TEMPLETON CAPITAL ACCUMULATOR FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 1, 1997
700 CENTRAL AVENUE
ST. PETERSBURG, FL 33701 1-800/DIAL BEN
TABLE OF CONTENTS
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CONTENTS PAGE
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How does the Fund Invest its Assets?......................... 2
What are the Fund's Potential Risks?......................... 6
Investment Restrictions...................................... 8
Officers and Directors....................................... 10
Investment Management and Other Services..................... 15
How Does the Fund Buy Securities for its Portfolio?.......... 16
How Do I Buy, Sell and Exchange Shares?...................... 17
How are Fund Shares Valued?.................................. 18
Additional Information on Distributions and Taxes............ 19
The Fund's Underwriter....................................... 22
How does the Fund Measure Performance?....................... 22
Miscellaneous Information.................................... 25
Financial Statements......................................... 26
Useful Terms and Definitions................................. 26
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When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and
Definitions."
The Templeton Capital Accumulator Fund, Inc. (the "Fund") is an open-end
management investment company. The Fund's investment objective is long-term
capital growth. The Fund seeks to achieve its objective through a flexible
policy of investing in stocks and debt obligations of companies and governments
of any nation. Any income realized will be incidental.
The Prospectus, dated January 1, 1997, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN or write the Fund at the address shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
<PAGE>
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How does the Fund Invest its Assets?"
The Fund may invest for defensive purposes in commercial paper which, at the
date of investment, must be rated A-1 by S&P or Prime-1 by Moody's or, if not
rated, of comparable quality, as defined by TICI.
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. TICI 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, I.E., banks or broker-dealers which have been
determined by TICI 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
TICI. As an operating policy, the Fund will not invest more than 5% of its
assets in debt securities rated lower than Baa by Moody's or BBB by S&P. The
market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the Fund's Net Asset Value.
Higher yielding corporate debt securities are ordinarily unrated or in the
lower rating categories of recognized rating agencies (that is, ratings of Baa
or lower by Moody's or BBB or lower by S&P) and are generally considered to be
predominantly speculative and, therefore, may involve greater volatility of
price and risk of loss of principal and income (including the possibility of
default or bankruptcy of issuers of such securities) than securities in the
higher rating categories. A debt security rated Caa by Moody's is of poor
standing. Such a security may be in default or there may be present elements of
danger with respect to principal and interest. A debt security rated CCC by S&P
is regarded, on balance, as speculative. Such a security will have some quality
and protective characteristics, but these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
Although they may offer higher yields than do higher rated securities, low
rated and unrated debt securities generally involve greater volatility of price
and risk of principal and income, including the possibility of default by, or
bankruptcy of, the issuers of the securities. In addition, the markets in which
low rated and unrated debt securities are traded are more limited than those in
which higher rated securities are traded. The existence of limited markets for
particular securities may diminish the Fund's ability to sell the securities at
fair value either to meet redemption requests or to respond to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
Reduced secondary market liquidity for certain low rated or unrated debt
securities may also make it more difficult for the Fund to obtain accurate
market quotations for the purposes of valuing the Fund's portfolio. Market
quotations are generally available on many low rated or unrated securities only
from a limited number of dealers and may not necessarily represent firm bids of
such dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the value and liquidity of low rated debt securities,
especially in a thinly traded market. Analysis of the creditworthiness of
issuers of low rated debt securities may be more complex than for issuers of
higher rated securities, and the ability of the Fund to achieve its investment
objective may, to the extent of investment in low rated debt securities, be more
dependent upon such creditworthiness analysis than would be the case if the Fund
were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of low rated debt securities have been found to be less sensitive to
interest rate changes than higher rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. A projection of
an economic downturn or of a period of rising interest rates, for example, could
cause a decline in low rated debt securities prices because the advent of a
recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of low
rated debt securities defaults, the Fund may incur additional expenses to seek
recovery.
The Fund may accrue and report interest on high yield bonds structured as zero
coupon bonds or pay-in-kind securities as income even though it receives no cash
interest until the security's maturity or payment date. In order to qualify for
beneficial tax treatment, the Fund must distribute substantially all of its
income to shareholders (see "Additional Information on Distributions and
Taxes"). 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.
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 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 TICI's ability
to predict correctly movements in the direction of the stock markets. No
assurance can be given that TICI'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 NYSE. The S&P 500 Index
assigns relative weightings to the value of one share of each of these 500
common stocks included in the index, and the index fluctuates with changes in
the market values of the shares of those common stocks. In the case of the S&P
500 Index, contracts are to buy or sell 500 units. Thus, if the value of the S&P
500 Index were $150, one contract would be worth $75,000 (500 units x $150). The
stock index futures contract specifies that no delivery of the actual stocks
making up the index will take place. Instead, settlement in cash must occur upon
the termination of the contract, with the settlement being the difference
between the contract price and the actual level of the stock index at the
expiration of the contract. For example, if the Fund enters into a futures
contract to buy 500 units of the S&P 500 Index at a specified future date at a
contract price of $150 and the S&P 500 Index is at $154 on that future date, the
Fund will gain $2,000 (500 units x gain of $4). If the Fund enters into a
futures contract to sell 500 units of the S&P 500 Index at a specified future
date at a contract price of $150 and the S&P 500 Index is at $154 on that future
date, the Fund will lose $2,000 (500 units x loss of $4).
During or in anticipation of a period of market appreciation, the Fund may
enter into a "long hedge" of common stock which it proposes to add to its
portfolio by purchasing stock index futures for the purpose of reducing the
effective purchase price of such common stock. To the extent that the securities
which the Fund proposes to purchase change in value in correlation with the
stock index contracted for, the purchase of futures contracts on that index
would result in gains to the Fund which could be offset against rising prices of
such common stock.
During or in anticipation of a period of market decline, the Fund may "hedge"
common stock in its portfolio by selling stock index futures for the purpose of
limiting the exposure of its portfolio to such decline. To the extent that the
Fund's portfolio of securities changes in value in correlation with a given
stock index, the sale of futures contracts on that index could substantially
reduce the risk to the portfolio of a market decline and, by so doing, provide
an alternative to the liquidation of securities positions in the portfolio with
resultant transaction costs.
Parties to an index futures contract must make initial margin deposits to
secure performance of the contract, which currently range from 1/2% to 5% of the
contract amount. Initial margin requirements are determined by the respective
exchanges on which the futures contracts are traded. There also are requirements
to make variation margin deposits as the value of the futures contract
fluctuates.
At the time the Fund purchases a stock index futures contract, an amount of
cash, U.S. government securities, or other highly liquid debt securities equal
to the market value of the contract will be deposited in a segregated account
with the Fund's custodian. When selling a stock index futures contract, the Fund
will maintain with its custodian liquid assets that, when added to the amounts
deposited with a futures commission merchant or broker as margin, are equal to
the market value of the instruments underlying the contract. Alternatively, the
Fund may "cover" its position by owning a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based, or holding a call option permitting the Fund to purchase the same futures
contract at a price no higher than the price of the contract written by the Fund
(or at a higher price if the difference is maintained in liquid assets with the
Fund's custodian).
STOCK INDEX OPTIONS. The Fund may purchase and sell put and call options on
securities indices in standardized contracts traded on national securities
exchanges, boards of trade, or similar entities, or quoted on NASDAQ. An option
on a securities index is a contract that gives the purchaser of the option, in
return for the premium paid, the right to receive from the writer of the option,
cash equal to the difference between the closing price of the index and the
exercise price of the option, expressed in dollars, times a specified multiplier
for the index option. An index is designed to reflect specified facets of a
particular financial or securities market, a specific group of financial
instruments or securities, or certain indicators.
