodian and Transfer Agent
-Legal Counsel
-Independent Accountants
-Reports to Shareholders
Brokerage Allocation
Purchase, Redemption and Pricing of Shares
-Ownership and Authority Disputes
Tax Status
Principal Underwriter
Description of Shares
Performance Information
Financial Statements
GENERAL INFORMATION AND HISTORY
Templeton Capital Accumulator Fund, Inc. (the "Fund") was
incorporated in Maryland on October 26, 1990 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 Policies. The Fund's investment objective and
policies are described in the Prospectus under the heading
"General Description -- Investment Objective and Policies." The
Fund may invest for defensive purposes in commercial paper which,
at the date of investment, must be rated A-1 by Standard & Poor's
Corporation ("S&P") or Prime-1 by Moody's Investors Service, Inc.
("Moody's") or, if not rated, be issued by a company which, at
the date of investment, has an outstanding debt issue rated AAA
or AA by S&P or Aaa or Aa by Moody's.
Repurchase Agreements. Repurchase agreements are contracts
under which the buyer of a security simultaneously commits to
resell the security to the seller at an agreed-upon price and
date. Under a repurchase agreement, the seller is required to
maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. Templeton
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 Directors,
i.e., banks or broker-dealers which have been determined by the
Investment Manager to present no serious risk of becoming
involved in bankruptcy proceedings within the time frame
contemplated by the repurchase transaction.
Loans of Portfolio Securities. The Fund may lend to banks
and broker-dealers portfolio securities with an aggregate market
value of up to one-third of its total assets. Such loans must be
secured by collateral (consisting of any combination of cash,
U.S. Government securities or irrevocable letters of credit) in
an amount at least equal (on a daily marked-to-market basis) to
the current market value of the securities loaned. The Fund
retains all or a portion of the interest received on investment
of the cash collateral or receives a fee from the borrower. The
Fund may terminate the loans at any time and obtain the return of
the securities loaned within five business days. The Fund will
continue to receive any interest or dividends paid on the loaned
securities and will continue to have voting rights with respect
to the securities. However, as with other extensions of credit,
there are risks of delay in recovery or even loss of rights in
collateral should the borrower fail.
Debt Securities. The Fund may invest in debt securities
which are rated no lower than Caa by Moody's or CCC by S&P or
deemed to be of comparable quality by the Investment Manager. As
an operating policy, the Fund will not invest more than 5% of its
assets in debt securities rated lower than Baa by Moody's or BBB
by S&P. The market value of debt securities generally varies in
response to changes in interest rates and the financial condition
of each issuer. During periods of declining interest rates, the
value of debt securities generally increases. Conversely, during
periods of rising interest rates, the value of such securities
generally declines. These changes in market value will be
reflected in the Fund's net asset value.
Higher yielding corporate debt securities are ordinarily
unrated or in the lower rating categories of recognized rating
agencies (that is, ratings of Baa or lower by Moody's or BBB or
lower by S&P) and are generally considered to be predominantly
speculative and, therefore, may involve greater volatility of
price and risk of loss of principal and income (including the
possibility of default or bankruptcy of issuers of such
securities) than securities in the higher rating categories. A
debt security rated Caa by Moody's is of poor standing. Such a
security may be in default or there may be present elements of
danger with respect to principal and interest. A debt security
rated CCC by S&P is regarded, on balance, as speculative. Such a
security 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 value 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, 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.
Futures Contracts. The Fund's investment policies also
permit it to buy and sell stock index futures contracts with
respect to any stock index traded on a recognized stock exchange
or board of trade, to an aggregate amount not exceeding 20% of
the Fund's total assets at the time when such contracts are
entered into. Successful use of stock index futures is subject
to the Investment Manager's ability to predict correctly
movements in the direction of the stock markets. No assurance
can be given that the Investment Manager's judgment in this
respect will be correct.
A stock index futures contract is a contract to buy or sell
units of a stock index at a specified future date at a price
agreed upon when the contract is made. The value of a unit is
the current value of the stock index. For example, the Standard
& Poor's 500 Stock Index (the "S&P 500 Index") is composed of 500
selected common stocks, most of which are listed on the New York
Stock Exchange ("NYSE"). The S&P 500 Index assigns relative
weightings to the value of one share of each of these 500 common
stocks included in the index, and the index fluctuates with
changes in the market values of the shares of those common
stocks. In the case of the S&P 500 Index, contracts are to buy
or sell 500 units. Thus, if the value of the S&P 500 Index were
$150, one contract would be worth $75,000 (500 units x $150).
The stock index futures contract specifies that no delivery of
the actual stocks making up the index will take place. Instead,
settlement in cash must occur upon the termination of the
contract, with the settlement being the difference between the
contract price and the actual level of the stock index at the
expiration of the contract. For example, if the Fund enters into
a futures contract to buy 500 units of the S&P 500 Index at a
specified future date at a contract price of $150 and the S&P 500
Index is at $154 on that future date, the Fund will gain $2,000
(500 units x gain of $4). If the Fund enters into a futures
contract to sell 500 units of the S&P 500 Index at a specified
future date at a contract price of $150 and the S&P 500 Index is
at $154 on that future date, the Fund will lose $2,000 (500 units
x loss of $4).
During or in anticipation of a period of market
appreciation, the Fund may enter into a "long hedge" of common
stock which it proposes to add to its portfolio by purchasing
stock index futures for the purpose of reducing the effective
purchase price of such common stock. To the extent that the
securities which the Fund proposes to purchase change in value in
correlation with the stock index contracted for, the purchase of
futures contracts on that index would result in gains to the Fund
which could be offset against rising prices of such common stock.
During or in anticipation of a period of market decline, the
Fund may "hedge" common stock in its portfolio by selling stock
index futures for the purpose of limiting the exposure of its
portfolio to such decline. To the extent that the Fund's
portfolio of securities changes in value in correlation with a
given stock index, the sale of futures contracts on that index
could substantially reduce the risk to the portfolio of a market
decline and, by so doing, provide an alternative to the
liquidation of securities positions in the portfolio with
resultant transaction costs.
Parties to an index futures contract must make initial
margin deposits to secure performance of the contract, which
currently range from 1/2% to 5% of the contract amount. Initial
margin requirements are determined by the respective exchanges on
which the futures contracts are traded. There also are
requirements to make variation margin deposits as the value of
the futures contract fluctuates.
At the time the Fund purchases a stock index futures
contract, an amount of cash, U.S. Government securities, or other
highly liquid debt securities equal to the market value of the
contract will be deposited in a segregated account with the
Fund's custodian. When selling a stock index futures contract,
the Fund will maintain with its custodian liquid assets that,
when added to the amounts deposited with a futures commission
merchant or broker as margin, are equal to the market value of
the instruments underlying the contract. Alternatively, the Fund
may "cover" its position by owning a portfolio with a volatility
substantially similar to that of the index on which the futures
contract is based, or holding a call option permitting the Fund
to purchase the same futures contract at a price no higher than
the price of the contract written by the Fund (or at a higher
price if the difference is maintained in liquid assets with the
Fund's custodian).
Stock Index Options. The Fund may purchase and sell put and
call options on securities indices in standardized contracts
traded on national securities exchanges, boards of trade, or
similar entities, or quoted on NASDAQ. An option on a securities
index is a contract that gives the purchaser of the option, in
return for the premium paid, the right to receive from the writer
of the option, cash equal to the difference between the closing
price of the index and the exercise price of the option,
expressed in dollars, times a specified multiplier for the index
option. An index is designed to reflect specified facets of a
particular financial or securities market, a specific group of
financial instruments or securities, or certain indicators.
