Registration No. 33-37338 and 811-6198
As filed with the Securities and Exchange Commission on October 28, 1998
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 10 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 12 X
(Check appropriate box or boxes)
TEMPLETON CAPITAL ACCUMULATOR FUND, INC.
(Exact Name of Registrant as Specified in Charter)
500 EAST BROWARD BOULEVARD, FORT LAUDERDALE, FLORIDA 33394
(Address of Principal Executive Offices) Zip Code)
Registrant's Telephone Number: (954) 527-7500
Barbara J. Green
Templeton Worldwide, Inc.
500 East Broward Boulevard
FORT LAUDERDALE, FLORIDA 33394
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b) of Rule 485
on pursuant to paragraph (b) of Rule 485
60 days after filing pursuant to paragraph (a)(1) of Rule 485
X on DECEMBER 31, 1998 pursuant to paragraph (a)(1) of Rule 485
75 days after filing pursuant to paragraph (a)(2) of Rule 485
on pursuant to paragraph (a)(2) of Rule 485
this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
PAGE
TEMPLETON CAPITAL ACCUMULATOR FUND, INC.
CROSS-REFERENCE SHEET
FORM N-1A
PART A
<TABLE>
<CAPTION>
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
<S> <C> <C>
1 Cover page Cover Page
2 Synopsis Expense Summary
3 Condensed Financial "Financial Highlights";
Information "How Does the Fund
Measure Performance?"
4 General Description "How Is the Fund Organized?";
of Registrant "How Does the Fund Invest Its Assets?";
"What Are the Risks of Investing in
the Fund?"
5 Management of the Fund "Who Manages the Fund?"
5A Management's Discussion Contained in Registrant's Annual
of Fund Performance Report to Shareholders
6 Capital Stock and Other "How is the Fund Organized?"; "Services
Securities to Help You Manage Your Account"; "What
Distributions Might I Receive From the
Fund?"; "How Taxation Affects the Fund
and its Shareholders"
7 Purchase of Securities "How Do I Buy Shares?"; "May I Exchange
Being Offered Shares for Shares of Another Fund?";
"Transaction Procedures and Special
Requirements"; "Services to Help You Manage
Your Account"; "Who Manages the Fund?"; "Useful
Terms and Definitions"
8 Redemption or Repurchase "May I Exchange Shares for Shares of Another
Fund?"; "How Do I Sell Shares?"; "Transaction
Procedures and Special Requirements"?; "Services
to Help You Manage Your Account"
9 Pending Legal Proceedings Not Applicable
</TABLE>
PAGE
TEMPLETON CAPTIAL ACCUMULATOR FUND, INC.
CROSS-REFERENCE SHEET
FORM N-1A
PART B
<TABLE>
<CAPTION>
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
<S> <C> <C>
10 Cover Page Cover Page
11 Table of Contents Table of Contents
12 General Information and Not Applicable
History
13 Investment Objectives and "How Does the Fund Invest Its Assets?";
Policies "Investment Restrictions"; "What Are the
Risks of Investing in the Fund?"
14 Management of the "Officers and Directors"; "Investment
Registrant Management and Other Services"
15 Control Persons and "Officers and Directors"; "Investment
Principal Holders of Management and Other Services"; "Miscellaneous
Securities Information?"
16 Investment Advisory and "Investment Management and Other Services";
Other Services "The Fund's Underwriter"
17 Brokerage Allocation and "How Does the Fund Buy Securities
Other Practices For Its Portfolio?"
18 Capital Stock and Other "Miscellaneous Information"; See Prospectus
Securities "How Is The Fund Organized?"
19 Purchase, Redemption and "How Do I Buy, Sell and Exchange Shares?";
Pricing of Securities "How Are Fund Shares Valued?";
Being Offered "Financial Statements"
20 Tax Status "Additional Information on Distributions
and Taxes"
21 Underwriters "The Fund's Underwriter"
22 Calculation of Performance "How Does the Fund Measure Performance?"
Data
23 Financial Statements Financial Statements
</TABLE>
PART A
PROSPECTUS
PAGE
PROSPECTUS & APPLICATION
TEMPLETON CAPITAL ACCUMULATOR FUND, INC.
JANUARY 1, 1999
This prospectus describes Templeton Capital Accumulator Fund, Inc. (the "fund").
Please read this prospectus before investing, and keep it for future reference.
It contains important information, including how the fund invests and the
services available to shareholders.
You may not purchase fund shares directly. You may acquire fund shares only by
investing in Templeton Capital Accumulation Plans (the "Plans" or "Plan"). The
sales charges for the first year of a Plan can amount to as much as 50% of the
amounts you invest that year under the Plan. The Plans are not suitable for
short-term investment. Details of the Plans, including all charges, are in the
attached prospectus for the Plans. Please read the Plan prospectus before
investing and keep it for future reference.
To learn more about the fund and its policies, you may request a copy of the
fund's Statement of Additional Information ("SAI"), dated January 1, 1999, which
we may amend from time to time. We have filed the SAI with the SEC and have
incorporated it by reference into this prospectus.
For a free copy of the SAI or a larger print version of this prospectus, contact
your investment representative or call 1-800/DIAL BEN.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES
OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES DESCRIBED HEREIN IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
PAGE
TEMPLETON CAPITAL ACCUMULATOR FUND, INC.
January 1, 1999
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our glossary section.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary........................................................[P-3]
Financial Highlights...................................................[P-4]
How Does the Fund Invest Its Assets?...................................[P-5]
What Are the Risks of Investing in the Fund?...........................[P-7]
Who Manages the Fund?..................................................[P-9]
How Does the Fund Measure Performance?.................................[P-10]
How Taxation Affects the Fund and Its Shareholders.....................[P-10]
How Is the Fund Organized?.............................................[P-13]
ABOUT YOUR ACCOUNT
How Do I Buy Shares?...................................................[P-13]
May I Exchange Shares for Shares of Another Fund?......................[P-13]
How Do I Sell Shares?..................................................[P-14]
What Distributions Might I Receive From the Fund?......................[P-15]
Transaction Procedures and Special Requirements........................[P-16]
Services to Help You Manage Your Account...............................[P-19]
What If I Have Questions About My Account?.............................[P-20]
GLOSSARY
Useful Terms and Definitions...........................................[P-21]
100 Fountain Parkway
P.O. Box 33030
St. Petersburg
FL 33733-8030
1-800/DIAL BEN(R)
PAGE
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
fund. It is based on the fund's historical expenses for the fiscal year ended
August 31, 1998. The fund's actual expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases None
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS)
Management Fees [0.75]%
Other Expenses [0.38]%
Total fund Operating Expenses [1.13]%
C. EXAMPLE
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Assume the fund's annual return is 5% and its operating $[] $[] $[] $[]
expenses are as described above, and you sell your
shares after the number of years shown. These are the
projected expenses for each $1,000 that you invest in
the fund.
</TABLE>
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends and are not directly charged to your account.
The expense summary shows only the expenses of the fund. You will be charged a
separate sales charge to compensate Distributors for creating the Plans and to
pay selling expenses and commissions to Securities Dealers. We deduct this
charge from each monthly investment that you make. The charge will vary
according to the size of your monthly investment. For example, on a $100 per
month Plan, $50 is deducted from each of the first 12 monthly investments. After
that, the charge drops to $6.07 on each subsequent monthly investment. For
details concerning sales charges, see the accompanying prospectus for the Plans.
