TEMPLETON CAPITAL ACCUMULATOR FUND, INC.
THIS STATEMENT OF ADDITIONAL INFORMATION DATED JANUARY 1, 1996,
IS NOT A PROSPECTUS.
IT SHOULD BE READ IN CONJUNCTION WITH
THE PROSPECTUS OF TEMPLETON CAPITAL ACCUMULATOR FUND, INC.
DATED JANUARY 1, 1996, AS AMENDED FROM TIME TO TIME,
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/DIAL BEN
TABLE OF CONTENTS
General Information and History.......................1
Investment Objective and Policies.....................1
-Investment Policies.................................1
-Repurchase Agreements...............................2
-Loans of Portfolio Securities.......................2
-Debt Securities.....................................2
-Structured Investments..............................4
-Futures Contracts...................................5
-Stock Index Options.................................7
-Foreign Currency Hedging
Transactions.......................................8
-Investment Restrictions.............................9
-Risk Factors.......................................11
-Trading Policies...................................17
-Personal Securities Transactions...................17
Management of the Fund...............................18
Director Compensation................................23
Principal Shareholders...............................24
Investment Management and Other Services.............24
-Investment Management Agreement....................24
-Management Fees....................................26
-Templeton Investment Counsel, Inc..................26
-Business Manager...................................26
-Custodian and Transfer Agent.......................28
-Legal Counsel......................................28
-Independent Accountants............................28
-Reports to Shareholders............................29
Brokerage Allocation.................................29
Purchase, Redemption and Pricing
of Shares..........................................32
-Ownership and Authority Disputes...................33
-Redemptions in Kind................................33
Tax Status...........................................34
Principal Underwriter................................39
Description of Shares................................40
Performance Information..............................40
Financial Statements.................................44
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.
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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.
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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
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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.
STRUCTURED INVESTMENTS. Included among the issuers of debt securities
in which the Fund may invest are entities organized and operated solely for the
purpose of restructuring the investment characteristics of various securities.
These entities are typically organized by investment banking firms which receive
fees in connection with establishing each entity and arranging for the placement
of its securities. This type of restructuring involves the deposit with or
purchases by an entity, such as a corporation or trust, of specified instruments
and the issuance by that entity of one or more classes of securities
("Structured Investments") backed by, or representing interests in, the
underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued Structured Investments to create securities
with different investment characteristics such as varying maturities, payment
priorities or interest rate provisions; the extent of the payments made with
respect to Structured Investments is dependent on the extent of the cash flow on
the underlying instruments. Because Structured Investments of the type in which
the Fund anticipates investing typically involve no credit enhancement, their
credit risk will generally be equivalent to that of the underlying instruments.
The Fund is permitted to invest in a class of Structured
Investments that is either subordinated or unsubordinated to the
right of payment of another class. Subordinated Structured
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Investments typically have higher yields and present greater risks than
unsubordinated Structured Investments. Although the Fund's purchase of
subordinated Structured Investments would have a similar economic effect to that
of borrowing against the underlying securities, the purchase will not be deemed
to be leverage for purposes of the limitations placed on the extent of the
Fund's assets that may be used for borrowing activities.
Certain issuers of Structured Investments may be deemed to be
"investment companies" as defined in the 1940 Act. As a result, the Fund's
investment in these Structured Investments may be limited by the restrictions
contained in the 1940 Act. Structured Investments are typically sold in private
placement transactions, and there currently is no active trading market for
Structured Investments. To the extent such investments are illiquid, they will
be subject to the Fund's restrictions on investments in illiquid securities.
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
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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
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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.
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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
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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.
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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.1 (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.)
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.
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1 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.
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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
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to purchase such securities if they are unlisted. Investors should consider
carefully the substantial risks involved in securities of companies and
governments of foreign nations, which are in addition to the usual risks
inherent in domestic investments.
There may be less publicly available information about foreign
companies comparable to the reports and ratings published about companies in the
United States. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards, and auditing practices
and requirements may not be comparable to those applicable to United States
companies. The Fund, therefore, may encounter difficulty in obtaining market
quotations for purposes of valuing its portfolio and calculating its net asset
value. Foreign markets have substantially less volume than the 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.