The Fund may write call options and put options only if they
are "covered." A call option on an index is covered if the Fund
maintains with its custodian cash or cash equivalents equal to
the contract value. A call option is also covered if the Fund
holds a call on the same index as the call written where the
exercise price of the call held is (1) equal to or less than the
exercise price of the call written, or (2) greater than the
exercise price of the call written, provided the difference is
maintained by the Fund in cash or cash equivalents in a
segregated account with its custodian. A put option on an index
is covered if the Fund maintains cash or cash equivalents equal
to the exercise price in a segregated account with its custodian.
A put option is also covered if the Fund holds a put on the same
index as the put written where the exercise price of the put held
is (1) equal to or greater than the exercise price of the put
written, or (2) less than the exercise price of the put written,
provided the difference is maintained by the Fund in cash or cash
equivalents in a segregated account with its custodian.
If an option written by the Fund expires, the Fund will
realize a capital gain equal to the premium received at the time
the option was written. If an option purchased by the Fund
expires unexercised, the Fund will realize a capital loss equal
to the premium paid.
Prior to the earlier of exercise or expiration, an option
may be closed out by an offsetting purchase or sale of an option
of the same series (type, exchange, index, exercise price, and
expiration). There can be no assurance, however, that a closing
purchase or sale transaction can be effected when the Fund
desires.
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 that 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 is the case with other kinds of options, however,
the writing of an option on foreign currency will constitute only
a partial hedge, up to the amount of the premium received, and
the Fund could be required to purchase or sell foreign currencies
at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an
effective hedge against fluctuation in exchange rates, although,
in the event of rate movements adverse to the Fund's position,
the Fund may forfeit the entire amount of the premium plus
related transaction costs. Options on foreign currencies to be
written or purchased by the Fund will be traded on U.S. and
foreign exchanges or over-the-counter.
The Fund may enter into exchange-traded contracts for the
purchase or sale for future delivery of foreign currencies
("foreign currency futures"). This investment technique will be
used only to hedge against anticipated future changes in exchange
rates which otherwise might adversely affect the value of the
Fund's portfolio securities or adversely affect the prices of
securities that the Fund intends to purchase at a later date.
The successful use of 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.
Investment Restrictions. The Fund has imposed upon itself
certain investment restrictions, which together with the
investment objective, are fundamental policies. No changes in
the Fund's investment objective or investment restrictions can be
made without approval of the Shareholders. For this purpose, the
provisions of the 1940 Act require the affirmative vote of the
lesser of either (1) 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 (2) more than 50%
of the outstanding Shares of the Fund.
In accordance with these restrictions, the Fund will not:
1. Invest in real estate or mortgages on real estate
(although the Fund may invest in marketable securities
secured by real estate or interests therein or issued
by companies or investment trusts which invest in real
estate or interests therein); invest in interests
(other than debentures or equity stock interests) in
oil, gas or other mineral exploration or development
programs; purchase or sell commodity contracts (except
forward contracts and futures contracts as described in
the Fund's Prospectus); or invest in other open-end
investment companies.
2. Purchase or retain securities of any company in which
Directors or Officers of the Fund or of its Investment
Manager, individually owning more than 1/2 of 1% of the
securities of such company, in the aggregate own more
than 5% of the securities of such company.
3. 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;
purchase on margin or sell short; write, buy or sell
puts, calls, straddles or spreads (but the Fund may
make margin payments in connection with futures
contracts, forward contracts and options on securities
indices and foreign currencies).
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 for any purpose other than redeeming its
Shares or purchasing its Shares for cancellation, and
then only as a temporary measure up to an amount not
exceeding 5% of the value of its total assets; or
pledge, mortgage, or hypothecate its assets for any
purpose other than to secure such borrowings, and then
only up to such extent not exceeding 10% of the value
of its total assets as the Board of Directors may by
resolution approve.* (For the purposes of this
investment restriction, collateral arrangements with
respect to margin for a futures contract or a forward
contract are not deemed to be a pledge of assets.)
_______________
* As an operating policy approved by the Board of Directors,
the Fund will not pledge, mortgage or hypothecate its assets
to the extent that at any time the percentage of pledged
assets plus the sales commission will exceed 10% of the
Offering Price of the Shares of the Fund.
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 Exchanges, 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 investment restriction. This
investment restriction does not apply to options on
securities indices.
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. Invest in "letter stocks" or securities on which there
are any sales restrictions under a purchase agreement.
13. 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 mutual funds with the same or affiliated
advisers.)
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."
Nothing in the investment policies or investment restrictions
(except Investment Restrictions 10 and 11) shall be deemed to
prohibit the Fund from purchasing securities pursuant to
subscription rights distributed to the Fund by any issuer of
securities held at the time in its portfolio (as long as such
purchase is not contrary to the Fund's status as a diversified
investment company under the 1940 Act).
Risk Factors. The Fund has an unlimited right to purchase
securities in any foreign country, developed or developing, if
they are listed on a stock exchange, as well as a limited right
to purchase such securities if they are unlisted. Investors
should consider carefully the substantial risks involved in
securities of companies and governments of foreign nations, which
are in addition to the usual risks inherent in domestic
investments.
There may be less publicly available information about
foreign companies comparable to the reports and ratings published
about companies in the United States. Foreign companies are not
generally subject to uniform accounting, auditing and financial
reporting standards, and auditing practices and requirements may
not be comparable to those applicable to United States companies.
Foreign markets have substantially less volume than the NYSE and
securities of some foreign companies are less liquid and more
volatile than securities of comparable United States companies.
Investments in unlisted foreign securities raise liquidity
concerns, and the Board of Directors of the Fund (or the
Investment Manager under the supervision of the Board of
Directors) will monitor, on a continuing basis, the status of the
Fund's positions (and any anticipated positions) in these
securities in light of the Fund's restriction against investments
in illiquid securities exceeding 10% of its total net assets.
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 (1) less social,
political and economic stability; (2) 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; (3) certain national
policies which may restrict the Fund's investment opportunities,
including restrictions on investment in issuers or industries
deemed sensitive to national interests; (4) the absence of
developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private
property; (5) the absence, until recently in certain Eastern
European countries, of a capital market structure or market-
oriented economy; and (6) the possibility that recent favorable
economic developments in Eastern Europe may be slowed or reversed
by unanticipated political or social events in such countries.
Investments in Eastern European countries may involve risks
of nationalization, expropriation and confiscatory taxation. The
Communist governments of a number of Eastern European countries
expropriated large amounts of private property in the past, in
many cases without adequate compensation, and there can be no
assurance that such expropriation will not occur in the future.
In the event of such expropriation, the Fund could lose a
substantial portion of any investments it has made in the
affected countries. Further, no accounting standards exist in
Eastern European countries. Finally, even though certain Eastern
European currencies may be convertible into United States
dollars, the conversion rates may be artificial to the actual
market values and may be adverse to Fund Shareholders.
Investing in Russian companies involves a high degree of
risk and special considerations not typically associated with
investing in the United States securities markets, and should be
considered highly speculative. Such risks include: (1) delays
in settling portfolio transactions and risk of loss arising out
of Russia's system of share registration and custody; (2) the
risk that it may be impossible or more difficult than in other
countries to obtain and/or enforce a judgment; (3) pervasiveness
of corruption and crime in the Russian economic system; (4)
currency exchange rate volatility and the lack of available
currency hedging instruments; (5) higher rates of inflation
(including the risk of social unrest associated with periods of
hyper-inflation); (6) controls on foreign investment and local
practices disfavoring foreign investors and limitations on
repatriation of invested capital, profits and dividends, and on
the Fund's ability to exchange local currencies for U.S. dollars;
(7) the risk that the government of Russia or other executive or
legislative bodies may decide not to continue to support the
economic reform programs implemented since the dissolution of the
Soviet Union and could follow radically different political
and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain
industries at the expense of other sectors or investors, or a
return to the centrally planned economy that existed prior to the
dissolution of the Soviet Union; (8) the financial condition of
Russian companies, including large amounts of inter-company debt
which may create a payments crisis on a national scale; (9)
dependency on exports and the corresponding importance of
international trade; (10) the risk that the Russian tax system
will not be reformed to prevent inconsistent, retroactive and/or
exorbitant taxation; and (11) possible difficulty in identifying
a purchaser of securities held by the Fund due to the
underdeveloped nature of the securities markets.