PAGE
FINANCIAL HIGHLIGHTS
This table summarizes the fund's financial history. The information has been
audited by [ ], the fund's independent auditors. Their audit
report covering each of the most recent five years appears in the financial
statement in the fund's Annual Report to Shareholders for the fiscal year ended
August 31, 1998. The Annual Report to Shareholders also includes more
information about the fund's performance. For a free copy, please call Fund
Information.
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE(2) YEAR ENDED AUGUST 31
--------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE 1998 1997 1996 1995 1994 1993 1992
YEAR)
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------- ------------ ----------- ------------ ----------- ---------- ----------- ----------
Net asset value, beginning of year...... $ 9.08 $ 7.97 $ 8.10 $ 6.87 $ 5.48 $ 5.21
- ------------------------------------------- ------------ ----------- ------------ ----------- ---------- ----------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................... .18 .19 .14 .09 .10 .08
Net realized and unrealized gains....... 2.03 1.10 .12 1.30 1.44 .28
---------- ---------- --------- --------- --------- --------
TOTAL FROM INVESTMENT OPERATIONS........ 2.21 1.29 .26 1.39 1.54 .36
---------- ---------- --------- --------- --------- --------
LESS DISTRIBUTIONS
Dividends from net investment income.... (.18) (.15) (.10) (.07) (.10) (.09)
Distributions from net realized gains... (.14) (.03) (.29) (.09) (.05) --
----------- ----------- ---------- ---------- ---------- --------
TOTAL DISTRIBUTIONS..................... (.32) (.18) (.39) (.16) (.15) (.09)
- ------------------------------------------- ------------ ----------- ------------ ----------- ---------- ----------- ----------
Net asset value, end of year............ $ 10.97 $ 9.08 $ 7.97 $ 8.10 $ 6.87 $ 5.48
- ------------------------------------------- ------------ ----------- ------------ ----------- ---------- ----------- ----------
TOTAL RETURN(3)......................... 25.06% 16.50% 3.40% 20.64% 29.11% 7.01%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000)........... $ 172,683 $ 108,019 $ 65,538 $ 38,323 $ 18,365 $ 8,690
RATIOS TO AVERAGE NET ASSETS
Expenses................................ 1.13% 1.16% 1.34% 1.58% 1.91% 1.84%
Expenses, net of reimbursement.......... 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Net investment income................... 2.00% 2.56% 2.37% 1.58% 1.99% 2.06%
Portfolio turnover rate................. 7.43% 11.08% 12.91% 15.25% 14.97% 16.42%
Average commission rate paid(5)......... $ .0110 $ .0210 -- -- -- --
- ------------------------------------------- ------------ ----------- ------------ ----------- ---------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE(2) YEAR ENDED AUGUST 31
--------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE 1991(1)
YEAR)
<S> <C>
- ------------------------------------------- ------------
Net asset value, beginning of year...... $ 5.00
- ------------------------------------------- ------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................... .07
Net realized and unrealized gains....... .14
-----------
TOTAL FROM INVESTMENT OPERATIONS........ .21
-----------
LESS DISTRIBUTIONS
Dividends from net investment income.... --
Distributions from net realized gains... --
-----------
TOTAL DISTRIBUTIONS..................... --
- ------------------------------------------- ------------
Net asset value, end of year............ $ 5.21
- ------------------------------------------- ------------
TOTAL RETURN(3)......................... 4.20%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000)........... $ 3,635
RATIOS TO AVERAGE NET ASSETS
Expenses................................ 3.99%(4)
Expenses, net of reimbursement.......... 1.00%(4)
Net investment income................... 3.80%(4)
Portfolio turnover rate................. --
Average commission rate paid(5)......... --
- ------------------------------------------- ------------
</TABLE>
1. For the period from March 1, 1991 (commencement of operations) to August 31,
1991.
2. Per share amounts for all periods to August 31, 1996 have been restated to
reflect a 2 for 1 stock split effective March 27, 1996.
3. Not annualized for periods of less than one year. Does not reflect the Plan's
sales charges.
4. Annualized.
5. Relates to purchases and sales of equity securities. Prior to fiscal year end
1996, disclosure of average commission rate was not required.
PAGE
HOW DOES THE FUND INVEST ITS ASSETS?
WHAT IS THE FUND'S GOAL?
The investment goal of the fund is long-term capital appreciation. This goal is
fundamental, which means that it may not be changed without shareholder
approval.
WHAT IS THE FUND'S INVESTMENT STRATEGY?
The fund tries to achieve its investment goal through a flexible policy of
investing in equity securities and debt obligations of companies and governments
of any nation.
WHAT KINDS OF SECURITIES DOES THE FUND BUY?
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. Equity securities include common stock, preferred
stock, convertible securities, warrants or rights. The fund's primary
investments are in common stock.
In selecting equity securities, Investment Counsel does a company-by-company
analysis, rather than focusing on a specific industry or economic sector.
Investment Counsel concentrates primarily on the market price of a company's
securities relative to its view regarding the company's long-term earnings
potential. A company's historical value measures, including price/earnings
ratios, profit margins and liquidation value, also will be considered.
DEBT SECURITIES represent an obligation of the issuer to repay a loan of money
to it, and generally provides for the payment of interest. These include bonds,
notes and debentures, commercial paper, time deposits, bankers' acceptances, and
structured investments, all of which are described more fully in the SAI.
The fund may buy both rated and unrated debt securities. Independent rating
organizations rate debt securities based upon their assessment of the financial
soundness of the issuer. Generally, a lower rating indicates higher risk. At
present, the fund does not intend to invest more than 5% percent of its assets
in debt securities rated less than Baa by Moody's or less than BBB by S&P or to
invest in any debt securities rated less than Caa by Moody's or less than CCC by
S&P. Please see the SAI for more details on the risks associated with
lower-rated securities.
DEPOSITARY RECEIPTS. The fund may invest in American, European and Global
Depositary Receipts. Depositary Receipts are certificates typically issued by a
bank or trust company that give their holders the right to receive securities
issued by a foreign or domestic corporation.
GENERAL. The fund may invest no more than 5% of its total assets in securities
of any one company or government. The fund may invest an unlimited amount in
U.S. government securities. Although the fund may invest up to 25% of its assets
in a single industry, it has no present intention of doing so. The fund may
invest up to 5% of its assets in warrants (excluding warrants acquired in units
or attached to securities). The fund may invest up to 15% of its total assets in
foreign securities that are not listed on a recognized U.S. or foreign
securities exchange. Please refer to the SAI for more information on the types
of securities in which the fund invests.
WHAT ARE SOME OF THE FUND'S OTHER INVESTMENT STRATEGIES AND PRACTICES?
TEMPORARY INVESTMENTS. When Investment Counsel believes that the securities
trading markets or the economy are experiencing excessive volatility or a
prolonged general decline, it may invest the fund's portfolio in a temporary
defensive manner.
Under these circumstances, the fund may invest up to 100% of its assets in
money market securities, denominated in the currency of any nation. These may
include:
PAGE
/bullet/ short-term (maturity of less than 12 months) and medium-term (maturity
up to 5 years) obligations issued or guaranteed by the U.S. or a
foreign government, their agencies or instrumentalities;
/bullet/ finance company and corporate commercial paper, and other short-term
corporate obligations, rated Prime-1 by Moody's or A or better by S&P
or, if unrated, determined to be of comparable quality;
/bullet/ repurchase agreements with U.S. banks and broker-dealers with respect
to Canadian or U.S. government securities;
/bullet/ obligations (including certificates of deposit, time deposits and
bankers' acceptances) of U.S. and foreign banks; provided that the
fund will limit its investment in these obligations to 25% of its
total assets and will limit its investment in time deposits for which
there is a penalty for early withdrawal to 10% of its total assets.