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In addition, many countries in which the Fund may invest have
experienced substantial, and in some periods extremely high, rates of inflation
for many years. Inflation and rapid fluctuations in inflation rates have had and
may continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the United States economy in such respects
as growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
Investments in Eastern European countries may involve risks of
nationalization, expropriation and confiscatory taxation. The Communist
governments of a number of Eastern European countries expropriated large amounts
of private property in the past, in many cases without adequate compensation,
and there can be no assurance that such expropriation will not occur in the
future. In the event of such expropriation, the Fund could lose a substantial
portion of any investments it has made in the affected countries. Further, no
accounting standards exist in Eastern European countries. Finally, even though
certain Eastern European currencies may be convertible into 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
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<PAGE>
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.
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<PAGE>
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 cessation of trading on national exchanges,
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. Some countries in which the Fund may invest may also
have fixed or managed currencies that are not free-floating against the U.S.
dollar. Further, certain currencies have experienced a steady devaluation
relative to the U.S. dollar. Any devaluations in the currencies in which the
Fund's portfolio securities are denominated may have a detrimental impact on the
Fund. Through the Fund's flexible policy, 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
- 15 -
<PAGE>
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
- 16 -
<PAGE>
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 certain of these funds and clients may
contain many or some of the same securities. When certain funds or clients are
engaged simultaneously in the purchase or sale of the same security, the trades
may be aggregated for execution and then allocated in a manner designed to be
equitable to each party. The larger size of the transaction may affect the price
of the security and/or the quantity which may be bought or sold for each party.
If the transaction is large enough, brokerage commissions may be negotiated
below those otherwise chargeable.
Sale or purchase of securities, without payment of brokerage
commissions, fees (except customary transfer fees) or other remuneration in
connection therewith, may be effected between any of these funds, or between
funds and private clients, under procedures adopted pursuant to Rule 17a-7 under
the 1940 Act.
PERSONAL SECURITIES TRANSACTIONS. Access persons of the Franklin
Templeton Group, as defined in SEC Rule 17(j) under the 1940 Act, who are
employees of Franklin Resources, Inc. or their subsidiaries, are permitted to
engage in personal securities transactions subject to the following general
restrictions and procedures: (1) The trade must receive advance clearance from a
Compliance Officer and must be completed within 24 hours after this clearance;
(2) Copies of all brokerage confirmations must be sent to the Compliance Officer
and within 10 days after the end of each calendar quarter, a report of all
securities transactions must be provided to the Compliance Officer; (3) In
addition to items (1) and (2), access persons involved in preparing and making
investment decisions must file annual reports of their securities holdings each
January and also inform the Compliance Officer (or other designated personnel)
if they own a security that is being considered for a fund or other client
transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
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<PAGE>
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
Metro Center
1 Station Place
Stamford, Connecticut
Director
Chairman of the Board, president and
chief executive officer of General Host
Corporation (nursery and craft centers);
and a director of RBC Holdings (U.S.A.)
Inc. (a bank holding company) and Bar-S
Foods. Age 63.
NICHOLAS F. BRADY*
The Bullitt House
102 East Dover Street
Easton, Maryland
Director
Chairman of Templeton Emerging Markets Investment Trust PLC; chairman of
Templeton Latin America Investment Trust PLC; chairman of 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. Age 65.
F. BRUCE CLARKE
19 Vista View Blvd.
Thornhill, Ontario
Director
Retired; formerly, credit adviser for
National Bank of Canada, Toronto. Age
85.
HASSO-G VON DIERGARDT-
NAGLO
R.R. 3
Stouffville, Ontario
Director
Farmer; and president of Clairhaven
Investments, Ltd. and other private
investment companies. Age 79.
S. JOSEPH FORTUNATO
200 Campus Drive
Florham Park, New Jersey
Director
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and a director of
General Host Corporation. Age 63.
- 18 -
<PAGE>
JOHN Wm. GALBRAITH
360 Central Avenue
Suite 1300
St. Petersburg, Florida
Director
President of Galbraith Properties, Inc.