The Fund may write call options and put options only if they are "covered." A
call option on an index is covered if the Fund maintains with its custodian cash
or cash equivalents equal to the contract value. A call option is also covered
if the Fund holds a call on the same index as the call written where the
exercise price of the call held is (1) equal to or less than the exercise price
of the call written, or (2) greater than the exercise price of the call written,
provided the difference is maintained by the Fund in cash or cash equivalents in
a segregated account with its custodian. A put option on an index is covered if
the Fund maintains cash or cash equivalents equal to the exercise price in a
segregated account with its custodian. A put option is also covered if the Fund
holds a put on the same index as the put written where the exercise price of the
put held is (1) equal to or greater than the exercise price of the put written,
or (2) less than the exercise price of the put written, provided the difference
is maintained by the Fund in cash or cash equivalents in a segregated account
with its custodian.
If an option written by the Fund expires, the Fund will realize a capital gain
equal to the premium received at the time the option was written. If an option
purchased by the Fund expires unexercised, the Fund will realize a capital loss
equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out by
an offsetting purchase or sale of an option of the same series (type, exchange,
index, exercise price, and expiration). There can be no assurance, however, that
a closing purchase or sale transaction can be effected when the Fund desires.
FOREIGN CURRENCY HEDGING TRANSACTIONS. In order to hedge against foreign
currency exchange rate risks, the Fund may enter into forward foreign currency
exchange contracts and foreign currency futures contracts, as well as purchase
put or call options on foreign currencies, as described below. The Fund may also
conduct its foreign currency exchange transactions on a spot (I.E., cash) basis
at the spot rate prevailing in the foreign currency exchange market.
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to minimize the risk to the Fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. The Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security. In addition, for example, when the Fund believes
that a foreign currency may suffer or enjoy a substantial movement against
another currency, it may enter into a forward contract to sell an amount of that
foreign currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency. This second investment practice
is generally referred to as "cross-hedging." Because in connection with the
Fund's forward contract 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 CFTC, the CFTC may in the future assert authority to regulate
forward contracts. In such event, the Fund's ability to utilize forward
contracts in the manner set forth above may be restricted. Forward contracts may
limit potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance for the Fund than if it had not engaged in
such contracts.
The Fund may purchase and write put and call options on foreign currencies for
the purpose of protecting against declines in the dollar value of foreign
portfolio securities and against increases in the dollar cost of foreign
securities to be acquired. As is the case with other kinds of options, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received, and the Fund could be required
to purchase or sell foreign currencies at disadvantageous exchange rates,
thereby incurring losses. The purchase of an option on foreign currency may
constitute an effective hedge against fluctuation in exchange rates, although,
in the event of rate movements adverse to the Fund's position, the Fund may
forfeit the entire amount of the premium plus related transaction costs. Options
on foreign currencies to be written or purchased by the Fund will be traded on
U.S. and foreign exchanges or over-the-counter.
The Fund may enter into exchange-traded contracts for the purchase or sale for
future delivery of foreign currencies ("foreign currency futures"). This
investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of
the Fund's portfolio securities or adversely affect the prices of securities
that the Fund intends to purchase at a later date. The successful use of foreign
currency futures will usually depend on TICI'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.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The Fund has an unlimited right to purchase securities in any foreign country,
developed or developing, if they are listed on a stock exchange, as well as a
limited right to purchase such securities if they are unlisted. Investors should
consider carefully the substantial risks involved in securities of companies and
governments of foreign nations, which are in addition to the usual risks
inherent in domestic investments.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or financial
reporting standards, and auditing practices and requirements may not be
comparable to those applicable to U.S. 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 U.S. companies.
Investments in unlisted foreign securities raise liquidity concerns, and the
Board of the Fund (or TICI under the supervision of the Board) 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 U.S., 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 U.S.
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.
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 U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Investments in Eastern European countries may involve risks of nationalization,
expropriation and confiscatory taxation. The Communist governments of a number
of Eastern European countries expropriated large amounts of private property in
the past, in many cases without adequate compensation, and there can be no
assurance that such expropriation will not occur in the future. In the event of
such expropriation, the Fund could lose a substantial portion of any investments
it has made in the affected countries. Further, no accounting standards exist in
Eastern European countries. Finally, even though certain Eastern European
currencies may be convertible into U.S. dollars, the conversion rates may be
artificial to the actual market values and may be adverse to Fund shareholders.
Investing in Russian companies involves a high degree of risk and special
considerations not typically associated with investing in the U.S. securities
markets, and should be considered highly speculative. Such risks include: (1)
delays in settling portfolio transactions and risk of loss arising out of
Russia's system of share registration and custody; (2) the risk that it may be
impossible or more difficult than in other countries to obtain and/or enforce a
judgment; (3) pervasiveness of corruption and crime in the Russian economic
system; (4) currency exchange rate volatility and the lack of available currency
hedging instruments; (5) higher rates of inflation (including the risk of social
unrest associated with periods of hyper-inflation); (6) controls on foreign
investment and local practices disfavoring foreign investors and limitations on
repatriation of invested capital, profits and dividends, and on the Fund's
ability to exchange local currencies for U.S. dollars; (7) the risk that the
government of Russia or other executive or legislative bodies may decide not to
continue to support the economic reform programs implemented since the
dissolution of the Soviet Union and could follow radically different political
and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, or a return to the centrally planned
economy that existed prior to the dissolution of the Soviet Union; (8) the
financial condition of Russian companies, including large amounts of
inter-company debt which may create a payments crisis on a national scale; (9)
dependency on exports and the corresponding importance of international trade;
(10) the risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation; and (11) possible
difficulty in identifying a purchaser of securities held by the Fund due to the
underdeveloped nature of the securities markets.
There is little historical data on Russian securities markets because they are
relatively new and a substantial proportion of securities transactions in Russia
are privately negotiated outside of stock exchanges. Because of the recent
formation of the securities markets as well as the underdeveloped state of the
banking and telecommunications systems, settlement, clearing and registration of
securities transactions are subject to significant risks. Ownership of shares
(except where shares are held through depositories that meet the requirements of
the 1940 Act) is defined according to entries in the company's share register
and normally evidenced by extracts from the register or by formal share
certificates. However, there is no central registration system for shareholders
and these services are carried out by the companies themselves or by registrars
located throughout Russia. These registrars are not necessarily subject to
effective state supervision and it is possible for the Fund to lose its
registration through fraud, negligence or even mere oversight. While the Fund
will endeavor to ensure that its interest continues to be appropriately recorded
either itself or through a custodian or other agent inspecting the share
register and by obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability and it is possible
that subsequent illegal amendment or other fraudulent act may deprive the Fund
of its ownership rights or improperly dilute its interests. In addition, while
applicable Russian regulations impose liability on registrars for losses
resulting from their errors, it may be difficult for the Fund to enforce any
rights it may have against the registrar or issuer of the securities in the
event of loss of share registration. Furthermore, although a Russian public
enterprise with more than 1,000 shareholders is required by law to contract out
the maintenance of its shareholder register to an independent entity that meets
certain criteria, in practice this regulation has not always been strictly
enforced. Because of this lack of independence, management of a company may be
able to exert considerable influence over who can purchase and sell the
company's shares by illegally instructing the registrar to refuse to record
transactions in the share register. This practice may prevent the Fund from
investing in the securities of certain Russian companies deemed suitable by
TICI. 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, TICI endeavors to avoid unfavorable consequences and
to take advantage of favorable developments in particular nations where from
time to time it places the Fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove profitable
and others may not. No assurance can be given that profits, if any, will exceed
losses.