There is little historical data on Russian securities
markets because they are relatively new and a substantial
proportion of securities transactions in Russia are privately
negotiated outside of stock exchanges. Because of the recent
formation of the securities markets as well as the underdeveloped
state of the banking and telecommunications systems, settlement,
clearing and registration of securities transactions are subject
to significant risks. Ownership of shares (except where shares
are held through depositories that meet the requirements of the
1940 Act) is defined according to entries in the company's share
register and normally evidenced by extracts from the register or
by formal share certificates. However, there is no central
registration system for shareholders and these services are
carried out by the companies themselves or by registrars located
throughout Russia. These registrars are not necessarily subject
to effective state supervision and it is possible for the Fund to
lose its registration through fraud, negligence or even mere
oversight. While the Fund will endeavor to ensure that its
interest continues to be appropriately recorded either itself or
through a custodian or other agent inspecting the share register
and by obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability and it
is possible that subsequent illegal amendment or other fraudulent
act may deprive the Fund of its ownership rights or improperly
dilute its interests. In addition, while applicable Russian
regulations impose liability on registrars for losses resulting
from their errors, it may be difficult for the Fund to enforce
any rights it may have against the registrar or issuer of the
securities in the event of loss of share registration.
Furthermore, although a Russian public enterprise with more than
1,000 shareholders is required by law to contract out the
maintenance of its shareholder register to an independent entity
that meets certain criteria, in practice this regulation has not
always been strictly enforced. Because of this lack of
independence, management of a company may be able to exert
considerable influence over who can purchase and sell the
company's shares by illegally instructing the registrar to refuse
to record transactions in the share register. This practice may
prevent the Fund from investing in the securities of certain
Russian companies deemed suitable by the Investment Manager.
Further, this also could cause a delay in the sale of Russian
company securities by the Fund if a potential purchaser is deemed
unsuitable, which may expose the Fund to potential loss on the
investment.
The Fund endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread in currency
exchange (to cover service charges) may be incurred, particularly
when the Fund changes investments from one country to another or
when proceeds of the sale of Shares in U.S. dollars are used for
the purchase of securities in foreign countries. Also, some
countries may adopt policies which would prevent the Fund from
transferring cash out of the country or withhold portions of
interest and dividends at the source. There is the possibility
of expropriation, nationalization or confiscatory taxation,
foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country), default in
foreign government securities, political or social instability,
or diplomatic developments that could affect investments in
securities of issuers in those 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. Through
the Fund's flexible policy, the Investment Manager endeavors to
avoid unfavorable consequences and to take advantage of favorable
developments in particular nations where from time to time it
places the Fund's investments.
The exercise of this flexible policy may include decisions
to purchase securities with substantial risk characteristics and
other decisions such as changing the emphasis on investments from
one nation to another and from one type of security to another.
Some of these decisions may later prove profitable and others may
not. No assurance can be given that profits, if any, will exceed
losses.
The Directors consider at least annually the likelihood of
the imposition by any foreign government of exchange control
restrictions which would affect the liquidity of the Fund's
assets maintained with custodians in foreign countries, as well
as the degree of risk from political acts of foreign governments
to which such assets may be exposed. The Directors also consider
the degree of risk involved through the holding of portfolio
securities in domestic and foreign securities depositories (see
"Investment Management and Other Services -- Custodian and
Transfer Agent"). However, in the absence of willful
misfeasance, bad faith or gross negligence on the part of the
Investment Manager, any losses resulting from the holding of the
Fund's portfolio securities in foreign countries and/or with
securities depositories will be at the risk of the Shareholders.
No assurance can be given that the Directors' appraisal of the
risks will always be correct or that such exchange control
restrictions or political acts of foreign governments might not
occur.
There are additional risks involved in stock index futures
transactions. These risks relate to the Fund's ability to reduce
or eliminate its futures positions, which will depend upon the
liquidity of the secondary markets for such futures. The Fund
intends to purchase or sell futures only on exchanges or boards
of trade where there appears to be an active secondary market,
but there is no assurance that a liquid secondary market will
exist for any particular contract or at any particular time. Use
of stock index futures for hedging may involve risks because of
imperfect correlations between movements in the prices of the
stock index futures on the one hand and movements in the prices
of the securities being hedged or of the underlying stock index
on the other. Successful use of stock index futures by the Fund
for hedging purposes also depends upon the Investment Manager's
ability to predict correctly movements in the direction of the
market, as to which no assurance can be given.
There are several risks associated with transactions in
options on securities indices. For example, there are
significant differences between the securities and options
markets that could result in an imperfect correlation between
these markets, causing a given transaction not to achieve its
objectives. A decision as to whether, when and how to use
options involves the exercise of skill and judgment, and even a
well-conceived transaction may be unsuccessful to some degree
because of market behavior or unexpected events. There can be no
assurance that a liquid market will exist when the Fund seeks to
close out an option position. If the Fund were unable to close
out an option that it had purchased on a securities index, it
would have to exercise the option in order to realize any profit
or the option may expire worthless. If trading were suspended in
an option purchased by the Fund, it would not be able to close
out the option. If restrictions on exercise were imposed, the
Fund might be unable to exercise an option it has purchased.
Except to the extent that a call option on an index written by
the Fund is covered by an option on the same index purchased by
the Fund, movements in the index may result in a loss to the
Fund; however, such losses may be mitigated by changes in the
value of the Fund's securities during the period the option was
outstanding.
Trading Policies. The Investment Manager and its affiliated
companies serve as investment manager to other investment
companies and private clients. Accordingly, the respective
portfolios of these funds and clients may contain many or some of
the same securities. When any two or more of these funds or
clients are engaged simultaneously in the purchase or sale of the
same security, the transactions will be placed for execution in a
manner designed to be equitable to each party. The larger size
of the transaction may affect the price of the security and/or
the quantity which may be bought or sold for each party. If the
transaction is large enough, brokerage commissions 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 Directors
and Principal Executive Officers of the Fund are as follows:
Name, Address and Principal Occupation
Offices With Fund During Past Five Years
HARRIS J. ASHTON Chairman of the Board, president
Metro Center and chief executive officer of
1 Station Place General Host Corporation (nursery
Stamford, Connecticut and craft centers); and a director
Director of RBC Holdings (U.S.A.) Inc. (a
bank holding company) and Bar-S
Foods.
NICHOLAS F. BRADY* Chairman of Templeton Emerging
The Bullitt House Markets Investment Trust PLC;
102 East Dover Street chairman of Templeton Latin America
Easton, Maryland Investment Trust PLC; chairman of
Director Darby Overseas Investments, Ltd.
(an investment firm), (1994-
present); director of the Amerada
Hess Corporation, Capital
Cities/ABC, Inc., Christiana
Companies, and the H.J. Heinz
Company; Secretary of the United
States Department of the Treasury
(1988-January 1993); and chairman
of the board of Dillion, Read & Co.
Inc. (investment banking) prior
thereto.
F. BRUCE CLARKE Retired; formerly, credit adviser
19 Vista View Blvd. for National Bank of Canada,
Thornhill, Ontario Toronto.
Director
HASSO-G VON DIERGARDT- Farmer; and president of Clairhaven
NAGLO Investments, Ltd. and other private
R.R. 3 investment companies.