(personal investment company); director
of Gulfwest Banks, Inc. (bank holding
company) (1995-present) and Mercantile
Bank (1991-present); vice chairman of
Templeton, Galbraith & Hansberger Ltd.
(1986-1992); and chairman of Templeton
Funds Management, Inc. (1974-1991). Age
74.
ANDREW H. HINES, JR.
150 2nd Avenue N.
St. Petersburg, Florida
Director
Consultant for the Triangle Consulting Group; chairman of the board and chief
executive officer 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. Age 72.
CHARLES B. JOHNSON*
777 Mariners Island Blvd.
San Mateo, California
Chairman of the Board
and Vice President
President, chief executive officer, and director of Franklin Resources, Inc.;
chairman of the board and director of Franklin Advisers, Inc. and Franklin
Templeton Distributors, Inc.; director of Franklin Administrative Services,
Inc., General Host Corporation, and Templeton Global Investors, Inc.; and
officer and director, trustee or managing general partner, as the case may be,
of most other subsidiaries of Franklin and of 55 of the investment companies in
the Franklin Templeton Group. Age 62.
CHARLES E. JOHNSON*
500 East Broward Blvd.
Fort Lauderdale, Florida
Director
Senior vice president and director of Franklin Resources, Inc.; senior vice
president of Franklin 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. Age 39.
BETTY P. KRAHMER
2201 Kentmere Parkway
Wilmington, Delaware
Director
Director or trustee of various civic
associations; formerly, economic
analyst, U.S. Government. Age 66.
GORDON S. MACKLIN
8212 Burning Tree Road
Bethesda, Maryland
Director
Chairman of White River Corporation (information services); director of Fund
America Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI
Communications Corporation, Fusion Systems Corporation, Infovest Corporation,
and Medimmune, Inc.; and formerly held the following positions: chairman of
Hambrecht and Quist Group; director of H&Q Healthcare Investors;and president
of the National Association of Securities Dealers, Inc. Age 67.
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
FRED R. MILLSAPS
2665 NE 37th Drive
Fort Lauderdale, Florida
Director
Manager of personal investments (1978- present); chairman and chief executive
officer of Landmark 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. Age 66.
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<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
GARY P. MOTYL
500 East Broward Blvd.
Fort Lauderdale, Florida
President
Senior vice president and director of Templeton Investment Counsel, Inc.;
director of Templeton Global Investors, Inc.; and president or vice president of
other Templeton Funds. Age 43.
MARK G. HOLOWESKO
Lyford Cay
Nassau, Bahamas
Vice President President and director of Templeton, Galbraith & Hansberger
Ltd.; director of global equity research for Templeton Worldwide, Inc.;
president or vice president of the Templeton Funds; formerly, investment
administrator, Roy West Trust Corporation (Bahamas) (1984- 1985). Age 35.
MARTIN L. FLANAGAN
777 Mariners Island Blvd.
San Mateo, California
Vice President Senior vice president, treasurer and chief financial officer of
Franklin Resources, Inc.; director and executive vice president of 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. Age 35.
JOHN R. KAY
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President
Vice president of the Templeton Funds; vice president and treasurer of Templeton
Global Investors, Inc. and Templeton Worldwide, Inc.; assistant vice president
of Franklin Templeton Distributors, Inc.; formerly, vice president and
controller, the Keystone Group, Inc. Age 55.
- 20 -
<PAGE>
THOMAS M. MISTELE
700 Central Avenue
St. Petersburg, Florida
Secretary
Senior vice president of Templeton Global Investors, Inc.; vice president of
Franklin Templeton 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). Age 42.
JAMES R. BAIO
500 East Broward Blvd.
Fort Lauderdale, Florida
Treasurer
Certified public accountant; treasurer of the Templeton Funds; senior vice
president of Templeton Worldwide, Inc., Templeton Global Investors, Inc., and
Templeton Funds Trust Company; formerly, senior tax manager, Ernst & Young
(certified public accountants) (1977- 1989). Age 41.
JEFFREY L. STEELE
1500 K Street, N.W.
Washington, D.C.