The directors consider at least annually the likelihood of the imposition by
any foreign government of exchange control restrictions which would affect the
liquidity of the Fund's assets maintained with custodians in foreign countries,
as well as the degree of risk from political acts of foreign governments to
which such assets may be exposed. The directors also consider the degree of risk
involved through the holding of portfolio securities in domestic and foreign
securities depositories (see "Investment Management and Other Services --
Custodian and Transfer Agent"). However, in the absence of willful misfeasance,
bad faith or gross negligence on the part of TICI, 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 TICI's ability to predict correctly movements in the direction of
the market, as to which no assurance can be given.
There are several risks associated with transactions in options on securities
indices. For example, there are significant differences between the securities
and options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. A decision
as to whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events. There can be no
assurance that a liquid market will exist when the Fund seeks to close out an
option position. If the Fund were unable to close out an option that it had
purchased on a securities index, it would have to exercise the option in order
to realize any profit or the option may expire worthless. If trading were
suspended in an option purchased by the Fund, it would not be able to close out
the option. If restrictions on exercise were imposed, the Fund might be unable
to exercise an option it has purchased. Except to the extent that a call option
on an index written by the Fund is covered by an option on the same index
purchased by the Fund, movements in the index may result in a loss to the Fund;
however, such losses may be mitigated by changes in the value of the Fund's
securities during the period the option is outstanding.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. The Fund MAY NOT:
1. Invest in real estate or mortgages on real estate (although
the Fund may invest in marketable securities secured by real
estate or interests therein or issued by companies or
investment trusts which invest in real estate or interests
therein); invest in interests (other than debentures or equity
stock interests) in oil, gas or other mineral exploration or
development programs; purchase or sell commodity contracts
(except forward contracts and futures contracts as described
in the Fund's Prospectus); or invest in other open-end
investment companies.
2. Purchase or retain securities of any company in which
directors or officers of the Fund or of TICI, 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 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.
9. Invest more than 5% of the Fund's total assets in warrants,
whether or not listed on the NYSE or AMEX, 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 U.S. 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. Participat on a joint or a joint and everal basis in any
trading account in securities. (See "How Does the Fund Buy
Securities for its Portfolio?" as to transactions in the same
securities for the Fund, other clients and/or other mutual
funds within the Franklin Templeton Group of Funds.)
The Fund may also be subject to investment limitations imposed by foreign
jurisdictions in which the Fund sells its shares.
The Fund may also be subject to investment limitations imposed by foreign
jurisdictions in which the Fund sells its shares. If a percentage restriction is
met at the time of investment, a later increase or decrease in the percentage
due to a change in the value of portfolio securities or the amount of assets
will not be considered a violation of any of the foregoing restrictions. Assets
are calculated as described in the Prospectus under the heading "How Do I Buy
Shares?" 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).
OFFICERS AND DIRECTORS
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
<TABLE>
<CAPTION>
POSITIONS AND OFFICES WITH THE FUND PRINCIPAL OCCUPATION DURING THE PAST
NAME, ADDRESS AND AGE FIVE YEARS
<S> <C> <C>
HARRIS J. ASHTON Director Chairman of the board, president and
Metro Center chief executive officer of General
1 Station Place Host Corporation (nursery and craft
Stamford, Connecticut centers); director of RBC Holdings
Age 64 (U.S.A.) Inc. (a bank holding
company) and Bar-S Foods; and
director or trustee of 55 of the
investment companies in the
Franklin Templeton Group of Funds.
<PAGE>
NICHOLAS F. BRADY* Director Chairman of Templeton Emerging
The Bullitt House Markets Investment Trust PLC;
102 East Dover Street chairman of Templeton Latin America
Easton, Maryland Investment Trust PLC; chairman of
Age 66 Darby Overseas Investments, Ltd. (an
investment firm)(1994-present); chairman
and director of Templeton Central
and Eastern European Fund; director
of the Amerada Hess Corporation,
Christiana Companies, and the H.J.
Heinz Company; formerly, Secretary
of the United States Department of
the Treasury (1988-1993) and chairman
of the board of Dillon, Read & Co.
Inc. (investment banking) prior to
1988; and director or trustee of 23
of the investment companies in the
Franklin Templeton Group of Funds.
S. JOSEPH FORTUNATO Director Member of the law firm of Pitney,
200 Campus Drive Hardin, Kipp & Szuch; director of
Florham Park, New Jersey General Host Corporation (nursery
Age 64 and craft centers); and director or
trustee of 57 of the investment
companies in the Franklin Templeton
Group of Funds.
JOHN Wm. GALBRAITH Director President of Galbraith Properties,
360 Central Avenue Inc. (personal investment company);
Suite 1300 director of Gulf West Banks, Inc.
St. Petersburg, Florida (bank holding company)
Age 75 (1995-present); formerly, director
of Mercantile Bank (1991-1995), vice
chairman of Templeton, Galbraith &
Hansberger Ltd. (1986-1992), and
chairman of Templeton Funds
Management, Inc. (1974-1991); and
director or trustee of 22 of the
investment companies in the Franklin
Templeton Group of Funds.
ANDREW H. HINES, JR. Director Consultant for the Triangle
150 2nd Avenue N. Consulting Group; chairman and
St. Petersburg, Florida director of Precise Power
Age 73 Corporation; executive-in-residence
of Eckerd College (1991-present);
director of Checkers Drive-In
Restaurants, Inc.; formerly, chairman
of the board and chief executive
officer of Florida Progress Corporation
(1982-1990) and director of various
of its subsidiaries; and director or
trustee of 24 of the investment
companies in the Franklin Templeton
Group of Funds.
CHARLES B. JOHNSON* Chairman of the Board and Vice President, chief executive officer,
777 Mariners Island Blvd. President and director of Franklin Resources,
San Mateo, California Inc.; chairman of the board and
Age 63 director of Franklin Advisers, Inc.
and Franklin Templeton Distributors,
Inc.; director of General Host
Corporation (nursery and craft
centers) and Franklin Templeton
Investor Services, Inc.; and
officer and/or director, trustee
or managing general partner, as
the case may be, of most other
subsidiaries of Franklin Resources,
Inc. and 56 of the investment
companies in the Franklin Templeton
Group of Funds.
<PAGE>
CHARLES E. JOHNSON Director and Vice President Senior vice president and director
500 East Broward Blvd. of Franklin Resources, Inc.; senior
Fort Lauderdale, Florida vice president of Franklin Templeton
Age 40 Distributors, Inc.; president and
chief executive officer of Templeton
Worldwide, Inc.; president and
director of Franklin Institutional
Services Corporation; chairman of
the board of Templeton Investment
Counsel, Inc.; officer and/or
director, as the case may be, of
other subsidiaries of Franklin
Resources, Inc.; and officer
and/or director or trustee of
39 of the investment companies
in the Franklin Templeton Group
of Funds.
<PAGE>
BETTY P. KRAHMER Director Director or trustee of various civic
2201 Kentmere Parkway associations; formerly, economic
Wilmington, Delaware analyst, U.S. government; and
Age 67 director or trustee of 23 of the
investment companies in the Franklin
Templeton Group of Funds.