Stouffville, Ontario
Director
S. JOSEPH FORTUNATO Member of the law firm of Pitney,
200 Campus Drive Hardin, Kipp & Szuch; and a
Florham Park, New Jersey director of General Host
Director Corporation.
JOHN Wm. GALBRAITH President of Galbraith Properties,
360 Central Avenue Inc. (personal investment company);
Suite 1300 director of Gulfwest Banks, Inc.
St. Petersburg, Florida (bank holding company) (1995-
Director present) and Mercantile Bank (1991-
present); vice chairman of
Templeton, Galbraith & Hansberger
Ltd. (1986-1992); and chairman of
Templeton Funds Management, Inc.
(1974-1991).
ANDREW H. HINES, JR. Consultant for the Triangle
150 2nd Avenue N. Consulting Group; chairman of the
St. Petersburg, Florida board and chief executive officer
Director of Florida Progress Corporation
(1982-February 1990) and director
of various of its subsidiaries;
chairman and director of Precise
Power Corporation; executive-in-
residence of Eckerd College (1991-
present); and a director of
Checkers Drive-In Restaurants, Inc.
CHARLES B. JOHNSON* President, chief executive officer,
777 Mariners Island Blvd. and director of Franklin Resources,
San Mateo, California Inc.; chairman of the board and
Chairman of the Board director of Franklin Advisers, Inc.
and Vice President and Franklin Templeton
Distributors, Inc.; director of
Franklin Administrative Services,
Inc., General Host Corporation, and
Templeton Global Investors, Inc.;
and officer and director, trustee
or managing general partner, as the
case may be, of most other
subsidiaries of Franklin and of 55
of the investment companies in the
Franklin Templeton Group.
CHARLES E. JOHNSON* Senior vice president and director
500 East Broward Blvd. of Franklin Resources, Inc.; senior
Fort Lauderdale, Florida vice president of Franklin
Director Templeton Distributors, Inc.;
president and director of Franklin
Institutional Service Corporation
and Templeton Worldwide, Inc.;
chairman of the board of Templeton
Investment Counsel, Inc.; vice
president and/or director, as the
case may be, for some of the
subsidiaries of Franklin Resources,
Inc.; and an officer and/or
director or trustee, as the case
may be, of 24 the investment
companies in the Franklin Templeton
Group.
BETTY P. KRAHMER Director or trustee of various
2201 Kentmere Parkway civic associations; formerly,
Wilmington, Delaware economic analyst, U.S. Government.
Director
GORDON S. MACKLIN Chairman of White River Corporation
8212 Burning Tree Road (information services); director of
Bethesda, Maryland Fund America Enterprises Holdings,
Director Inc., Lockheed Martin Corporation,
MCI Communications Corporation,
Fusion Systems Corporation,
Infovest Corporation, and
Medimmune, Inc.; formerly, chairman
of Hambrecht and Quist Group;
director of H&Q Healthcare
Investors; and president of the
National Association of Securities
Dealers, Inc.
FRED R. MILLSAPS Manager of personal investments
2665 NE 37th Drive (1978-present); chairman and chief
Fort Lauderdale, Florida executive officer of Landmark
Director Banking Corporation (1969-1978);
financial vice president of Florida
Power and Light (1965-1969); vice
president of The Federal Reserve
Bank of Atlanta (1958-1965); and a
director of various other business
and nonprofit organizations.
GARY P. MOTYL Senior vice president and director
500 East Broward Blvd. of Templeton Investment Counsel,
Fort Lauderdale, Florida Inc.; director of Templeton Global
President Investors, Inc.; and president or
vice president of other Templeton
Funds.
MARK G. HOLOWESKO President and director of
Lyford Cay Templeton, Galbraith & Hansberger
Nassau, Bahamas Ltd.; director of global equity
Vice President research for Templeton Worldwide,
Inc.; president or vice president
of the Templeton Funds; formerly,
investment administrator, Roy West
Trust Corporation (Bahamas) (1984-
1985).
MARTIN L. FLANAGAN Senior vice president, treasurer
777 Mariners Island and chief financial officer of
Blvd. Franklin Resources, Inc.; director
San Mateo, California and executive vice president of
Vice President Templeton Investment Counsel, Inc.;
director, president and chief
executive officer of Templeton
Global Investors, Inc.; director or
trustee, president or vice
president of various Templeton
Funds; accountant, Arthur Andersen
& Company (1982-1983); and a member
of the International Society of
Financial Analysts and the American
Institute of Certified Public
Accountants.
JOHN R. KAY Vice president of the Templeton
500 East Broward Blvd. Funds; vice president and treasurer
Fort Lauderdale, Florida of Templeton Global Investors, Inc.
Vice President and Templeton Worldwide, Inc.;
assistant vice president of
Franklin Templeton Distributors,
Inc.; formerly, vice president and
controller, the Keystone Group,
Inc.
THOMAS M. MISTELE Senior vice president of Templeton
700 Central Avenue Global Investors, Inc.; vice
St. Petersburg, Florida president of Franklin Templeton
Secretary Distributors, Inc.; secretary of
the Templeton Funds; formerly,
attorney, Dechert Price & Rhoads
(1985-1988) and Freehill,
Hollingdale & Page (1988); and
judicial clerk, U.S. District Court
(Eastern District of Virginia)
(1984-1985).
JAMES R. BAIO Certified public accountant;
500 East Broward Blvd. treasurer of the Templeton Funds;
Fort Lauderdale, Florida senior vice president of Templeton
Treasurer Worldwide, Inc., Templeton Global
Investors, Inc., and Templeton
Funds Trust Company; formerly,
senior tax manager, Ernst & Young
(certified public accountants)
(1977-1989).
JACK L. COLLINS Assistant treasurer of the
700 Central Avenue Templeton Funds; assistant vice
St. Petersburg, Florida president of Franklin Templeton
Assistant Treasurer Investor Services, Inc.; formerly,
partner, Grant Thornton,
independent public accountants
(1976-1988).
JEFFREY L. STEELE Partner, Dechert Price & Rhoads.
1500 K Street, N.W.
Washington, D.C.
Assistant Secretary
_______________
* These are Directors who are "interested persons" of the Fund
as that term is defined in the 1940 Act. Mr. Brady and
Franklin Resources, Inc. are limited partners of Darby
Overseas Partners, L.P. ("Darby Overseas"). Mr. Brady
established Darby Overseas in February, 1994, and is
Chairman and a shareholder of the corporate general partner
of Darby Overseas. In addition, Darby Overseas and
Templeton, Galbraith & Hansberger, Ltd. are limited partners
of Darby Emerging Markets Fund, L.P.
There are no family relationships between any of the
Directors, except that Mr. Charles B. Johnson is the father of
Mr. Charles E. Johnson.
DIRECTOR COMPENSATION
All of the Fund's Officers and Directors also hold positions
with other investment companies in the Franklin Templeton Group.
No compensation is paid by the Fund to any officer or Director
who is an officer, trustee or employee of the Investment Manager
or its affiliates. Each Templeton Fund pays its independent
directors and trustees and Mr. Brady an annual retainer and/or
fees for attendance at Board and Committee meetings, the amount
of which is based on the level of assets in each fund.
Accordingly, the Fund currently pays the independent Directors
and Mr. Brady an annual retainer of $1,000 and a fee of $100 per
meeting attended of the Board and its Committees. The
independent Directors and Mr. Brady are reimbursed for any
expenses incurred in attending meetings, paid pro rata by each
Franklin Templeton Fund in which they serve. No pension or
retirement benefits are accrued as part of Fund expenses.