If the fund adopts a temporary defensive position, the investment practices
described above may not be consistent with the fund's stated investment
objectives.
REPURCHASE AGREEMENTS. For temporary defensive purposes and for cash managment
purposes, the fund may enter into repurchase agreements with U.S. banks and
registered broker dealers. Under a repurchase agreement, the fund agrees to buy
a security from one of these entities then to sell the security back after a
short period of time (generally, less than seven days) at a higher price. The
bank or boker dealer must transfer to the fund's cusotidan securities equal to
102% of the dollar amount invested by the fund in each repurchase agreement.
OPTIONS ON SECURITIES INDICES. The fund may buy and sell options on securities
indices. An option on a securities index is a contract that allows the buyer of
the option the right to receive cash from the seller, in an amount equal to the
difference between the index's closing price and the option's exercise price.
The fund may not commit more than 5% of its total assets to premiums to buy
options on securities indices.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. To help protect its portfolio against
adverse changes in currency exchange rates, the fund may enter into forward
foreign currency contracts, which are agreements to buy or sell a specific
currency at a set price on a future date (generally within one year). The fund
may not commit more than 20% of its total assets to these contracts. The fund
also may buy and sell put and call options on foreign currencies.
FUTURES CONTRACTS. Changes in interest rates, securities prices or foreign
currency valuations may affect the value of the fund's investments. To reduce
its exposure to these factors, the fund may buy and sell stock index futures
contracts, foreign currency futures contracts and options on any of these
contracts. A stock index futures contract is an agreement to take or make
delivery of an amount of cash based on the difference between the value of the
index at the beginning and end of the contract period. A futures contract on a
foreign currency is an agreement to buy or sell a specific amount of a currency
for a set price on a future date. The fund may not commit more than 5% of its
total assets to initial margin deposits on futures contracts and related
options.
PAGE
SECURITIES LENDING. The fund may lend its portfolio securities to banks and
broker-dealers. Such loans may not exceed 33 1/3 % of the value of the fund's
total assets measured at the time of the most recent loan. For each loan, the
fund must receive collateral with a value at least equal to 100% of the current
market value of the loaned securities. The fund may terminate the loans at any
time and obtain the return of the securities loaned within five business days.
The fund will receive any interest or dividends paid on the loaned securities
and will keep the voting rights on the loaned securities.
SHORT TERM TRADING AND PORTFOLIO TURNOVER. The fund invests for long-term
appreciation of capital and does not intend to emphasize short-term trading
profits. It is anticipated, therefore, that the fund's annual portfolio turnover
rate generally will be below 50%; although this rate may be higher or lower, in
relation to market conditions. A portfolio turnover rate of less than 50% means
that in a one year period, less than one-half of the fund's portfolio has
changed.
ILLIQUID INVESTMENTS. The fund will not invest more than 10% of its net assets
in illiquid securities. Illiquid securities generally are securities that cannot
be sold within seven days in the normal course of business at approximately the
amount at which the fund has valued them.
OTHER POLICIES AND RESTRICTIONS. The fund has a number of additional investment
policies and restrictions that govern its activities. Those that are identified
as "fundamental" only may be changed with shareholder approval. The others may
be changed by the Board alone. For a list of these restrictions and more
information about the fund's investment policies, including those described
above, please see "How Does the Fund Invest Its Assets?" and "Investment
Restrictions" in the SAI.
Generally, the policies and restrictions discussed in this prospectus and in the
SAI apply when the fund makes an investment. In most cases, the fund is not
required to sell a security because circumstances change and the investment no
longer meets one or more of the fund's policies or restrictions.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
GENERAL RISK. There is no assurance that the fund's investment goal will be met.
The fund will seek to spread investment risk by diversifying its investments but
the possibility of losses remains. Generally, if the securities owned by the
fund increase in value, the value of the shares of the fund which you own will
increase. Similarly, if the securities owned by the fund decrease in value, the
value of your shares also will decline. In this way, you participate in any
change in the value of the securities owned by the fund.
FOREIGN SECURITIES RISK. The fund may invest up to 100% of its total assets in
any foreign country, developed or undeveloped. The value of foreign (and U.S.)
securities is affected by general economic conditions and individual company and
industry earnings prospects. While foreign securities may offer significant
opportunities for gain, they also involve additional risks that can increase the
potential for losses in the fund. These risks can be significantly greater for
investments in emerging markets. Investments in Depositary Receipts also involve
some or all of the risks described below.
The political, economic and social structures of some countries in which the
fund invests may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of exchange
controls, expropriation, restrictions on removal of currency or other assets,
nationalization of assets, and punitive taxes.
There may be less publicly available information about a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they may not have uniform accounting,
auditing and financial reporting standards and may have less government
supervision of financial markets. Foreign securities markets may have
substantially lower trading volumes than U.S. markets, resulting in less
PAGE
liquidity and more volatility than in the U.S. Transaction costs on foreign
securities markets are generally higher than in the U.S. The settlement
practices may be cumbersome and result in delays that may affect portfolio
liquidity. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with respect
to foreign investments in foreign courts than with respect to domestic issuers
in U.S. courts.
Some of the countries in which the fund may invest, such as Russia and certain
Asian and Eastern European countries, are considered developing or emerging
markets. Investments in these markets are subject to all of the risks of foreign
investing generally, and have additional and heightened risks due to a lack of
legal, business and social frameworks to support securities markets.
EMERGING MARKETS involve additional significant risks, including political and
social uncertainty (for example, regional conflicts and risk of war), currency
exchange rate volatility, pervasiveness of corruption and crime, delays in
settling portfolio transactions, and risk of loss arising out of the system of
share registration and custody.
The fund may invest up to 100% of its total assets in emerging markets,
including up to 5% of its total assets in Russian securities. For more
information on the risks associated with emerging markets securities, please see
the SAI.
MARKET, CURRENCY, AND INTEREST RATE RISK. General market movements in any
country where the fund has investments are likely to affect the value of the
securities that the fund owns in that country and the fund's share price may
also be affected. The fund's investments may be denominated in foreign
currencies so that changes in foreign currency exchange rates will also affect
the value of what the fund owns, and thus the price of its shares. To the extent
the fund invests in debt securities, changes in interest rates in any country
where the fund is invested will affect the value of the fund's portfolio and,
consequently, its share price. Rising interest rates, which often occur during
times of inflation or a growing economy, are likely to cause the value of a debt
security to decrease, decreasing the value of the fund's shares. Of course,
individual and worldwide stock markets, interest rates and currency valuations
have both increased and decreased, sometimes very dramatically, in the past.
These changes are likely to occur again in the future at unpredictable times.
CREDIT AND ISSUER RISK. The fund's investments in debt securities involve credit
risk. This is the risk that the issuer of a debt security will be unable to make
principal and interest payments in a timely manner and the debt security will go
into default. The fund is authorized to invest in medium quality or high risk,
lower quality debt securities that are rated between BBB and CCC by S&P and
between Baa and Caa by Moody's, or, if unrated, are of equivalent investment
quality as determined by Investment Counsel.