GORDON S. MACKLIN Director Chairman of White River Corporation
8212 Burning Tree Road (information services); director of
Bethesda, Maryland Fund America Enterprises Holdings,
Age 68 Inc., MCI Communications Corporation,
Fusion Systems Corporation, Infovest
Corporation, MedImmune, Inc., Source
One Mortgage Services Corporation,
and Shoppers Express, Inc. (on-line
shopping service); formerly, chairman
of Hambrecht and Quist Group, director
of H&Q Healthcare Investors and
Lockheed Martin Corporation, and
president of the National Association
of Securities Dealers, Inc.; and
director or trustee of 52 of the
investment companies in the Franklin
Templeton Group of Funds.
FRED R. MILLSAPS Director Manager of personal investments
2665 N.E. 37th Drive (1978-present); director of various
Fort Lauderdale, Florida business and nonprofit
Age 67 organizations; formerly, chairman
and chief executive officer of
Landmark Banking Corporation (1969-1978),
financial vice president of Florida
Power and Light (1965-1969), and
vice president of The Federal Reserve
Bank of Atlanta (1958-1965); and
director or trustee of 24 of the
investment companies in the Franklin
Templeton Group of Funds.
GARY P. MOTYL President Security analyst and portfolio
500 East Broward Blvd. manager with Templeton Investment
Fort Lauderdale, Florida Counsel, Inc. since 1981; executive
Age 44 vice president and director of
Templeton Investment Counsel, Inc.;
director of Templeton Global Investors,
Inc.; formerly research analyst and
portfolio manager with Landmark First
National Bank(1979-1981) and security
analyst with S&P 1974-1979); and officer
of 2 of the investment companies in
the Franklin Templeton Group of
Funds.
RUPERT H. JOHNSON, JR. Vice President Executive vice president and
777 Mariners Island Blvd. director of Franklin Resources, Inc.
San Mateo, California and Franklin Templeton Distributors,
Age 56 Inc.; president and director of
Franklin Advisers, Inc.; director
of Franklin Templeton Investor
Services, Inc.; and officer and/or
director, trustee or managing
general partner, as the case may
be, of most other subsidiaries
of Franklin Resources, Inc. and
60 of the investment companies
in the Franklin Templeton Group
of Funds.
HARMON E. BURNS Vice President Executive vice president, secretary
777 Mariners Island Blvd. and director of Franklin Resources,
San Mateo, California Inc.; executive vice president and
Age 51 director of Franklin Templeton
Distributors, Inc.; executive vice
president of Franklin Advisers, Inc.;
officer and/or director, as the case
may be, of other subsidiaries of
Franklin Resources, Inc.; and officer
and/or director or trustee of 60 of
the investment companies in the
Franklin Templeton Group of Funds.
MARK G. HOLOWESKO Vice PresVicetPresident President and director of Templeton
Lyford Cay Global Advisors Limited; chief
Nassau, Bahamas investment officer of global equity
Age 36 research for Templeton Worldwide,
Inc.; president or vice president
of the Templeton Funds; formerly,
investment administrator with Roy
West Trust Corporation (Bahamas)
Limited (1984-1985); and officer
of 23 of the investment companies
in the Franklin Templeton Group
of Funds.
DEBORAH R. GATZEK Vice President Senior vice president and general
777 Mariners Island Blvd. counsel of Franklin Resources, Inc.;
San Mateo, California senior vice president of Franklin
Age 47 Templeton Distributors, Inc.; vice
president of Franklin Advisers, Inc.;
and officer of 60 of the investment
companies in the Franklin Templeton
Group of Funds.
MARTIN L. FLANAGAN Vice President Senior vice president, treasurer and
777 Mariners Island Blvd. chief financial officer of Franklin
San Mateo, California Resources, Inc.; director and
Age 36 executive vice president of
Templeton Investment Counsel, Inc.;
a member of the International Society
of Financial Analysts and the American
Institute of Certified Public Accountants;
formerly, with Arthur Andersen &
Company (1982-1983); officer and/or
director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.;
and officer and/or director or trustee
of 60 of the investment companies in
the Franklin Templeton Group of Funds.
<PAGE>
JOHN R. KAY Vice President Vice president and treasurer of
500 East Broward Blvd. Templeton Worldwide, Inc.; assistant
Fort Lauderdale, Florida vice president of Franklin Templeton
Age 56 Distributors, Inc.; formerly, vice
president and controller of the
Keystone Group, Inc.; and officer of
27 of the investment companies in
the Franklin Templeton Group of
Funds.
ELIZABETH M. KNOBLOCK Vice President - Compliance General counsel, secretary and a
500 East Broward Blvd. senior vice president of Templeton
Fort Lauderdale, Florida Investment Counsel, Inc.; formerly,
Age 41 vice president and associate general
counsel of Kidder Peabody & Co. Inc.
(1989-1990), assistant general
counsel of Gruntal & Co., Inc.
(1988), vice president and associate
general counsel of Shearson Lehman
Hutton Inc. (1988), vice president
and assistant general counsel of
E.F. Hutton & Co. Inc. (1986-1988),
and special counsel of the division
of investment management of the
Securities and Exchange Commission
(1984-1986); and officer of 23 of
the investment companies in the
Franklin Templeton Group of Funds.
<PAGE>
JAMES R. BAIO Treasurer Certified public accountant; senior
500 East Broward Blvd. vice president of Templeton
Fort Lauderdale, Florida Worldwide, Inc. and Templeton Funds
Age 42 Trust Company; formerly, senior tax
manager with Ernst & Young (certified
public accountants)(1977-1989); and
treasurer of 23 of the investment
companies in the Franklin Templeton
Group of Funds.
BARBARA J. GREEN Secretary Senior vice president of Templeton
500 East Broward Blvd. Worldwide, Inc. and an officer of
Fort Lauderdale, Florida other subsidiaries of Templeton
Age 49 Worldwide, Inc.; formerly, deputy
director of the Division of
Investment Management, executive
assistant and senior advisor to
the chairman, counsellor to the
chairman, special counsel and
attorney fellow, U.S. Securities
and Exchange Commission (1986-1995),
attorney, Rogers & Wells, and
judicial clerk, U.S. District Court
(District of Massachusetts); and
secretary of 23 of the investment
companies in the Franklin Templeton
Group of Funds.
</TABLE>
* Nicholas F. Brady, Charles E. Johnson and Charles B. Johnson are
"interested persons" of the Fund under the 1940 Act, which limits the
percentage of interested persons that can comprise a fund's board. Charles
B. Johnson is an interested persons due to his ownership interest in
Resources, and Charles E. Johnson is an interested person due to his
employment affiliation with Resources. Mr. Brady's status as an interested
person results from his business affiliations with Resources and TGAL. Mr.
Brady and Resources are both limited partners of Darby Overseas Partners,
L.P. ("Darby Overseas"). Mr. Brady established Darby Overseas in February
1994, and is Chairman and shareholder of the corporate general partner of
Darby Overseas. In addition, Darby Overseas and TGAL are limited partners
of Darby Emerging Markets Fund, L.P. The remaining Board members of the
Fund are not interested persons (the "independent member of the Board").