The following table shows the total compensation paid to the
Directors by the Fund and by all investment companies in the
Franklin Templeton Group:
Number of Total
Franklin Compensation
Aggregate Templeton Fund from All Funds
Compensation Boards on in Franklin
from the Which Director Templeton
Name of Director Fund* Serves Group**
Harris J. Ashton $2,000 54 $319,925
Nicholas F. Brady 1,000 23 86,125
F. Bruce Clarke 3,000 19 95,275
Hasso-G von 2,000 19 75,275
Diergardt-Naglo
S. Joseph Fortunato 2,000 56 336,065
John Wm. Galbraith 0 22 0
Andrew H. Hines, Jr. 3,500 23 106,125
Betty P. Krahmer 2,000 23 75,275
Gordon S. Macklin 2,000 51 303,685
Fred R. Millsaps 3,500 23 106,125
_______________
* For the fiscal year ended August 31, 1994.
** For the calendar year ended December 31, 1994.
PRINCIPAL SHAREHOLDERS
As of December 2, 1994 there were 2,860,305 Shares of the
Fund outstanding. As of that date, no Shares were owned
beneficially by any Directors or Officers of the Fund. As of
December 2, 1994, to the knowledge of management, no person owned
beneficially 5% or more of the Fund's outstanding Shares.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Agreement. The Investment Manager of
the Fund is Templeton Investment Counsel, Inc. a Florida
corporation with offices in Fort Lauderdale, Florida. On October
30, 1992, the Investment Manager assumed the investment
management duties of Templeton, Galbraith & Hansberger Ltd.
("TGH"), a Cayman Islands corporation, with respect to the Fund
in connection with the merger of the business of TGH with that of
Franklin Resources, Inc. ("Franklin"). The Investment Management
Agreement, dated October 30, 1992, was approved by Shareholders
of the Fund on October 30, 1992, was last approved by the Board
of Directors, including a majority of the Directors who were not
parties to the Agreement or interested persons of any such party,
at a meeting on December 6, 1994, and will continue through
December 31, 1995. The Investment Management Agreement continues
from year to year, subject to approval annually by the Board of
Directors 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
Directors who are not parties to the Investment Management
Agreement or interested persons of any such party in person at a
meeting called for the purpose of voting on such approval.
The Investment Management Agreement requires the Investment
Manager to manage the investment and reinvestment of the Fund's
assets. The Investment Manager is not required to furnish any
personnel, overhead items or facilities for the Fund, including
daily pricing or trading desk facilities, although such expenses
are paid by investment advisers of some other investment
companies.
The Investment Management Agreement provides that the
Investment Manager will select brokers and dealers for execution
of the Fund's portfolio transactions consistent with the Fund's
brokerage policy (see "Brokerage Allocation"). Although the
services provided by broker-dealers in accordance with the
brokerage policy 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 securities for the Fund that the Investment Manager or one
or more of its affiliates has selected for one or more of its
other clients or for clients of its affiliates, the orders for
all such securities transactions are placed for execution by
methods determined by the Investment Manager, with approval by
the Fund's Board of Directors, to be impartial and fair, in order
to seek good results for all parties (see "Investment Objective
and Policies -- Trading Policies"). Records of securities
transactions of persons who know when orders are placed by the
Fund are available for inspection at least four times annually by
the Compliance Officer of the Fund so that the non-interested
Directors (as defined in the 1940 Act) can be satisfied that the
procedures are generally fair and equitable for all parties.
The Investment Management Agreement further provides that
the Investment Manager shall have no liability to the Fund or any
Shareholder of the Fund for any error of judgment, mistake of
law, or any loss arising out of any investment or other act or
omission in the performance by the Investment Manager of its
duties under the Investment Management Agreement, or for any loss
or damage resulting from the imposition by any government of
exchange control restrictions which might affect the liquidity of
the Fund's assets, or from acts or omissions of custodians or
securities depositories, or from any wars or political acts of
any foreign governments to which such assets might be exposed,
except for any liability, loss or damage resulting from willful
misfeasance, bad faith or gross negligence on the Investment
Manager's part or reckless disregard of its duties under the
Investment Management Agreement. The Investment Management
Agreement will terminate automatically in the event of its
assignment, and may be terminated by the Fund at any time without
payment of any penalty on 60 days' written notice, with the
approval of a majority of the Directors of the Fund in office at
the time or by vote of a majority of the outstanding Shares of
the Fund (as defined in the 1940 Act).
Management Fees. For its services, the Fund pays the
Investment Manager a monthly fee equal on an annual basis to
0.75% of its average daily net assets during the year. During
the fiscal years ended August 31, 1994, 1993 and 1992 the
Investment Manager (and, prior to October 30, 1992, Old TGH, the
Fund's previous investment manager) received from the Fund under
the Investment Management Agreement and agreements in effect
prior to October 30, 1992, fees of $208,441, $92,387, and
$45,817, respectively. The Investment Manager will comply with
any applicable state regulations which may require the Investment
Manager to make reimbursements to the Fund in the event that the
Fund's aggregate operating expenses, including the management
fee, but generally excluding interest, taxes, brokerage
commissions and extraordinary expenses, are in excess of specific
applicable limitations. The strictest rule currently applicable
to the Fund is 2.5% of the first $30,000,000 of net assets, 2% of
the next $70,000,000 of net assets and 1.5% of the remainder.
Templeton Investment Counsel, Inc. The Investment Manager
is an indirect wholly owned subsidiary of Franklin, a publicly
traded company whose shares are listed on the NYSE. Charles B.
Johnson (a Director and officer of the Fund), Rupert H. Johnson,
Jr., and R. Martin Wiskemann are principal shareholders of
Franklin and own, respectively, approximately 20%, 16% and 9.2%
of its outstanding shares. Messrs. Charles B. Johnson and Rupert
H. Johnson, Jr. are brothers.
Business Manager. Templeton Global Investors, Inc.,
performs certain administrative functions for the Fund including:
- providing office space, telephone, office equipment and
supplies for the Fund;
- paying compensation of the Fund's officers for services
rendered as such;
- authorizing expenditures and approving bills for
payment on behalf of the Fund;
- supervising preparation of annual and semiannual
reports to Shareholders, notices of dividends, capital
gain distributions and tax credits, and attending to
correspondence and other communications with individual
Shareholders;
- supervising publication of daily quotations of the bid
and asked prices of the Fund's Shares, earnings reports
and other financial data;
- daily pricing of the Fund's investment portfolio and
preparing and monitoring relationships with
organizations serving the Fund, including the Custodian
and printers;
- providing trading desk facilities for the Fund;
- supervising compliance by the Fund with record-keeping
requirements under the 1940 Act, regulations thereunder
and with state regulatory requirements; maintaining
books and records for the Fund (other than those
maintained by the Custodian and Transfer Agent); and
preparing and filing tax reports other than the Fund's
income tax returns; and
- providing executive, clerical and secretarial help
needed to carry out these responsibilities.
For its services, the Business Manager receives a monthly
fee equal on an annual basis to 0.15% of the first $200,000,000
of the Fund's average daily net assets, reduced to 0.135%
annually of 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 a fee of 0.075% annually of
such net assets in excess of $1,200,000,000. 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 may be higher than those of
other investment companies.
During the fiscal years ended August 31, 1994, 1993 and
1992, the Business Manager (and, prior to April 1, 1993,
Templeton Funds Management, Inc., the previous business manager)
received business management fees of $41,690, $18,477, and
$9,164, respectively. The Business Manager has voluntarily
agreed to temporarily waive all or a portion of its Business
Management fee and reimburse the Fund for other operating
expenses such that the Fund's operating expenses will not exceed
1.00%.
The Business Manager is relieved of liability to the Fund
for any act or omission in the course of its performance under
the Business Management Agreement in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of
its duties and obligations under the Agreement. The Business
Management Agreement may be terminated by the Fund at any time on
60 days' written notice without payment of penalty provided that
such termination by the Fund shall be directed or approved by
vote of a majority of the Directors of the Fund in office at the
time or by vote of the holders of a majority of the outstanding
voting securities of the Fund (as defined by the 1940 Act), and
shall terminate automatically and immediately in the event of its
assignment.