DERIVATIVE SECURITIES RISK. Derivative investments are those whose values are
dependent upon the performance of one or more other securities or investments or
indices; in contrast to common stock, for example, whose value is more dependent
upon the operations of the issuer. Option transactions, foreign currency
exchange transactions and futures contracts are considered derivative
investments. To the extent the fund enters into these transactions, their
success will depend upon Investment Counsel's ability to predict pertinent
market movements. These securities are subject to the risk that the other party
to the transaction may fail to perform, resulting in losses to the fund.
EURO. On January 1, 1999, the European Monetary Union (EMU) plans to introduce a
new single currency, the Euro, which will replace the national currency for
participating member countries. If the fund holds investments in countries with
currencies replaced by the Euro, the investment process, including trading,
foreign exchange, payments, settlements, cash accounts, custody and accounting
will be impacted.
The process to established the Euro may result in market volatility. It is not
possible to predict the impact of the Euro on the business or financial
condition of European issuers or on the fund. The transition and the elimination
of currency risk among EMU countries may change the economic environment and
behavior of investor, particularly in European markets. To the extent the fund
holds non-U.S. dollar (Euro or other) denominated securities, it will still be
exposed to currency risk due to fluctuations in those currencies versus the U.S.
dollar.
Resources has created an interdepartmental team to handle all Euro-related
changes to enable the Franklin Templeton Funds to process transactions
accurately and completely with minimal disruption to business activities. While
there can be no assurance that the fund will not be adversely affected, the
manager and its affiliated service providers are taking steps that they believe
are reasonably designed to address the Euro issue.
YEAR 2000. In evaluating current and potential portfolio positions, Year 2000 is
only one of the factors that Investment Counsel takes into consideration. It
will rely upon public filings and other statements made by companies regarding
their Year 2000 readiness. Issuers in countries outside of the U.S., and in
particular in emerging markets, may not be required to make the same level of
disclosure regarding Year 2000 readiness that is required in the U.S. Investment
Counsel, of course, cannot audit each company and its major suppliers to verify
their Year 2000 readiness. If a company the fund is invested in is adversely
affected by Year 2000 problems, it is likely that the price of its security will
also be adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the price of the fund's shares.
Please see "Year 2000 Problem" on page [ ] for more information.
PAGE
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the fund and elects its
officers. The officers are responsible for the fund's day-to-day operations.
INVESTMENT MANAGER. Investment Counsel manages the fund's assets and makes its
investment decisions. Investment Counsel also performs similar services for
other funds. It is wholly owned by Resources, a publicly owned company engaged
in the financial services industry through its subsidiaries. Charles B. Johnson
and Rupert H. Johnson, Jr. are the principal shareholders of Resources.
Together, Investment Counsel and its affiliates manage over $207 billion in
assets. The Templeton organization has been investing globally since 1940.
Investment Counsel and its affiliates have offices in Argentina, Australia,
Bahamas, Bermuda, Brazil, the British Virgin Island, Canada, China, Cyprus,
France, Germany, Hong Kong, India, Italy, Japan, Korea, Luxembourg, Mauritius,
the Netherlands, Poland, Russia, Singapore, South Africa, Switzerland, Taiwan,
United Kingdom, U.S., and Vietnam. Please see "Investment Management and Other
Services" and "Miscellaneous Information" in the SAI for information on
securities transactions and a summary of the fund's Code of Ethics.
PORTFOLIO MANAGEMENT. The fund's lead portfolio manager since 1993 is Gary P.
Motyl. Mr. Motyl is an executive vice president of Investment Counsel. He holds
a BS degree in finance from Lehigh University and an MBA in finance from Pace
University. Mr. Motyl is a Chartered Financial Analyst. Prior to joining
Templeton in 1981, Mr. Motyl worked from 1974 to 1979 as a security analyst with
Standard & Poor's Corporation and as a research analyst and portfolio manager
from 1979 to 1981 with Landmark First National Bank. While at Landmark, Mr.
Motyl had responsibility for equity research and managed several pension and
profit sharing plans. His research responsibilities with Templeton include the
global automobile industry, U.S. utilities and country coverage of Germany.
Mark R. Beveridge and Gary R. Clemons have secondary portfolio management
responsibilities for the fund. Mr. Beveridge is a senior vice president of
Investment Counsel. He holds a B.B.A. in finance from the University of Miami.
He is a Chartered Financial Analyst and a Chartered Investment Counselor, and a
member of the South Florida Society of Financial Analysts and the International
Society of Financial Analysts. Before joining the Templeton organization in 1985
as a securities analyst, Mr. Beveridge was a principal with a financial
accounting software firm based in Miami, Florida. He is currently a portfolio
manager and research analyst with responsibility for non-life insurance and
industrial components industries. He also has country coverage of Argentina. Mr.
Clemons is a senior vice president of Investment Counsel. He holds a BS from the
University of Nevada -- Reno and an MBA from the University of Wisconsin --
Madison. He joined Investment Counsel in 1993. Prior to that time he was a
research analyst at Templeton Quantitative Advisors, Inc. in New York, where he
was also responsible for management of a small capitalization fund. As a
portfolio manager and research analyst with Templeton, Mr. Clemons has
responsibility for the telecommunications industry and country coverage of
Columbia, Norway, Peru and Sweden.
MANAGEMENT FEES. During the fiscal year ended August 31, 1998, management fees
totaled [ ]% of the fund's average daily net assets. Total expenses, including
fees paid to Investment Counsel, were [ ]%.
PORTFOLIO TRANSACTIONS. Investment Counsel tries to obtain the best execution on
all transactions. If Investment Counsel believes more than one broker or dealer
can provide the best execution, it may consider research and related services
and the sale of Plans (and therefore, indirectly, the sale of fund shares), as
well as shares of other funds in the Franklin Templeton Group of Funds, when
selecting a broker or dealer. Please see "How Does the Fund Buy Securities For
Its Portfolio?" in the SAI for more information.
ADMINISTRATIVE SERVICES. FT Services provides certain administrative
services and facilities for the fund. During the fiscal year ended August 31,
1998, administration fees totaling []% of the average daily net assets of the
fund were paid to FT Services. These fees are included in the amount of total
expenses shown above. Please see "Investment Management and Other Services" in
the SAI for more information.
YEAR 2000 PROBLEM. The fund's business operations depend upon a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the date,
and unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly referred to as the Year
2000 problem). In addition, the fact that the Year 2000 is a non-standard leap
year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected if
the computer systems used by Investment Counsel, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including securities
trade processing, interest and dividend payments, securities pricing,
shareholder account services, reporting, custody functions and others. The fund
could experience difficulties in effecting transactions if any of its foreign
subcustodians, or if foreign broker/dealers or foreign markets are not ready for
Year 2000.
Investment Counsel and its affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their Year
2000 problems. Of course, the fund's ability to reduce the effects of the Year
2000 problem is also very much dependent upon the efforts of third parties over
which the fund and Investment Counsel may have no control.
PAGE
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, the fund advertises its performance. A commonly used measure
of performance is total return. Performance figures may not include sales
charges associated with the purchase of the fund through the Plans. Of course,
total return quotations would be lower if sales charges were taken into account.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested.
The fund's investment results will vary. Performance figures are always based on
past performance and do not guarantee future results. For a more detailed
description of how the fund calculates its performance figures, please see "How
Does the Fund Measure Performance?" in the SAI.