Assistant Secretary
Partner, Dechert Price & Rhoads. Age 50.
* 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.
- 21 -
<PAGE>
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:
<TABLE>
<CAPTION>
Number of Total Compensation
Aggregate Franklin Templeton from all Funds in
Name of Compensation Fund Boards on which Franklin Templeton
DIRECTOR FROM THE FUND* DIRECTOR SERVES GROUP**
<S> <C> <C> <C>
Harris J. Ashton $900 56 $327,925
Nicholas F. Brady 900 24 98,225
F. Bruce Clarke 1,400 20 83,350
Hasso-G von Diergardt-Naglo 900 20 77,350
S. Joseph Fortunato 900 58 344,745
John Wm. Galbraith 350 23 70,100
Andrew H. Hines, Jr. 1,400 24 106,325
Betty P. Krahmer 900 24 93,475
Gordon S. Macklin 900 53 321,525
Fred R. Millsaps 1,400 24 104,325
</TABLE>
- ---------------
* For the fiscal year ended August 31, 1995.
** For the calendar year ended December 31, 1995.
- 22 -
<PAGE>
PRINCIPAL SHAREHOLDERS
As of December 1, 1995 there were 4,591,146 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 1, 1995, to the knowledge of management,
no person owned beneficially or of record 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,
amended and restated December 6, 1994 and May 25, 1995 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 5,
1995, and will continue through December 31, 1996. 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,
- 23 -
<PAGE>
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 certain of its affiliates
have selected for one or more of the Investment Manager's other clients or for
clients of its affiliates, the orders for all such securities trades may be
placed for execution by methods determined by the Investment Manager, with
approval by the 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 Manager also provides management services to numerous
other investment companies or funds and accounts pursuant to management
agreements with each fund or account. The Investment Manager may give advice and
take action with respect to any of the other funds and accounts its manages, or
for its own account, which may differ from action taken by the Investment
Manager on behalf of the Fund. Similarly, with respect to the Fund, the
Investment Manager is not obligated to recommend, purchase or sell, or to
refrain from recommending, purchasing or selling any security that the
Investment Manager and access persons, as defined by the 1940 Act, may purchase
and sell for its or their own account or for the accounts of any other fund or
account. Furthermore, the Investment Manager is not obligated to refrain from
investing in securities held by the Fund or other funds or accounts which it
manages or administers. Any transactions for the accounts of the Investment
Manager and other access persons will be made in compliance with the Fund's Code
of Ethics as described in the section "Investment Objectives and
Policies--Personal Securities Transactions."
The Investment Management Agreement 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
- 24 -
<PAGE>
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, 1995, 1994 and 1993
the Investment Manager received from the Fund under the Investment Management
Agreement fees of $378,859, $208,441, and $92,387, 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) and Rupert H.
Johnson, Jr. are principal shareholders of Franklin and own,
respectively, approximately 20% and 16% of its outstanding
shares. Messrs. Charles B. Johnson and Rupert H. Johnson, Jr.
are brothers.
BUSINESS MANAGER. Templeton Global Investors, Inc.,
performs certain administrative functions for the Fund including:
o providing office space, telephone, office equipment and
supplies for the Fund;
o paying compensation of the Fund's officers for services
rendered as such;
o authorizing expenditures and approving bills for
payment on behalf of the Fund;
- 25 -
<PAGE>
o 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;
o supervising publication of daily quotations of the bid
and asked prices of the Fund's Shares, earnings reports
and other financial data;
o daily pricing of the Fund's investment portfolio and
preparing and monitoring relationships with
organizations serving the Fund, including the Custodian
and printers;
o providing trading desk facilities for the Fund;
o 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
o providing executive, clerical and secretarial help
needed to carry out these responsibilities.
For its services, the Business Manager receives a monthly fee equal on
an annual basis to 0.15% of the first $200,000,000 of the Fund's average daily
net assets, reduced to 0.135% annually of the Fund's net assets in excess of
$200,000,000, further reduced to 0.1% annually of such net assets in excess of
$700,000,000, and further reduced to 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, 1995, 1994, and 1993, the
Business Manager (and, prior to April 1, 1993, Templeton Funds Management, Inc.,
the previous business manager) received business management fees of $75,773,
$41,690, and $18,477, 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%.