Templeton Global Investors, Inc. is an indirect wholly owned
subsidiary of Franklin.
Custodian and Transfer Agent. The Chase Manhattan Bank,
N.A. serves as Custodian of the Fund's assets, which are
maintained at the custodian's principal office, MetroTech Center,
Brooklyn, New York 11245, and at the offices of its branches and
agencies throughout the world. The Custodian has entered into
agreements with foreign sub-custodians approved by the Directors
pursuant to Rule 17f-5 under the 1940 Act. The Custodian, its
branches and sub-custodians generally domestically, and
frequently abroad, do not actually hold certificates for the
securities in their custody, but instead have book records with
domestic and foreign securities depositories, which in turn have
book records with the transfer agents of the issuers of the
securities. Compensation for the services of the Custodian is
based on a schedule of charges agreed on from time to time.
Franklin Templeton Investor Services, Inc. serves as the
Fund's Transfer Agent. Services performed by the Transfer Agent
include processing purchase and redemption orders; making
dividend payments, capital gain distributions and reinvestments;
and handling all routine communications with Shareholders. The
Transfer Agent receives from the Fund an annual fee of $13.74 per
Shareholder account plus out-of-pocket expenses. 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
August 31. Shareholders are provided at least semiannually with
reports showing the Fund's portfolio and other information,
including an annual report with financial statements audited by
independent accountants. Shareholders who would like receive an
interim quarterly report may phone Fund Information at 1-800-292-
9293.
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. It is not the duty of the Investment Manager, nor
does it have any obligation, to provide a trading desk for the
Fund's portfolio transactions.
All decisions and placements are made in accordance with the
following principles:
1. Purchase and sale orders will usually be 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 and the Fund in
determining the overall reasonableness of brokerage
commissions.
2. In selecting brokers for portfolio transactions, the
Investment Manager takes into account their 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 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 commissions were
recommended or paid only for products or services which
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 (a)
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 (b) the quality, comprehensiveness and
frequency of research studies which are provided for
the Fund and the Investment Manager are useful to the
Investment Manager in performing its advisory services
under its Investment Management Agreement with the
Fund. Research services provided by brokers to the
Investment Manager are considered to be in addition to,
and not in lieu of, services required to be performed
by the Investment Manager under its Investment
Management Agreement. 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 shall
be executed with primary market makers acting as
principal, except where, in the judgment of the
Investment Manager, better prices and execution may be
obtained on a commission basis or from other sources.
5. Sales of Templeton Capital Accumulation Plans (the
"Plans"), and thus sales of Fund Shares (which shall be
deemed to also include shares of other investment
companies registered under the 1940 Act which have
either the same investment manager or an investment
manager affiliated with the Fund's Investment Manager),
made by a broker are one factor among others to be
taken into account in recommending and in deciding to
allocate portfolio transactions (including agency
transactions, principal transactions, purchases in
underwritings or tenders in response to tender offers)
for the account of the Fund to that broker; provided
that the broker shall furnish "best execution" as
defined in paragraph 1 above, and that such allocation
shall be within the scope of the Fund's policies as
stated above; and provided further, that in every
allocation made to a broker in which the sale of Shares
is taken into account there shall be no increase in the
amount of the commissions or other compensation paid to
such broker beyond a reasonable commission or other
compensation determined, as set forth in paragraph 3
above, on the basis of best execution alone or best
execution plus research services, without taking
account of or placing any value upon such sale of
Shares.
Insofar as known to management, no Director or officer of
the Fund, nor the Investment Manager or Principal Underwriter or
any person affiliated with either of them, has any material
direct or indirect interest in any broker employed by or on
behalf of the Fund. Franklin Templeton Distributors, Inc., the
Principal Underwriter for the Fund, is a registered broker-dealer
but has never executed any purchase or sale transactions for the
Fund's portfolio or participated in commissions on any such
transactions, and it has no intention of doing so in the future.
During the fiscal years ended August 31, 1994, 1993 and 1992, the
Fund paid a total of $62,000, $46,000, and $8,540, respectively,
in brokerage commissions. 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
to the best available within the scope of the Fund's policies.
There is no fixed method used in determining which broker-dealers
receive which order or how many orders.
PURCHASE, REDEMPTION AND PRICING OF SHARES
The Fund has entered into an agreement with Franklin
Templeton Distributors, Inc. ("FTD"), under which the Fund will
issue Shares at net asset value to Franklin Templeton Trust
Company ("FTTC") as custodian for the unit investment trust
entitled "Templeton Capital Accumulation Plans." The Fund will
not offer its Shares publicly except through the Plans. Except
in cases where Planholders have liquidated their Plans and
received Fund Shares in distribution as a result of the
liquidation privilege under a Plan, it is not generally
contemplated that any person, other than FTTC, as custodian, will
directly hold any Shares of the Fund. The terms of the offering
of the Plans are contained in the prospectus for the Plans.
Other funds advised by the Investment Manager, including
those having capital growth as an objective, are currently being
offered with a sales charge that, when compared to the early
years of a Plan, would be less than the sales and creation
charges for the Plans. Investors wishing information on any of
these funds may contact FTD at the address shown on the cover.
The Prospectus describes the manner in which the Fund's
Shares may be redeemed by investors who hold Shares directly.
See "How to Sell Shares of the Fund."
Shares of the Fund are sold to the Plans at net asset value
and delivered directly to the Plans' custodian. Net asset value
per Share is determined as of the scheduled closing of the NYSE
(generally 4:00 p.m., New York time), every Monday through Friday
(exclusive of national business holidays). The Fund's offices
will be closed, and net asset value will not be calculated, on
those days on which the NYSE is closed, which currently are: New
Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Trading in securities on European and Far Eastern securities
exchanges and over-the-counter markets is normally completed well
before the close of business in New York on each day on which the
NYSE is open. Trading of European or Far Eastern securities
generally, or in a particular country or countries, may not take
place on every New York business day. Furthermore, trading takes
place in various foreign markets on days which are not business
days in New York and on which the Fund's net asset value is not
calculated. The Fund calculates net asset value per Share, and
therefore effects sales and redemptions of its Shares, as of the
close of the NYSE once on each day on which that Exchange is
open. Such calculation does not take place contemporaneously
with the determination of the prices of many of the portfolio
securities used in such calculation and, if events occur which
materially affect the value of those foreign securities, they
will be valued at fair market value as determined by the
management and approved in good faith by the Board of Directors.
The Board of Directors may establish procedures under which
the Fund may suspend the determination of net asset value for the
whole or any part of any period during which (1) the NYSE is
closed other than for customary weekend and holiday closings, (2)
trading on the NYSE is restricted, (3) an emergency exists as a
result of which disposal of securities owned by the Fund is not
reasonably practicable or it is not reasonably practicable for
the Fund fairly to determine the value of its net assets, or (4)
for such other period as the SEC may by order permit for the
protection of the holders of the Fund's Shares.
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.
TAX STATUS
The Fund intends normally to pay a dividend at least once
annually representing substantially all of its net investment
income and to distribute at least annually any realized net
capital gains. By so doing and meeting certain diversification
of assets and other requirements of the Internal Revenue Code of
1986, as amended (the "Code"), the Fund intends to qualify as a
regulated investment company under the Code. The status of the
Fund as a regulated investment company does not involve
government supervision of management or of its investment
practices or policies. As a regulated investment company, the
Fund generally will be relieved of liability for United States
Federal income tax on that portion of its net investment income
and net realized capital gains which it distributes to its
Shareholders. Amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement are
subject to a nondeductible 4% excise tax. To prevent application
of the excise tax, the Fund intends to make distributions in
accordance with the calendar year distribution requirement.