DISTRIBUTIONS AND TAXES
INCOME AND CAPTIAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least annually representing substantially all of its net investment income and
any net realized capital gains. The amount of this dividend will vary and there
is no guarantee the fund will pay dividends.
To receive an income dividends, you must be a shareholder on the record date.
The record date for the fund's dividend will vary. You may not want to invest a
large amount in the fund shortly before the record date since you will receive
some of your investment back as a taxable distribution.
TAX CONSIDERATIONS In general, fund distributions are taxable as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional shares of the fund or receive them in cash. Any
capital gains the fund distributes are taxable to you as long-term capital
gains no matter how long you have owned your shares.
- -------------------------------------------------------------------------------
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the IRS instructs the fund to do so.
- -------------------------------------------------------------------------------
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares, you may have a capital gain or loss. For tax
purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The tax rate on any gain from the sale or
exchange of your shares depends on how long you have held your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax.
Non-U.S. investors may be subject to U.S. withholding and estate tax. You should
consult your tax professional about federal, state, local or foreign tax
consequences.
For more information, please call 1-800/DIAL BEN to request a free copy of the
Franklin Templeton Tax Information Handbook.
HOW IS THE FUND ORGANIZED?
The fund is a diversified, open-end management investment company, commonly
called a mutual fund. It was organized as a Maryland corporation on October 26,
1990, and is registered with the SEC. The fund sells its shares only through
Templeton Capital Accumulation Plans, a unit investment trust. Each share of the
fund has one vote. All shares have equal voting, participation and liquidation
rights. Shares of the fund are considered Class I shares for redemption,
exchange and other purposes. In the future, the fund may offer additional
classes of shares.
The fund has noncumulative voting rights. This gives holders of more than 50% of
the shares voting the ability to elect all of the members of the Board. If this
happens, holders of the remaining shares voting will not be able to elect anyone
to the Board.
The fund does not intend to hold annual shareholder meetings. It may hold
special meetings, however, for matters requiring shareholder approval. A meeting
may also be called by the Board in its discretion or for the purpose of
considering the removal of a Board member if requested in writing to do so by
shareholders holding at least 10% of the outstanding shares. In certain
circumstances, we are required to help you communicate with other shareholders
about the removal of a Board member.
PAGE
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
You may purchase shares of the fund only by investing in the Plans. Details of
the Plans, including the terms of the offering, are in the attached Plan
prospectus. Except where Planholders have received fund shares in a Plan
liquidation or partial withdrawal from a Plan we do not expect that any person,
other than the Plan custodian will directly hold any fund shares.
No Securities Dealer, salesman, or other person is authorized to give any
information or to make any representations, other than those contained in this
prospectus and in the SAI, in connection with the offer contained in this
prospectus, and, if given or made, such other information or representations
must not be relied upon as having been authorized by the fund, Investment
Counsel, or Distributors.
Except for the fact that the fund's shares are available only through the Plans,
the fund does not represent an investment concept that is new or different from
other investment companies for which Investment Counsel or its affiliates acts
as an investment manager. The fund's investment goal of long-term capital growth
is similar to the objective of certain other Franklin Templeton Funds.
Investors wishing information on any of these funds may contact Shareholder
Services at 1-800/632-2301.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you liquidate a Plan or withdraw Plan
shares, you can move your investment to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Please refer to the attached Plans
prospectus, including "How Do I Terminate My Plan" for further information on
termination of a Plan. Because it is technically a sale and a purchase of
shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment goal and
policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums. No exchanges into the fund from other Franklin Templeton
Funds will be accepted.
METHOD STEPS TO FOLLOW
- --------------------- ---------------------------------------------------------
BY MAIL 1. Send TFTC signed written instructions
2. Include any outstanding share certificates
for the shares you want to exchange
BY PHONE Call Shareholder Services or TeleFACTS(R)
(If you do not want the ability to exchange by phone
to apply to your account, please let us know.)
THROUGH
YOUR DEALER Call your investment representative
- --------------------- ---------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
In general, no sales charge applies, and in the case of an exchange into a
Franklin Templeton Fund that offers two classes of shares, a shareholder would
receive Class I shares, which generally bear lower Rule 12b-1 distribution fees
than Class II shares of the same fund.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
/bullet/ You must meet the applicable minimum investment amount of the
fund you are exchanging into, or exchange 100% of your fund shares.
/bullet/ You may only exchange shares within the same class, except as noted
below.
/bullet/ The accounts must be identically registered. You may, however,
exchange shares from a fund account requiring two or more signatures
into an identically registered money fund account requiring only one
signature for all transactions. PLEASE NOTIFY US IN WRITING IF YOU DO
NOT WANT THIS OPTION TO BE AVAILABLE ON YOUR ACCOUNT. Additional
procedures may apply. Please see "Transaction Procedures and Special
Requirements."
/bullet/ Trust Company IRA or 403(b) retirement plan accounts may exchange
shares as described above. Restrictions may apply to other types of
retirement plans. Please contact Retirement Plan Services for
information on exchanges within these plans.
/bullet/ The fund you are exchanging into must be eligible for sale in your
state.
/bullet/ We may modify or discontinue our exchange policy if we give you 60
days' written notice.
PAGE
Because excessive trading can hurt fund performance, operations and
shareholders, we may refuse any exchange purchase if i) we believe the fund
would be harmed or unable to invest effectively, or ii) the fund receives or
anticipates simultaneous orders that may significantly affect the fund.
HOW DO I SELL SHARES?
If you liquidate your Plan or withdraw Plan shares, you may redeem (sell) the
fund shares that you receive at any time.
METHOD STEPS TO FOLLOW
- --------------------- -------------------------------------------------------
BY MAIL 1. Send TFTC signed written instructions. If
you would like your redemption proceeds wired
to a bank account, your instructions should
include:
/bullet/ The name, address and telephone number
of the bank where you want the proceeds
sent
/bullet/ Your bank account number
/bullet/ The Federal Reserve ABA routing number
/bullet/ If you are using a savings and loan or
credit union, the name of the
corresponding bank and the account
number
2. Include any outstanding share certificates for
the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may
need to send additional documents. Accounts
under court jurisdiction may have additional
requirements.
BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other
than an escrow account, you must first sign up for
the wire feature. To sign up, send us written
instructions, with a signature guarantee. To avoid
any delay in processing, the instruction should
include the items listed in "By Mail" above.
Telephone requests will be accepted:
/bullet/ If the request is up to $100,000 or
less.
/bullet/ If there are no share certificates
issued for the shares you want to sell
or you have already returned them to
the fund.
/bullet/ Unless you are selling shares in a
Trust Company retirement plan account.
/bullet/ Unless the address on your account was
changed by phone within in the last 15
days.
(If you do not want the ability to redeem by phone to
apply to your account, please let us know.)
- ------------------------ -----------------------------------------------------
THROUGH
YOUR DEALER Call your investment representative
- ------------------------ -----------------------------------------------------
PAGE
We will send your redemption check within 7 days after we receive your request
in proper form. If you would like the check sent to an address other than the
address of record or made payable to someone other than the registered owners on
the account, send us written instructions signed by all account owners, with a
signature guarantee. We are not able to receive or pay out cash in the form of
currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 4:00 p.m. Eastern time, your wire payment will be
sent the next business day. For requests received in proper form after 4:00 p.m.
Eastern time, the payment will be sent the second business day. By offering this
service to you, the fund is not bound to meet any redemption request in less
than the 7 day period prescribed by law. Neither the fund nor its agents shall
be liable to you or any other person if, for any reason, a redemption requests
by wire is not processed as described in this section.