The table above shows the Board members who are affiliated with
Distributors and TICI. Nonaffiliated members of the Board and Mr. Brady are
currently paid an annual retainer and/or fees for attendance at Board and
committee meetings. Currently, the Fund pays the nonaffiliated Board members and
Mr. Brady an annual retainer of $1,000, a fee of $100 per Board meeting, and its
portion of a flat fee of $2,000 for attendance at each combined meeting of the
audit committees and/or nominating committees and compensation committees of
the Templeton Funds. As shown above, some of the nonaffiliated Board members
also serve as directors, trustees or managing general partners of other
investment companies in the Franklin Templeton Group of Funds. They may
receive fees from these funds for their services. The following table
provides the total fees paid to nonaffiliated Board members and Mr. Brady by
the Fund and by other funds in the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
TOTAL FEES RECEIVED FROM THE NUMBER OF BOARDS IN THE
TOTAL FEES RECEIVED FROM FRANKLIN TEMPLETON GROUP OF FRANKLIN TEMPLETON GROUP OF
NAME THE FUND(1) FUNDS(2) FUNDS ON WHICH EACH SERVES(3
<S> <C> <C> <C>
Harris J. Ashton $1,500 $339,592 55
Nicholas F. Brady 1,500 119,275 23
F. Bruce Clarke(4) 1,642 69,500 0
Hasso-G von Diergardt-Naglo(5) 1,500 66,375 0
S. Joseph Fortunato 1,500 356,412 57
John Wm. Galbraith 1,442 102,475 22
Andrew H. Hines, Jr. 1,709 130,525 24
Betty P. Krahmer 1,500 119,275 23
Gordon S. Macklin 1,567 331,542 52
Fred R. Millsaps 1,642 130,525 24
</TABLE>
1 For the fiscal year ended August 31, 1996.
2 For the calendar year ended December 31, 1996.
3 We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds urrently
includes 61 registered investment companies, with approximately 171 U.S. based
funds or series.
4 Mr. Clarke resigned as a director on October 20, 1996.
5 Mr. von Diergardt resigned as a director on December 31, 1996.
Nonaffiliated members of the Board and Mr. Brady are reimbursed for expenses
incurred in connection with attending board meetings, paid pro rata by each fund
in the Franklin Templeton Group of Funds for which they serve as director,
trustee or managing general partner. No officer or Board member received any
other compensation, including pension or retirement benefits, directly or
indirectly from the Fund or other funds in the Franklin Templeton Group of
Funds. Certain officers or Board members who are shareholders of Resources may
be deemed to receive indirect remuneration by virtue of their participation, if
any, in the fees paid to its subsidiaries.
As of December 1, 1996, the officers and Board members did not own of record or
beneficially any shares of the Fund. Many of the Board members own shares in
other funds in the Franklin Templeton Group of Funds. Charles B. Johnson and
Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively, of
Charles E. Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is TICI.
TICI provides investment research and portfolio management services, including
the selection of securities for the Fund to buy, hold or sell and the selection
of brokers through whom the Fund's portfolio transactions are executed. TICI's
activities are subject to the review and supervision of the Board to whom TICI
renders periodic reports of the Fund's investment activities. TICI is covered by
fidelity insurance on its officers, directors and employees for the protection
of the Fund.
TICI and its affiliates act as investment manager to numerous other investment
companies and accounts. TICI may give advice and take action with respect to any
of the other funds it manages, or for its own account, that may differ from
action taken by TICI on behalf of the Fund. Similarly, with respect to the Fund,
TICI is not obligated to recommend, buy or sell, or to refrain from
recommending, buying or selling any security that TICI and access persons, as
defined by the 1940 Act, may buy or sell for its or their own account or for the
accounts of any other fund. TICI is not obligated to refrain from investing in
securities held by the Fund or other funds that it manages. Of course, any
transactions for the accounts of TICI and other access persons will be made in
compliance with the Fund's Code of Ethics. Please see "Miscellaneous Information
- - Summary of Code of Ethics."
MANAGEMENT FEES. Under its management agreement, the Fund pays TICI a manage-
ment fee equal to a annual rate of 0.75%. The fee is computed at the close of
business on the last business day of each month.
For the fiscal years ended August 31, 1996, 1995 and 1994, management fees,
before any advance waiver, totaled $656,146, $378,859, and $208,441,
respectively Under an agreement by TICI to limit its fees, the Fund paid
management fees totaling $512,356, $208,331 and $46,951, respectively.
MANAGEMENT AGREEMENT. The management agreement is in effect until December 31,
1997. It may continue in effect for successive annual periods if its continuance
is specifically approved at least annually by a vote of the Board or by a vote
of the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Board members who are not parties to the
management agreement or interested persons of any such party (other than as
members of the Board), cast in person at a meeting called for that purpose. The
management agreement may be terminated without penalty at any time by the Board
or by a vote of the holders of a majority of the Fund's outstanding voting
securities, or by TICI on 60 days' written notice, and will automatically
terminate in the event of its assignment, as defined in the 1940 Act.
ADMINISTRATIVE SERVICES. FT Services (and, prior to October 1, 1996, Templeton
Global Investors, Inc.) provides certain administrative services and facilities
for the Fund. These include preparing and maintaining books, records, and tax
and financial reports, and monitoring compliance with regulatory requirements.
FT Services is a wholly owned subsidiary of Resources.
Under its administration agreement, the Fund pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
During the fiscal years ended August 31, 1996, 1995, and 1994, administration
fees totaling $131,231, $75,773 and $41,690, respectively, were paid to
Templeton Global Investors, Inc.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account.
CUSTODIAN. The Chase Manhattan Bank, at its principal office at MetroTech
Center, Brooklyn, New York, 11245, and at the offices of its branches and
agents throughout the world, acts as custodian of the Fund's assets. The
custodian does not participate in decisions relating to the purchase and sale of
portfolio securities.
AUDITORS. McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, New York, 10017,
are the Fund's independent auditors. During the fiscal year ended August 31,
1996, their auditing services consisted of rendering an opinion on the financial
statements of the Fund included in the Fund's Annual Report to Shareholders for
the fiscal year ended August 31, 1996, and review of the Fund's filings with the
SEC and the IRS.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
The selection of brokers and dealers to execute transactions in the Fund's
portfolio is made by TICI in accordance with criteria set forth in the
management agreement and any directions that the Board may give.
When placing a portfolio transaction, TICI seeks to obtain prompt execution of
orders at the most favorable net price. When portfolio transactions are done on
a securities exchange, the amount of commission paid by the Fund is negotiated
between TICI and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid in connection
with portfolio transactions are based to a large degree on the professional
opinions of the persons responsible for the placement and review of the
transactions. These opinions are based on the experience of these individuals in
the securities industry and information available to them about the level of
commissions being paid by other institutional investors of comparable size. TICI
will ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in the
opinion of TICI, a better price and execution can otherwise be obtained.
Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask price.
In placing orders to effect transactions for the Fund, TICI may pay to
particular brokers commissions that are higher than another broker might charge,
if TICI determines in good faith that the amount of commission paid is
reasonable in relation to the value of the brokerage and research services to be
received, viewed in terms of the particular transaction or TICI's overall
responsibilities with respect to client accounts for which TICI exercises
investment discretion. Services received by TICI may include, among other
things, information relating to particular companies, markets or countries,
local, regional, national or transnational economies, statistical data,
quotations and other securities pricing information and other information which
provide lawful and appropriate assistance to TICI in carrying out its
investment advisory responsibilities. The services received may not always be
of direct benefit to the Fund, but must be of value to TICI in carrying out its
overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services received by TICI from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits TICI to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staff of other securities firms. As long as it is lawful and
appropriate to do so, TICI and its affiliates may use this research and data in
their investment advisory capacities with other clients. If the Fund's officers
are satisfied that the best execution is obtained, consistent with internal
policies the sale of Fund shares, as well as shares of other funds in the
Franklin Templeton Group of Funds, may also be considered a factor in the
selection of broker-dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to TICI will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the Fund and one or more other
investment companies or clients supervised by TICI are considered at or about
the same time, transactions in these securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all by
TICI, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
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 Franklin Templeton Funds, or between funds and
private clients, under procedures adopted pursuant to Rule 17a-7 under the 1940
Act.