For Federal tax purposes, Planholders will be regarded as
Shareholders of the Fund. Frequently, state and local taxes
follow Federal tax laws; accordingly, Planholders in such states
and localities will likewise be taxable under state and local tax
laws as if they were Shareholders of the Fund. However, since
state and local tax laws may vary, Planholders should consult
their tax advisers about questions relating to their tax
treatment as participants in the Plans.
Dividends representing net investment income and net
short-term capital gains (the excess of net short-term capital
gains over net long-term capital losses) are taxable to
Shareholders as ordinary income. Distributions of net investment
income may be eligible for the corporate dividends-received
deduction to the extent attributable to the Fund's qualifying
dividend income. However, the alternative minimum tax applicable
to corporations may reduce the benefit of the dividends-received
deduction. Distributions from net capital gains (the excess of
net long-term capital gains over net short-term capital losses)
designated by the Fund as capital gain dividends are taxable to
Shareholders as long-term capital gains, regardless of the length
of time the Fund's Shares have been held by a Shareholder, and
are not eligible for the dividends-received deduction.
Generally, dividends and distributions are taxable to
Shareholders, whether received in cash or reinvested in Shares of
the Fund. Any distributions that are not from the Fund's
investment company taxable income or net capital gain may be
characterized as a return of capital to Shareholders or, in some
cases, as capital gain. Shareholders will be notified annually
as to the Federal tax status of dividends and distributions they
receive and any tax withheld thereon.
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, at the close of any
fiscal year, more than 50% of the value of the Fund's total
assets are invested in securities of foreign corporations (as to
which no assurance can be given), the Fund may elect pursuant to
section 853 of the Code to pass through to its Shareholders the
foreign income and similar taxes paid by the Fund in order to
enable the Shareholders to take a credit (or deduction) for
foreign income taxes paid by the Fund. In that case, a
Shareholder must include in his gross income on his Federal
income tax return both dividends received by him from the Fund
and also the amount which the Fund advises him is his pro rata
portion of foreign income taxes paid with respect to, or withheld
from, dividends on other income of the Fund from its foreign
investments. The Shareholder may then subtract from his Federal
income tax the amount of such taxes withheld, or else treat such
foreign taxes as a deduction from his gross income; however, as
in the case of investors receiving income directly from foreign
sources, the above-described tax credit or tax deduction is
subject to certain limitations.
Certain options, futures, 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 on certain other dates as
prescribed under the Code) are "marked-to-market" with the result
that unrealized gains or losses are treated as though they were
realized.
Generally, the hedging transactions undertaken by the Fund
may result in "straddles" for U.S. Federal income tax purposes.
The straddle rules may affect the character of gains (or losses)
realized by the Fund. In addition, losses realized by a Fund on
positions that are part of the straddle may be deferred under the
straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which the
losses are realized. Because only a few regulations implementing
the straddle rules have been promulgated, the tax consequences to
the Fund of hedging transactions are not entirely clear. The
hedging transactions may increase the amount of short-term
capital gain realized by a Fund which is taxed as ordinary income
when distributed to Shareholders.
The Fund may make one or more of the elections available
under the Code which are applicable to straddles. If the Fund
makes any of the elections, the amount, character, and timing of
the recognition of gains or losses from the affected straddle
positions will be determined under rules that vary according to
the election(s) made. The rules applicable under certain of the
elections may operate to accelerate the recognition of gains or
losses from the affected straddle positions.
Because application of the straddle rules may affect the
character of gains or losses, defer losses and/or accelerate the
recognition of gains or losses from the affected straddle
positions, the amount which must be distributed to Shareholders
and which will be taxed to Shareholders as ordinary income or
long-term capital gain may be increased or decreased as compared
to a fund that did not engage in such hedging transactions.
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, forward
contracts and futures contracts.
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 futures, forward
contracts and options, gains or losses attributable to
fluctuations in the value of foreign currency between the date of
acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These
gains and losses, referred to under the Code as "section 988"
gains and losses, may increase or decrease the amount of the
Fund's net investment income to be distributed to its
Shareholders as ordinary income. For example, fluctuations in
exchange rates may increase the amount of income that a Fund must
distribute in order to qualify for treatment as a regulated
investment company and to prevent application of an excise tax on
undistributed income. Alternatively, fluctuations in exchange
rates may decrease or eliminate income available for
distribution. If foreign exchange losses exceed other net
investment income during a taxable year, the Fund would not be
able to make ordinary dividend distributions, or distributions
made before the losses were realized would be recharacterized as
a return of capital to Shareholders for Federal income tax
purposes, rather than as an ordinary dividend, reducing each
Shareholder's basis in his Fund Shares.
The Fund may invest in stocks of foreign companies that are
classified under the Code as passive foreign investment companies
("PFICs"). In general, a foreign company is classified as a PFIC
if at least one-half of its assets constitute investment-type
assets or 75% or more of its gross income is investment-type
income. Under the PFIC rules, an "excess distribution" received
with respect to PFIC stock is treated as having been realized
ratably over the period during which the Fund held the PFIC
stock. A Fund itself will be subject to tax on the portion, if
any, of the excess distribution that is allocated to the Fund's
holding period in prior taxable years (and an interest factor
will be added to the tax, as if the tax had actually been payable
in such prior taxable years) even though the Fund distributes the
corresponding income to Shareholders. Excess distributions
include any gain from the sale of PFIC stock as well as certain
distributions from a PFIC. All excess distributions are taxable
as ordinary income.
The Fund may be able to elect alternative tax treatment with
respect to PFIC shares. Under an election that currently may be
available, the Fund generally would be required to include in its
gross income its share of the earnings of a PFIC on a current
basis, regardless of whether any distributions are received from
the PFIC. If this election is 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.
Certain of the debt securities acquired by the Fund may be
treated as debt securities that were 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, original issue discount
on a taxable debt security earned in a 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.
Upon the sale or exchange of his Shares, a Shareholder
generally will realize a taxable gain or loss depending upon the
basis in the Shares. Such gain or loss will be treated as
capital gain or loss if the Shares are capital assets in the
Shareholder's hands, and will be long-term if the Shareholder's
holding period for the Shares is more than one year and generally
otherwise will be short-term. Any loss realized on a sale or
exchange will be disallowed to the extent that the Shares
disposed of are replaced (including replacement through the
reinvesting of dividends and capital gain distributions in the
Fund) within a period of 61 days beginning 30 days before and
ending 30 days after the disposition of the Shares. In such a
case, the basis of the Shares acquired will be adjusted to
reflect the disallowed loss. Any loss realized by a Shareholder
on the sale of Fund Shares held by the Shareholder for six months
or less will be treated for Federal income tax purposes as a
long-term capital loss to the extent of any distributions of
long-term capital gains designated by the Fund as capital gain
dividends received by the Shareholder with respect to such
Shares.
In some cases, Shareholders will not be permitted to take
sales charges into account for purposes of determining the amount
of gain or loss realized on the disposition of their Shares.
This prohibition generally applies where (1) the Shareholder
incurs a sales charge in acquiring the stock of a regulated
investment company, (2) the stock is disposed of before the 91st
day after the date on which it was acquired, and (3) the
Shareholder subsequently acquires shares of the same or another
regulated investment company and the otherwise applicable sales
charge is reduced under a "reinvestment right" received upon the
initial purchase of shares of stock. Sales charges affected by
this rule are treated as if they were incurred with respect to
the stock acquired under the reinvestment right. This provision
may be applied to successive acquisitions of shares of stock.