If you sell shares you recently purchased in the Plan with a check or draft, we
may delay sending you the proceeds until your check or draft has cleared, which
may take 7 business days or more. A certified or cashier's check may clear
in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than 7 days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
Dividend and capital gain distributions (if any) are usually paid in October and
(if necessary) in December representing all or substantially all of the fund's
net investment income and any net realized capital gains.
Income dividends and capital gain distributions paid by the fund, pursuant to
the terms of the Plans, are automatically reinvested on the payment date in
whole or fractional shares of the fund at net asset value as of the ex-dividend
date. The processing date for the reinvestment of dividends may vary from time
to time, and does not affect the amount or value of the shares acquired. If you
elect, you may receive distributions in cash so long as the account is not a
Trust Company retirement plan account. If you have the money sent to another
person or to a checking or savings account, you may need a signature guarantee.
If you send the money to a checking or savings account, please see "Electronic
Fund Transfers" under "Services to Help you Manage Your Account."
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. The fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
You may purchase fund shares only by purchasing shares in a Plan. The Offering
Price of the Plan shares is based on the fund's Net Asset Value per share, and
includes the maximum sales charge. We calculate it to two decimal places using
standard rounding criteria. You sell shares at Net Asset Value.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
PAGE
HOW AND WHEN SHARES ARE PRICED
The fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the scheduled close of the NYSE, normally 4:00 p.m.
Eastern time. You can find the prior day's closing Net Asset Value in many
newspapers.
To calculate Net Asset Value per share, the fund's assets are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares outstanding. The fund's assets are valued as
described under "How are Fund Shares Valued?" in the SAI.
If you liquidate your Plan or withdraw shares from your Plan Account, you may
hold fund shares directly. The following procedures and requirements apply to
all fund shares held directly.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
/bullet/ Your name,
/bullet/ The fund's name,
/bullet/ A description of the request,
/bullet/ For exchanges, the name of the fund you are exchanging into,
/bullet/ Your account number,
/bullet/ The dollar amount or number of shares, and
/bullet/ A telephone number where we may reach you during the day, or
in the evening if preferred.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of transactions
or account changes. These include transactions or account changes that you could
also make by phone, such as certain redemptions of $50,000 or less, exchanges
between identically registered accounts, and changes to the address of record.
For most other types of transactions or changes, written instructions must be
signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed by
all registered owners on the account.
PAGE
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $100,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential
claims based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency or securities exchange or association. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account by phone. Please
refer to the sections of this prospectus that discuss the transaction you would
like to make or call Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that your instructions are genuine. We may also record calls. If our
lines are busy or you are otherwise unable to reach us by phone, you may wish to
ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we are
not reasonably satisfied that the instructions are genuine. If this occurs, we
will not be liable for any loss. We also will not be liable for any loss if we
follow instructions by phone that we reasonably believe are genuine or if you
are unable to execute a transaction by phone.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
PAGE
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, we cannot accept instructions to change owners on the account unless ALL
owners agree in writing, even if the law in your state says otherwise. If you
would like another person or owner to sign for you, please send us a current
power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/ Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account. Since shares in the fund can only be acquired by transferring shares
from a Plan, a transfer letter of instructions is required in addition to the
following documents:
- -------------------- ----------------------------------------------------------
TYPE OF DOCUMENTS REQUIRED
ACCOUNT
- -------------------- ----------------------------------------------------------
CORPORATION Corporate Resolution
- -------------------- ----------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify
the general partners, or
2. A certification for a partnership agreement
- -------------------- ----------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- -------------------- ----------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the fund. Telephone instructions
directly from your representative will be accepted unless you have told us that
you do not want telephone privileges to apply to your account.
PAGE
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $250, or less than $50 for
employee accounts and custodian accounts for minors. We will only do this if the
value of your account fell below this amount because you voluntarily sold your
shares and your account has been inactive(except for the reinvestment of
distribution) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $1,000,
or $100 for employee accounts and custodian accounts for minors. These minimums
do not apply to IRAs and other retirement plan accounts or to accounts managed
by the Franklin Templeton Group.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
SYSTEMATIC WITHDRAWAL PROGRAM
Our Systematic Withdrawal Program allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
You may choose to direct your payments to buy shares of another Franklin
Templeton Fund or have the money sent directly to you, to another person, or to
a checking or savings account. Once your plan is established, any distributions
paid by the fund will be automatically reinvested in your account. If you choose
to have the money sent to a checking or savings account, please see "Electronic
Fund Transfer" below. Once your plan is established, any distributions paid by
the fund will be automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
You may discontinue a Systematic Withdrawal Program, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us in
writing at least 7 business days before the end of the month preceding a
scheduled payment. Please see "How Do I Buy, Sell and Exchange Shares? --
Systematic Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFER
You may choose to have dividend and capital gain distributions or payments under
a Systematic Withdrawal Program sent directly to a checking or saving account.
If the account is with a bank that is a member of the Automated Clearing House,
the payments may be made automatically by electronic funds transfer. If you
choose this option, please allow at least 15 days for initial processing. We
will send any payments made during that time to the address of record on your
account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
/bullet/ obtain information about your account;
/bullet/ obtain price and performance information about any Franklin
Templeton Fund;
/bullet/ exchange shares between identically registered Franklin accounts;
and
/bullet/ request duplicate statements and deposit slips for Franklin
accounts.
You will need the fund's code number to use TeleFACTS(R). The code number is
450.
PAGE
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
/bullet/ Confirmation and account statements reflecting transactions in
your account, including transfers from your Plan account and
dividend reinvestments. PLEASE VERIFY THE ACCURACY OF YOUR
STATEMENTS WHEN YOU RECEIVE THEM.
/bullet/ Financial reports of the fund will be sent every 6 months. To
reduce fund expenses, we attempt to identify related shareholders
within a household and send only one copy of a report. Call Fund
Information if you would like an additional free copy of the
fund's financial reports.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor
Services, 100 Fountain Parkway, P.O. Box 33030, St. Petersburg, Florida
33733-8030. The fund and Distributors are also located at this address.
Investment Counsel is located at 500 East Broward Boulevard, Fort Lauderdale,
Florida 33394-3091. You may also contact us by phone at one of the numbers
listed below.
- --------------------------- ------------------- ----------------------
DEPARTMENT TELEPHONE HOURS OF OPERATION
EASTERN TIME
(MONDAY THROUGH
- --------------------------- ------------------- -----------------------
Shareholder Services 1-800/632-2301 8:30 a.m. to 8:00 p.m.
Dealer Services 1-800/524-4040 8:30 a.m. to 8:00 p.m.
Fund Information 1-800/DIAL BEN 8:30 a.m. to 11:00 p.m.
(1-800/342-5236) 9:30 a.m. to 5:30 p.m.
(Saturday)
Retirement Plan Services 1-800/527-2020 8:30 a.m. to 8:00 p.m.
TDD (hearing impaired) 1-800/851-063 8:30 a.m. to 8:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
PAGE
GLOSSARY
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
CLASS I AND CLASS II - certain funds in the Franklin Templeton Funds offer
multiple classes of shares. The different 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. The fund's shares 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 and sponsor of Templeton Capital Accumulation Plans. The SAI lists
the officers and Board members who are affiliated with Distributors. See
"Officers and Directors."