During the fiscal years ended August 31, 1996, 1995 and 1994, the Fund paid
brokerage commissions totaling $102,000, $124,082 and $62,000, respectively
As of August 31, 1996, the Fund did no own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund has entered into an agreement with Distributors, under which the Fund
will issue shares at Net Asset Value to TFTC as custodian for the unit
investment trust entitled Templeton Capital Accumulation Plans. (the "Plan" or
"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 advise by TICI, 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
Distributors at the address shown on the cover.
Reinvestment Date. Shares acquired through the reinvestment of dividends will be
purchased at the Net Asset Value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
The Prospectus describes the manner in which the Fund's shares may be exchanged
by investors who hold shares directly. See "MAY I EXCHANGE SHARES FOR SHARES OF
ANOTHER FUND?" Backup withholding and information reporting may apply.
Information regarding the possible tax consequences of an exchange is included
in the tax section in this SAI and in the Prospectus.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
The Prospectus describes the manner win which the Fund's shares may be redeemed
by investors who hold shares directly. See "HOW DO I SELL SHARES?"
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the prior business day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the scheduled close of the
NYSE, generally 4:00 p.m. Eastern time, each day that the NYSE is open for
trading. As of the date of this SAI, the Fund is informed that the NYSE observes
the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by TICI.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
of the NYSE on each day that the NYSE is open. Trading in European or Far
Eastern securities generally, or in a particular country or countries, may not
take place on every NYSE business day. Furthermore, trading takes place in
various foreign markets on days that are not business days for the NYSE and on
which the Fund's Net Asset Value is not calculated. Thus, the calculation of the
Fund's Net Asset Value does not take place contemporaneously with the
determination of the prices of many of the portfolio securities used in the
calculation and, if events materially affecting the values of these foreign
securities occur, the securities will be valued at fair value as determined by
management and approved in good faith by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the Net Asset Value of the Fund's shares is determined as of such times.
Occasionally, events affecting the values of these securities may occur between
the times at which they are determined and the scheduled close of the NYSE that
will not be reflected in the computation of the Fund's Net Asset Value. If
events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. INCOME DIVIDENDS. The Fund receives income generally in the form of
dividends, interest and other income derived from its investments. This income,
less the expenses incurred in the Fund's operations, is its net investment
income from which income dividends may be distributed. Thus, the amount of
dividends paid per share may vary with each distribution.
2. CAPITAL GAIN DISTRIBUTIONS. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any capital loss carryforward or post October
loss deferral) may generally be made once a year in December to reflect any net
short-term and net long-term capital gains realized by the Fund as of October 31
of the current fiscal year and any undistributed capital gains from the prior
fiscal year. The Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or adjust the timing of
these distributions for operational or other reasons.
TAXES
As stated in the Prospectus, the Fund has elected and qualified to be treated as
a regulated investment company under Subchapter M of 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 U.S.
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.
The Board reserves the right not to maintain the qualification of the Fund as a
regulated investment company if it determines this course of action to be
beneficial to shareholders. In that case, the Fund will be subject to federal
and possibly state corporate taxes on its taxable income and gains, and
distributions to shareholders will be taxable to the extent of the Fund's
available earnings and profits.
For federal tax purposes, planholders will be regarded as shareholders of the
Fund. Frequently, state and local taxes follow federal tax laws; accordingly,
planholders in such states and localities will likewise be taxable under state
and local tax laws as if they were shareholders of the Fund. However, since
state and local tax laws may vary, planholders should consult their tax advisers
about questions relating to their tax treatment as participants in the Plans.
Dividends representing net investment income and net short-term capital gains
(the excess of net short-term capital gains over net long-term capital losses)
are taxable to shareholders as ordinary income. Distributions of net investment
income may be eligible for the corporate dividends-received deduction to the
extent attributable to the Fund's qualifying dividend income. However, the
alternative minimum tax applicable to corporations may reduce the benefit of the
dividends-received deduction. Distributions from net capital gains (the excess
of net long-term capital gains over net short-term capital losses) designated by
the Fund as capital gain dividends are taxable to shareholders as long-term
capital gains, regardless of the length of time the Fund's shares have been held
by a shareholder, and are not eligible for the dividends-received deduction.
Generally, dividends and distributions are taxable to shareholders, whether
received in cash or reinvested in shares of the Fund. Any distributions that are
not from the Fund's investment company taxable income or net capital gain may be
characterized as a return of capital to shareholders or, in some cases, as
capital gain. Shareholders will be notified annually as to the federal tax
status of dividends and distributions they receive and any tax withheld thereon.
Income received by the Fund from sources within foreign countries may be subject
to withholding and other income or similar taxes imposed by such countries. If,
at the close of any fiscal year, more than 50% of the value of the Fund's total
assets are invested in securities of foreign corporations (as to which no
assurance can be given), the Fund may elect pursuant to section 853 of the Code
to pass through to its shareholders the foreign income and similar taxes paid by
the Fund in order to enable the shareholders to take a credit (or deduction) for
foreign income taxes paid by the Fund. In that case, a shareholder must include
in his gross income on his federal income tax return both dividends received by
him from the Fund and also the amount which the Fund advises him is his pro rata
portion of foreign income taxes paid with respect to, or withheld from,
dividends on other income of the Fund from its foreign investments. The
shareholder may then subtract from his federal income tax the amount of such
taxes withheld, or else treat such foreign taxes as a deduction from his gross
income; however, as in the case of investors receiving income directly from
foreign sources, the above-described tax credit or tax deduction is subject to
certain limitations.
Certain options, futures, and forward contracts in which the Fund may invest are
"section 1256 contracts." Gains or losses on section 1256 contracts generally
are considered 60% long-term and 40% short-term capital gains or losses
("60/40"); however, foreign currency gains or losses (as discussed below)
arising from certain section 1256 contracts may be treated as ordinary income or
loss. Also, section 1256 contracts held by the Fund at the end of each taxable
year (and on certain other dates as prescribed under the Code) are
"marked-to-market" with the result that unrealized gains or losses are treated
as though they were realized.
Generally, the hedging transactions undertaken by the Fund may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by the Fund. In addition, losses
realized by a Fund on positions that are part of the straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which the losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to the Fund of hedging transactions are not
entirely clear. The hedging transactions may increase the amount of short-term
capital gain realized by a Fund which is taxed as ordinary income when
distributed to shareholders.
The Fund may make one or more of the elections available under the Code which
are applicable to straddles. If the Fund makes any of the elections, the amount,
character, and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
shareholders and which will be taxed to shareholders as ordinary income or
long-term capital gain may be increased or decreased as compared to a fund that
did not engage in such hedging transactions.
Requirements relating to the Fund's tax status as a regulated investment company
may limit the extent to which the Fund will be able to engage in transactions in
options, forward contracts and futures contracts.