The Fund generally will be required to withhold Federal
income tax at a rate of 31% ("backup withholding") from dividends
paid, capital gain distributions, and redemption proceeds to
Shareholders if (1) the Shareholder fails to furnish the Fund
with the Shareholder's correct taxpayer identification number or
social security number and to make such certification as the Fund
may require, (2) the IRS notifies the Shareholders, the
Custodian, or the Fund that the Shareholder has failed to report
properly certain interest and dividend income to the IRS and to
respond to notices to that effect, or (3) when required to do so,
the Shareholder fails to certify that he is not subject to backup
withholding. Any amounts withheld may be credited against the
Shareholder's Federal income tax liability.
Ordinary dividends and capital gain distributions declared
in October, November or December with a record date in such month
and paid during the following January will be treated as having
been paid by the Fund and received by Shareholders on December 31
of the calendar year in which declared, rather than the calendar
year in which the dividends are actually received.
As indicated, distributions also may be subject to state,
local, and other taxes. U.S. tax rules applicable to foreign
investors may differ significantly from those outlined above.
Shareholders are advised to consult their tax advisers for
details with respect to the particular tax consequences to them
of an investment in the Fund.
PRINCIPAL UNDERWRITER
Franklin Templeton Distributors, Inc. ("FTD" or the
"Principal Underwriter"), P.O. Box 33030, St. Petersburg, Florida
33733-8030 -- toll free telephone (800) 237-0738, is the
Principal Underwriter of the Fund's Shares. FTD is a wholly
owned subsidiary of Franklin.
The Distribution Agreement provides that the Fund shall pay
the costs and expenses incident to registering and qualifying its
Shares for sale under the Securities Act of 1933 and under the
applicable securities laws of the jurisdictions in which the
Principal Underwriter desires to distribute the Shares, and for
preparing, printing and distributing prospectuses and reports to
Shareholders. The Principal Underwriter is responsible for the
cost of printing additional copies of prospectuses and reports to
Shareholders used for selling purposes. (The Fund pays costs of
preparation, set-up and initial supply of the Fund's Prospectus
for existing Shareholders.)
The Distribution Agreement is subject to renewal from year
to year in accordance with the provisions of the 1940 Act and
terminates automatically in the event of its assignment. The
Distribution Agreement may be terminated without penalty by
either party on 60 days' written notice to the other, provided
termination by the Fund shall be approved by the Board of
Directors or a majority (as defined in the 1940 Act) of the
Shareholders. The Principal Underwriter is relieved of liability
for any act or omission in the course of its performance of the
Distribution Agreement, in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of its
obligations.
During the fiscal years ended August 31, 1994, 1993 and
1992, the Principal Underwriter, as sponsor of the Plans,
retained $336,780, $185,919, and $38,778 or approximately 8.8%,
8.6%, and 2.17% of the gross sales commissions, respectively,
attributable to sales of the Plans.
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
Directors at a meeting at which 50% of the outstanding Shares are
present can elect all the Directors and, in such event, the
holders of the remaining Shares voting for the election of
Directors will not be able to elect any person or persons to the
Board of Directors.
PERFORMANCE INFORMATION
The Fund may, from time to time, include its total return in
advertisements or reports to Shareholders or prospective
investors. Quotations of average annual total return for the
Fund will be expressed in terms of the average annual compounded
rate of return for periods in excess of one year or the total
return for periods less than one year of a hypothetical
investment in the Fund over periods of one, five and ten years,
calculated pursuant to the following formula: P(1 + T)n = ERV
(where P = a hypothetical initial payment of $1,000, T = the
average annual total return for periods of one year or more or
the total return for periods of less than one year, n = the
number of years, and ERV = the ending redeemable value of a
hypothetical $1,000 payment made at the beginning of the period).
All total return figures reflect the deduction of a proportional
share of Fund expenses on an annual basis, and assume that all
dividends and distributions are reinvested when paid. The Fund's
total returns will not include the effect of paying the sales and
creation charges associated with the purchase of Shares of the
Fund through the Plans; of course, total returns would be lower
if the sales and creation charges were taken into account. The
Fund's average annualized total return for the fiscal year ended
August 31, 1994 and the period from March 1, 1991 (commencement
of operations) to August 31, 1994 was 20.47% and 16.89%,
respectively.
Performance information for the Fund may be compared in
reports and promotional literature to: (1) the S&P 500 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; (2) other
groups of mutual funds tracked by Lipper Analytical Services, 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 (3)
the Consumer Price Index (measure for inflation) to assess the
real rate of return from an investment in the Fund. Unmanaged
indices may assume the reinvestment of dividends but generally do
not reflect deductions for administrative and management costs
and expenses.
Performance information for the Fund reflects only the
performance of a hypothetical investment in the Fund during the
particular time period on which the calculations are based.
Performance information should be considered in light of the
Fund's investment objective and policies, characteristics and
quality of the portfolio and the market conditions during the
given time period, and should not be considered as a
representation of what may be achieved in the future.
From time to time, the Fund and the Investment Manager may
also refer to the following information:
(1) The Investment Manager's and its affiliates' market
share of international equities managed in mutual funds
prepared or published by Strategic Insight or a similar
statistical organization.
(2) The performance of U.S. equity and debt markets
relative to foreign markets prepared or published by
Morgan Stanley Capital International or a similar
financial organization.
(3) The capitalization of U.S. and foreign stock markets as
prepared or published by the International Finance
Corporation, Morgan Stanley Capital International or a
similar financial organization.
(4) The geographic distribution of the Fund's portfolio.
(5) The gross national product and populations, including
age characteristics, literacy rates, foreign investment
improvements due to a liberalization of securities laws
and a reduction of foreign exchange controls, and
improving communication technology, of various
countries as published by various statistical
organizations.
(6) To assist investors in understanding the different
returns and risk characteristics of various
investments, the Fund may show historical returns of
various investments and published indices (e.g.,
Ibbotson Associates, Inc. Charts and Morgan Stanley
EAFE - Index).
(7) The major industries located in various jurisdictions
as published by the Morgan Stanley Index.
(8) Rankings by DALBAR Surveys, Inc. with respect to mutual
fund shareholder services.
(9) Allegorical stories illustrating the importance of
persistent long-term investing.
(10) The Fund's portfolio turnover rate and its ranking
relative to industry standards as published by Lipper
Analytical Services, Inc. or Morningstar, Inc.
(11) A description of the Templeton organization's
investment management philosophy and approach,
including its worldwide search for undervalued or
"bargain" securities and its diversification by
industry, nation and type of stocks or other
securities.
(12) Quotations from the Templeton organization's founder,
Sir John Templeton,* advocating the virtues of
diversification and long-term investing, including the
following:
_______________
* 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.
- "Never follow the crowd. Superior performance is
possible only if you invest differently from the
crowd."
- "Diversify by company, by industry and by
country."
- "Always maintain a long-term perspective."
- "Invest for maximum total real return."
- "Invest - don't trade or speculate."
- "Remain flexible and open-minded about types of
investment."
- "Buy low."
- "When buying stocks, search for bargains among
quality stocks."
- "Buy value, not market trends or the economic
outlook."
- "Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
- "Do your homework or hire wise experts to help
you."
- "Aggressively monitor your investments."
- "Don't panic."
- "Learn from your mistakes."
- "Outperforming the market is a difficult task."
- "An investor who has all the answers doesn't even
understand all the questions."
- "There's no free lunch."
- "And now the last principle: Do not be fearful or
negative too often."
In addition, the Fund and the Investment Manager may also
refer to the number of Shareholders in the Fund or the aggregate
number of shareholders of the Franklin Templeton Funds or the
dollar amount of fund and private account assets under management
in advertising materials.
FINANCIAL STATEMENTS
The financial statements contained in the 1994 Annual Report
to Shareholders of the Fund are incorporated herein by reference.