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except for Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc. and Templeton Variable Products
Series Fund
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 Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the fund's administrator
INVESTMENT COUNSEL - Templeton Investment Counsel, Inc., the fund's investment
manager
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.
PAGE
NET ASSET VALUE (NAV) - The value of a mutual fund is 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.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on 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.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
PAGE
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, 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.
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TFTC - Templeton Funds Trust Company, the custodian for the Plans as described
in the Plan prospectus
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
PAGE
FRANKLIN TEMPLETON GROUP OF FUNDS
LITERATURE REQUESTS. CALL 1-800/DIAL BEN(R) (1-800/342-5236) today for a free
descriptive brochure and prospectus on any of the funds listed below. The
prospectus contains more complete information, including fees, charges and
expenses, and should be read carefully before investing or sending money.
GLOBAL GROWTH
Franklin Global Health Care Fund
Mutual Discovery Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller
Companies Fund
Templeton Global
Infrastructure Fund
Templeton Global
Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller
Companies Fund
Templeton Greater European Fund
Templeton Growth Fund
Templeton Latin America Fund
Templeton Pacific Growth Fund
Templeton World Fund
GLOBAL GROWTH AND INCOME
Franklin Global Utilities Fund
Mutual European Fund
Templeton Global Bond Fund
Templeton Growth and Income Fund
GLOBAL INCOME
Franklin Global Government
Income Fund
Franklin Templeton
Global Currency Fund
Franklin Templeton Hard
Currency Fund
Templeton Americas
Government Securities Fund
GROWTH
Franklin Biotechnology
Discovery Fund
Franklin Blue Chip Fund
Franklin California Growth Fund
Franklin DynaTech Fund
Franklin Equity Fund
Franklin Gold Fund
Franklin Growth Fund
Franklin MidCap Growth Fund
Franklin Small Cap Growth Fund
GROWTH AND INCOME
Franklin Asset Allocation Fund
Franklin Balance Sheet
Investment Fund*
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Franklin MicroCap Value Fund*
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Rising Dividends Fund
Franklin Strategic Income Fund
Franklin Utilities Fund
Franklin Value Fund
Mutual Beacon Fund
Mutual Financial Services Fund
Mutual Qualified Fund
Mutual Shares Fund
Templeton American Trust, Inc.*
FUND ALLOCATOR SERIES
Franklin Templeton
Conservative Target Fund
Franklin Templeton
Moderate Target Fund
Franklin Templeton
Growth Target Fund
INCOME
Franklin Adjustable Rate
Securities Fund
Franklin Adjustable U.S.
Government Securities Fund
Franklin's AGE High Income Fund
Franklin Bond Fund
Franklin Floating Rate Trust
Franklin Investment
Grade Income Fund
Franklin Short-Intermediate U.S.
Government Securities Fund
Franklin U.S. Government
Securities Fund
Franklin Money Fund
Franklin Federal Money Fund
FRANKLIN FUNDS SEEKING
TAX-FREE INCOME
Federal Intermediate-Term
Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund
Puerto Rico Tax-Free Income Fund
Tax-Exempt Money Fund
FRANKLIN STATE-SPECIFIC FUNDS SEEKING TAX-FREE INCOME
Alabama
Arizona**
Arkansas***
California**
Colorado
Connecticut
Florida**
Georgia
Hawaii***
Indiana
Kentucky
Louisiana
Maryland
Massachusetts+
Michigan**
Minnesota+
PAGE
Missouri
New Jersey
New York**
North Carolina
Ohio+
Oregon
Pennsylvania
Tennessee***
Texas
Virginia
Washington***
VARIABLE ANNUITIES++
Franklin Valuemark(R)
Franklin Templeton
Valuemark Income Plus
(an immediate annuity)
* These funds are now closed to new accounts, with the exception of retirement
plan accounts.
** Two or more fund options available: long-term portfolio, intermediate-term
portfolio, a portfolio of insured municipal securities, and/or a high yield
portfolio (CA) and a money market portfolio (CA and NY).
*** The fund may invest up to 100% of its assets in bonds that pay interest
subject to the federal alternative minimum tax.
+ Portfolio of insured municipal securities.
++ Franklin Valuemark and Franklin Templeton Valuemark Income Plus are issued by
Allianz Life Insurance Company of North America or by its wholly owned
subsidiary, Preferred Life Insurance Company of New York, and distributed by
NALAC Financial Plans, LLC. The Franklin Valuemark Funds are managed by Franklin
Advisers, Inc. and its Templeton and Franklin affiliates.
PAGE
PART B
STATEMENT OF ADDITIONAL INFORMATION
PAGE
TEMPLETON
CAPITAL ACCUMULATOR
FUND, INC.
STATEMENT OF
ADDITIONAL INFORMATION LOGO
100 FOUNTAIN PARKWAY, P.O. BOX 33030
JANUARY 1, 1999 ST. PETERSBURG, FL 33733-8030 1-800/DIAL BEN (R)
Templeton Capital Accumulator Fund, Inc. (the "fund") is a diversified, open-end
management investment company. The Prospectus, dated December 1, 1998, which we
may amend 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(R).
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.
CONTENTS PAGE
How Does the Fund Invest Its Assets?.
What Are the Risks of Investing in the
Fund?..............................
Investment Restrictions..............
Officers and Directors...............
Investment Management and Other
Services...........................
How Does the Fund Buy Securities for Its
Portfolio?.........................
How Do I Buy, Sell and Exchange
Shares?............................
How Are Fund Shares Valued?..........
Additional Information on Distributions
and Taxes..........................
The Fund's Underwriter...............
How Does the Fund Measure
Performance?.......................
Miscellaneous Information............
Financial Statements.................
Useful Terms and Definitions.........
Appendix.............................
Description of Ratings
- ------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
/bullet/ ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY
OF THE U.S. GOVERNMENT;
/bullet/ ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
/bullet/ ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
- -------------------------------------------------------------------------------
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
TLCAP SAI 01/99
PAGE
HOW DOES THE FUND INVEST ITS ASSETS?
WHAT IS THE FUND'S GOAL?
The fund's goal is long-term capital growth. The fund seeks to achieve its
investment goal through a flexible policy of investing in stocks and debt
obligations of companies and governments of any nation. Any income realized will
be incidental. This goal is fundamental which means that it may not be changed
without shareholder approval.
MORE INFORMATION ABOUT THE KINDS OF SECURITIES THE FUND BUYS
The fund may invest for defensive purposes in commerical paper that, at the date
of investment, must be rated A 1 by S&P or Prime 1 by Moody's or, if not rated,
be issued by a company which, at the date of investment, has an outstanding debt
issue rated AAA or AA by S&P or Aaa or As by Moody's.
EQUITY SECURITIES. The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner of
an equity security may participate in a company's success through the receipt of
dividends which are distributions of earnings by the company to its owners.
Equity security owners may also participate in a company's success or lack of
success through increases or decreases in the value of the company's shares as
traded in the public trading market for such shares. Equity securities generally
take the form of common stock or preferred stock. Preferred stockholders
typically receive greater dividends but may receive less appreciation than
common stockholders and may have greater voting rights as well. Equity
securities may also include convertible securities, warrants or rights.
Convertible securities typically are debt securities or preferred stocks which
are convertible into common stock after certain time periods or under certain
circumstances. Warrants or rights give the holder the right to purchase a common
stock at a given time for a specified price.