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time the Fund accrues income or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and the
time the Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss. Similarly, on
disposition of debt securities denominated in a foreign currency and on
disposition of certain futures, forward contracts and options, gains or losses
attributable to fluctuations in the value of foreign currency between the date
of acquisition of the security or contract and the date of disposition also are
treated as ordinary gain or loss. These gains and losses, referred to under the
Code as "section 988" gains and losses, may increase or decrease the amount of
the Fund's net investment income to be distributed to its shareholders as
ordinary income. For example, fluctuations in exchange rates may increase the
amount of income that a Fund must distribute in order to qualify for treatment
as a regulated investment company and to prevent application of an excise tax on
undistributed income. Alternatively, fluctuations in exchange rates may decrease
or eliminate income available for distribution. If foreign exchange losses
exceed other net investment income during a taxable year, the Fund would not be
able to make ordinary dividend distributions, or distributions made before the
losses were realized would be recharacterized as a return of capital to
shareholders for federal income tax purposes, rather than as an ordinary
dividend, reducing each shareholder's basis in his Fund shares.
The Fund may invest in stocks of foreign companies that are classified under the
Code as passive foreign investment companies ("PFICs"). In general, a foreign
company is classified as a PFIC if at least one-half of its assets constitute
investment-type assets or 75% or more of its gross income is investment-type
income. Under the PFIC rules, an "excess distribution" received with respect to
PFIC stock is treated as having been realized ratably over the period during
which the Fund held the PFIC stock. A Fund itself will be subject to tax on the
portion, if any, of the excess distribution that is allocated to the Fund's
holding period in prior taxable years (and an interest factor will be added to
the tax, as if the tax had actually been payable in such prior taxable years)
even though the Fund distributes the corresponding income to shareholders.
Excess distributions include any gain from the sale of PFIC stock as well as
certain distributions from a PFIC. All excess distributions are taxable as
ordinary income. The Fund may be able to elect alternative tax treatment with
respect to PFIC shares. Under an election that currently may be available, the
Fund generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether any distributions
are received from the PFIC. If this election is made, the special rules,
discussed above, relating to the taxation of excess distributions, would not
apply. In addition, another election may be available that would involve marking
to market the Fund's PFIC shares at the end of each taxable year (and on certain
other dates prescribed in the Code), with the result that unrealized gains are
treated as though they were realized. If this election were made, tax at the
fund level under the PFIC rules would generally be eliminated, but the Fund
could, in limited circumstances, incur nondeductible interest charges. The
Fund's intention to qualify annually as a regulated investment company may limit
its elections with respect to PFIC shares.
Because the application of the PFIC rules may affect, among other things, the
character of gains, the amount of gain or loss and the timing of the recognition
of income with respect to PFIC shares, as well as subject the Fund itself to tax
on certain income from PFIC shares, the amount that must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a fund that did not invest in PFIC shares.
Certain of the debt securities acquired by the Fund may be treated as debt
securities that were originally issued at a discount. Original issue discount
can generally be defined as the difference between the price at which a security
was issued and its stated redemption price at maturity. Although no cash income
is actually received by the Fund, original issue discount on a taxable debt
security earned in a given year generally is treated for federal income tax
purposes as interest and, therefore, such income would be subject to the
distribution requirements of the Code.
Some of the debt securities may be purchased by the Fund at a discount which
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount will be treated as ordinary income to the extent it does not exceed the
accrued market discount on such debt security. Generally, market discount
accrues on a daily basis for each day the debt security is held by the Fund at a
constant rate over the time remaining to the debt security's maturity or, at the
election of the Fund, at a constant yield to maturity which takes into account
the semiannual compounding of interest.
Upon the sale or exchange of his shares, a shareholder generally will realize a
taxable gain or loss depending upon the basis in the shares. Such gain or loss
will be treated as capital gain or loss if the shares are capital assets in the
shareholder's hands, and will be long-term if the shareholder's holding period
for the shares is more than one year and generally otherwise will be short-term.
Any loss realized on a sale or exchange will be disallowed to the extent that
the shares disposed of are replaced (including replacement through the
reinvesting of dividends and capital gain distributions in the Fund) within a
period of 61 days beginning 30 days before and ending 30 days after the
disposition of the shares. In such a case, the basis of the shares acquired will
be adjusted to reflect the disallowed loss. Any loss realized by a shareholder
on the sale of Fund shares held by the shareholder for six months or less will
be treated for federal income tax purposes as a long-term capital loss to the
extent of any distributions of long-term capital gains designated by the Fund as
capital gain dividends received by the shareholder with respect to such shares.
In some cases, shareholders will not be permitted to take sales charges into
account for purposes of determining the amount of gain or loss realized on the
disposition of their shares. This prohibition generally applies where (1) the
shareholder incurs a sales charge in acquiring the stock of a regulated
investment company, (2) the stock is disposed of before the 91st day after the
date on which it was acquired, and (3) the shareholder subsequently acquires
shares of the same or another regulated investment company and the otherwise
applicable sales charge is reduced under a "reinvestment right" received upon
the initial purchase of shares of stock. Sales charges affected by this rule are
treated as if they were incurred with respect to the stock acquired under the
reinvestment right. This provision may be applied to successive acquisitions of
shares of stock.
The Fund generally will be required to withhold federal income tax at a rate of
31% ("backup withholding") from dividends paid, capital gain distributions, and
redemption proceeds to shareholders if (1) the shareholder fails to furnish the
Fund with the shareholder's correct taxpayer identification number or social
security number and to make such certification as the Fund may require, (2) the
IRS notifies the shareholders, the custodian, or the Fund that the shareholder
has failed to report properly certain interest and dividend income to the IRS
and to respond to notices to that effect, or (3) when required to do so, the
shareholder fails to certify that he is not subject to backup withholding. Any
amounts withheld may be credited against the shareholder's federal income tax
liability.
Ordinary dividends and capital gain distributions declared in October, November
or December with a record date in such month and paid during the following
January will be treated as having been paid by the Fund and received by
shareholders on December 31 of the calendar year in which declared, rather than
the calendar year in which the dividends are actually received.
As indicated, distributions also may be subject to state, local, and other
taxes. U.S. tax rules applicable to foreign investors may differ significantly
from those outlined above. Shareholders are advised to consult their tax
advisers for details with respect to the particular tax consequences to them of
an investment in the Fund.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter for shares of the Fund. The underwriting agreement will continue in
effect for successive annual periods if its continuance is specifically approved
at least annually by a vote of the Board or by a vote of the holders of a
majority of the Fund's outstanding voting securities, and in either event by a
majority vote of the Board members who are not parties to the underwriting
agreement or interested persons of any such party (other than as members of the
Board), cast in person at a meeting called for that purpose. The underwriting
agreement terminates automatically in the event of its assignment and may be
terminated by either party on 90 days' written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
In connection with the offering of the Plans, aggregate underwriting
commissions for the fiscal years ended August 31, 1996, 1995 and 1994, were
$5,361,206, $6,055,050 and $3,540,303, respectively. After allowances to
dealers, Distributors retained $610,774, $575,554 and $336,780 in net
underwriting discounts, commissions and compensation received in connection with
redemptions or repurchases, for the respective years. Except as noted,
Distributors received no other compensation from the Plans or the Fund for
acting as underwriter.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primiarily on the amount of sales of the fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, Distributors' retention of underwriting concessions
and, in the case of Funds that have Rule 12b-1 plans, from payments to
Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commission generated by fund portfolio transactions in
accordance with the NASD's rules.