- 26 -
<PAGE>
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
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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 the Fund Information Department at
1-800/DIAL BEN.
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
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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
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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.
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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, 1995, 1994, and
1993, the Fund paid a total of $124,082, $62,000, and $46,000, 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 Templeton Funds Trust Company ("TFTC") 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 TFTC, 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
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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.
REDEMPTIONS IN KIND. Redemption proceeds are normally paid in cash,
however, the Fund may pay the redemption price in whole or in part by a
distribution in kind of securities from the portfolio of the Fund, in lieu of
cash, in conformity with rules of the SEC. In such circumstances, the securities
distributed
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would be valued at the price used to compute the Fund's net assets value. If
Shares are redeemed in kind, the redeeming Shareholder might incur brokerage
costs in converting the assets into cash. A Fund is obligated to redeem Shares
solely in cash up to the lesser of $250,000 or 1% of its net assets during any
90-day period for any one Shareholder.
TAX STATUS
The Fund intends 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
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<PAGE>
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
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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
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<PAGE>
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
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<PAGE>
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.
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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.
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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, 1995, 1994, and 1993, the
Principal Underwriter, as sponsor of the Plans, retained $575,554, $336,780, and
$185,919, or approximately 8.7% 8.8%, and 8.6% 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
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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, 1995 and the period from March
1, 1991 (commencement of operations) to August 31, 1995 was 3.4% and 13.75%,
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:
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(1) The Investment Manager's and its affiliates' market share of
international equities managed in mutual funds prepared or
published by Strategic Insight or a similar statistical
organization.
(2) The performance of U.S. equity and debt markets
relative to foreign markets prepared or published by
Morgan Stanley Capital International or a similar
financial organization.
(3) The capitalization of U.S. and foreign stock markets as
prepared or published by the International Finance
Corporation, Morgan Stanley Capital International or a similar
financial organization.
(4) The geographic and industry distribution of the Fund's
portfolio and the Fund's top ten holdings.
(5) The gross national product and populations, including
age characteristics, literacy rates, foreign investment
improvements due to a liberalization of securities laws
and a reduction of foreign exchange controls, and
improving communication technology, of various
countries as published by various statistical
organizations.
(6) To assist investors in understanding the different
returns and risk characteristics of various
investments, the Fund may show historical returns of
various investments and published indices (E.G.,
Ibbotson Associates, Inc. Charts and Morgan Stanley
EAFE - Index).
(7) The major industries located in various jurisdictions
as published by the Morgan Stanley Index.
(8) Rankings by DALBAR Surveys, Inc. with respect to mutual
fund shareholder services.
(9) Allegorical stories illustrating the importance of
persistent long-term investing.
(10) The Fund's portfolio turnover rate and its ranking
relative to industry standards as published by Lipper
Analytical Services, Inc. or Morningstar, Inc.
(11) A description of the Templeton organization's
investment management philosophy and approach,
including its worldwide search for undervalued or
"bargain" securities and its diversification by
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<PAGE>
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:
o "Never follow the crowd. Superior performance is
possible only if you invest differently from the
crowd."
o "Diversify by company, by industry and by
country."
o "Always maintain a long-term perspective."
o "Invest for maximum total real return."
o "Invest - don't trade or speculate."
o "Remain flexible and open-minded about types of
investment."
o "Buy low."
o "When buying stocks, search for bargains among
quality stocks."
o "Buy value, not market trends or the economic
outlook."
o "Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
o "Do your homework or hire wise experts to help
you."
o "Aggressively monitor your investments."
o "Don't panic."
o "Learn from your mistakes."
o "Outperforming the market is a difficult task."
- --------
* 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.
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<PAGE>
o "An investor who has all the answers doesn't even
understand all the questions."
o "There's no free lunch."
o "And now the last principle: Do not be fearful or
negative too often."
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 Fund's Annual Report to
Shareholders dated August 31, 1995 are incorporated herein by reference.
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