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return quotations used by the Fund are based on the
standardized methods of computing performance mandated by the SEC. An
explanation of these and other methods used by the Fund to compute or express
performance follows. Regardless of the method used, past performance does not
guarantee future results, and is an indication of the return to shareholders
only for the limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over one-, five- and ten-year
periods, or fractional portion thereof, that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The Fund's
average annual total return does 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, average annual total return would be lower if the sales and
creation charges were taken into account. In addition, the calculation assumes
that income dividends and capital gain distributions are reinvested at Net Asset
Value. The quotation assumes the account was completely redeemed at the end of
each one-, five- and ten-year period and the deduction of all applicable charges
and fees.
The Fund's average annual total return for the one- and five-year periods ended
August 31, 1996, was 16.50% and 14.92%, and for the period March 1, 1991
(commencement of operations) to August 31, 1996, was 14.24%.
These figures were calculated according to the SEC formula:
P(1+T)n = ERV
where:
P =a hypothetical initial payment of $1,000
T =average annual total return
n =number of years
ERV =ending redeemable value of a hypothetical $1,000
payment made at the beginning of the one-, five- or
ten-year periods at the end of the one-, five- or ten-
year periods (or fractional portion thereof)
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return does 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,
cumulative total return would be lower if the sales and creation charges were
taken into account. In addition, the calculation assumes that income dividends
and capital gain distributions are reinvested at Net Asset Value. Cumulative
total return, however, will be based on the Fund's actual return for a specified
period rather than on its average return over one-, five- and ten-year periods,
or fractional portion thereof. The Fund's cumulative total return for the one-
and five-year periods ended August 31, 1996, was 16.50% and 100.48%, and for the
period March 1, 1991 (commencement of operations) to August 31, 1996, was
108.07%.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of both the Franklin Group of Funds and Templeton Group
of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
(i) unmanaged indices so that you may compare the Fund's results with those of a
group of unmanaged securities widely regarded by investors as representative of
the securities market in general; (ii) other groups of mutual funds tracked by
Lipper Analytical Services, Inc., a widely used independent research firm that
ranks mutual funds by overall performance, investment objectives and assets, or
tracked by other services, companies, publications, or persons who rank mutual
funds on overall performance or other criteria; and (iii) the Consumer Price
Index (measure for inflation) to assess the real rate of return from an
investment in the Fund. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
From time to time, the Fund and TICI may also refer to the following
information:
a) TICI's and its affiliates' market share of international equities
managed in mutual funds prepared or published by Strategic Insight or
a similar statistical organization.
b) 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.
c) 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.
d) The geographic and industry distribution of the Fund's portfolio and
the Fund's top ten holdings.
e) 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.
f) 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).
g) The major industries located in various jurisdictions as published by
the Morgan Stanley Index.
h) Rankings by DALBAR Surveys, Inc. with respect to mutual fund
shareholder services.
i) Allegorical stories illustrating the importance of persistent
long-term investing.
j) The Fund's portfolio turnover rate and its ranking relative to
industry standards as published by Lipper Analytical Services, Inc. or
Morningstar, Inc.
k) A description of the Templeton organization's investment management
philosophy and approach, including its worldwide search for undervalued
or "bargain" securities and its diversification by industry, nation and
type of stocks or other securities.
l) The number of shareholders in the Fund or the aggregate number of
shareholders of the open-end investment companies in the Franklin
Templeton Group of Funds or the dollar amount of fund and private
account assets under management.
m) Comparison of the characteristics of various emerging markets,
including population, financial and economic conditions.
n) Quotations from the Templeton organization's founder, Sir John
Templeton,* advocating the virtues of diversification and long-term
investing, including the following:
(infinity) "Never follow the crowd. Superior performance is
possible only if you invest differently from the
crowd."
(infinity) "Diversify by company, by industry and by country."
(infinity) "Always maintain a long-term perspective."
(infinity) "Invest for maximum total real return."
(infinity) "Invest - don't trade or speculate."
(infinity) "Remain flexible and open-minded about types of
investment."
(infinity) "Buy low."
(infinity) "When buying stocks, search for bargains among
quality stocks."
(infinity) "Buy value, not market trends or the economic
outlook."
(infinity) "Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
(infinity) "Do your homework or hire wise experts to help you."
(infinity) "Aggressively monitor your investments."
(infinity) "Don't panic."
(infinity) "Learn from your mistakes."
(infinity) "Outperforming the market is a difficult task."
(infinity) "An investor who has all the answers doesn't even
understand all the questions."
(infinity) "There's no free lunch."
(infinity) "And now the last principle: Do not be fearful or
negative too often."
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the Fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, if any, as well as the value of its shares that are
based upon the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition,
there can be no assurance that the Fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 48 years and
now services more than 2.5 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Together, the Franklin Templeton Group has over $152
billion in assets under management for more than 4.2 million U.S. based mutual
fund shareholder and other accounts. The Franklin Templeton Group of Funds
offers 121 U.S. based open-end investment companies to the public. The Fund may
identify itself by its NASDAQ symbol or CUSIP number.
The DALBAR Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past eight years.
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of the Fund, no other person holds beneficially or of record more
than 5% of the Fund's outstanding shares.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of Resources or its subsidiaries who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed within 24 hours after clearance; (ii) copies of all brokerage
confirmations must be sent to a 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; and (iii) access persons involved in
preparing and making investment decisions must, in addition to (i) and (ii)
above, file annual reports of their securities holdings each January and 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.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Fund, for the fiscal year ended August 31, 1996, including the auditors'
report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
BOARD - The Board of Directors of the Fund
CD - Certificate of deposit
CFTC - Commodity Futures Trading Commission
CLASS I AND CLASS II - Certain funds in the Franklin Templeton Funds offer two
classes of shares, designated "Class I" and "Class II." The two classes have
proportionate interests in the same portfolio of investment securities. They
differ, however, primarily in their sales charge structures and Rule 12b-1
plans. Shares of the Fund are considered Class I shares for redemption, exchange
and other purposes.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN FUNDS - The mutual funds in the Franklin Group of FundsAE except
Franklin Valuemark Funds and the
Franklin Government Securities Trust
FRANKLIN TEMPLETON FUNDS - The Franklin Funds and the Templeton Funds
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of FundsAE and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund i determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is the Net Asset Value per share.
Shares of the Fund may be initially acquired through an investment in Templeton
Capital Accumulation Plans. The charges for the first year of a Plan can amount
to 50% of the amounts paid during that year under the Plan.
PROSPECTUS - The prospectus for the Fund dated January 1, 1997, as may be
amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Rating Service, a division of McGraw Hill Companies,
Inc.
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution which, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TEMPLETON FUNDS - The U.S. registered mutual funds in the Templeton Group of
Funds except the Fund, Templeton Variable Annuity Fund, and Templeton
Variable Products Series Fund
TFTC - Templeton Funds Trust Company, the custodian for the Plans as described
in the Plan prospectus
TICI - Templeton Investment Counsel, Inc., the Fund's investmen manager, is
located at Broward Financial Centre, Fort Lauderdale, FL 33394-3091.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
TLCAP SAI 01/97
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1. As an operating policy approved by the Board, 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.
* Sir John Templeton sold the Templeton organization to Resources in
October, 1992 and resigned from the Board on April 16, 1995. He is no
longer involved with the investment management process.