DEBT SECURITIES. The fund may invest in debt securities that are rated no lower
than Caa by Moody's or CCC by S&P or deemed to be of comparable quality by
Investment Counsel. As an operating policy, which may be changed by the Board
without shareholder approval, the fund will not invest more than 5% of its total
assets in debt securities rated less than BBB by S&P or Baa by Moody's. The
Board may consider a change in this operating policy if, in its judgment,
economic conditions change such that a higher level of investment in high risk,
lower quality debt securities would be consistent with the interests of the fund
and its shareholders. High risk, lower quality debt securities, commonly known
as junk bonds, are regarded, on balance, as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation and may be in default. Unrated debt
securities are not necessarily of lower quality than rated securities but they
may not be attractive to as many buyers. Regardless of rating levels, all debt
securities considered for purchase (whether rated or unrated) will be carefully
analyzed by Investment Counsel to ensure, to the extent possible, that the
planned investment is sound. The fund may, from time to time, purchase defaulted
debt securities if, in the opinion of Investment Counsel, the issuer may resume
interest payments in the near future. As a fundamental policy, the fund will not
invest more than 10% of its total assets in defaulted debt securities, which may
be illiquid.
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 the 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.
DEPOSITARY RECEIPTS. The fund may purchase sponsored or unsponsored American
PAGE
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global
Depositary Receipts ("GDRs") (collectively, "depositary receipts"). ADRs are
depositary receipts typically issued by a U.S. bank or trust company which
evidence ownership of underlying securities issued by a foreign corporation.
EDRs and GDRs are typically issued by foreign banks or trust companies, although
they also may be issued by U.S. banks or trust companies, and evidence ownership
of underlying securities issued by either a foreign or a U.S. corporation.
Generally, depositary receipts in registered form are designed for use in the
U.S. securities market and depositary receipts in bearer form are designed for
use in securities markets outside the U.S. Depositary receipts may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. Depositary receipts may be issued pursuant to
sponsored or unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities traded in the form of depositary receipts.
In unsponsored programs, the issuer may not be directly involved in the creation
of the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the depositary receipts. Depositary receipts also involve the risks of other
investments in foreign securities, as discussed below. For purposes of the
fund's investment policies, the fund's investments in depositary receipts will
be deemed to be investments in the underlying securities.
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. Investment Counsel 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 Investment Counsel 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.
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
PAGE
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. The fund's investment in these structured
investments may be limited by its investment restrictions. See "Investment
Restrictions" below. 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 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 Investment Counsel's ability
to predict correctly movements in the direction of the stock markets. No
assurance can be given that Investment Counsel'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 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"
PAGE
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).
OPTIONS ON SECURITIES INDICES. 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 and put options only if the option is "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 its 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 its 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
PAGE
quality debt securities available in an amount sufficient to cover any
commitments under these contracts or to limit any potential risk. The segregated
account will be marked-to-market on a daily basis. While these contracts are not
presently regulated by the Commodity Futures Trading Commission, it 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 its position, the fund may forfeit the
entire amount of the premium plus related transaction costs. Options on foreign
currencies to be written or purchased by the fund will be traded on U.S. and
foreign exchanges or over-the-counter.
The fund may enter into exchange-traded contracts for the purchase or sale for
future delivery of foreign currencies ("foreign currency futures"). This
investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of
the fund's portfolio securities or adversely affect the prices of securities
that the fund intends to purchase at a later date. The successful use of foreign
currency futures will usually depend on the ability of Investment Counsel's 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 RISKS OF INVESTING IN THE FUND?
FOREIGN SECURITIES 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 Investment Counsel 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 (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
PAGE
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries.
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.
Certain Eastern European countries, which do not have market economies, are
characterized by an absence of developed legal structures governing private and
foreign investments and private property. Certain countries require governmental
approval prior to investments by foreign persons, or limit the amount of
investment by foreign persons in a particular company, or limit the investment
of foreign persons to only a specific class of securities of a company that may
have less advantageous terms than securities of the company available for
purchase by nationals. Although in most Eastern European countries the local
currencies have been allowed to fluctuate according to their market value,
various foreign exchange restrictions remain in effect, limiting the ability of
foreign investors to repatriate their profits. The conversion rates for certain
Easter European currencies may be artificial to the actual market values of the
currencies and may be adverse to fund shareholders. Further, accounting
standards which exist in Eastern European countries may differ from U.S.
standards.
Governments in certain Eastern European countries may require that a
governmental or quasi-governmental authority act as custodian of the fund's
assets invested in such country. To the extent such governmental or
quasi-governmental authorities do not satisfy the requirements of the 1940 Act
to act as foreign custodians of the fund's cash and securities, the fund's
investment in such countries may be limited or may be required to be effected
through intermediaries. The risk of loss through governmental confiscation may
be increased in such countries.
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,
together with Russia's continuing political and economic instability and the
slow-paced development of its market economy, the following: (a) delays in
settling portfolio transactions and risk of loss arising out of Russia's system
of share registration and custody; (b) the risk that it may be impossible or
more difficult than in other countries to obtain and/or enforce a judgment; (c)
pervasiveness of corruption, insider trading, and crime in the Russian economic
system; (d) currency exchange rate volatility and the lack of available currency
hedging instruments; (e) higher rates of inflation (including the risk of social
unrest associated with periods of hyper-inflation); (f) controls on foreign
investment and local practices disfavoring foreign investors and limitations on
repatriation of invested capital, profits and dividends, and on the fund's
ability to exchange local currencies for U.S. dollars; (g) the risk that the
government of Russia or other executive or legislative bodies may decide not to
continue to support the economic reform programs implemented since the
dissolution of the Soviet Union and could follow radically different political
and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, a return to the centrally planned economy
that existed prior to the dissolution of the Soviet Union, or the
nationalization of privatized enterprises; (h) the risks of investing in
securities with substantially less liquidity and in issuers having significantly
smaller market capitalizations, when compared to securities and issuers in more
developed markets; (i) the difficulties associated in obtaining accurate market
valuations of many Russian securities, based partly on the limited amount of
publicly available information; (j) the financial condition of Russian
companies, including large amounts of inter-company debt which may create a
payments crisis on a national scale; (k) dependency on exports and the
corresponding importance of international trade; (l) the risk that the Russian
PAGE
tax system will not be reformed to prevent inconsistent, retroactive and/or
exorbitant taxation or, in the alternative, the risk that a reformed tax system
may result in the inconsistent and unpredictable enforcement of the new tax
laws; (m) possible difficulty in identifying a purchaser of securities held by
the fund due to the underdeveloped nature of the securities markets; (n) the
possibility that pending legislation could restrict the levels of foreign
investment in certain industries, thereby limiting the number of investment
opportunities in Russia; (o) the risk that pending legislation would confer to
Russian courts the exclusive jurisdiction to resolve disputes between foreign
investors and the Russian government, instead of bringing such disputes before
an internationally-accepted third-country arbitrator; and (p) the difficulty in
obtaining information about the financial condition of Russian issuers, in light
of the different disclosures and accounting standards applicable to Russian
companies.
There is little long-term 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 nor are they licensed with any
governmental entity 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 interests continue 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
500 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. In addition, so-called "financial-industrial groups" have emerged in
recent years that seek to deter outside investors from interfering in the
management of companies they control. These practices may prevent the fund from
investing in the securities of certain Russian companies deemed suitable by
Investment Counsel. 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's management endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread in currency exchange (to
cover service charges) will be incurred, particularly when the fund changes
investments from one country to another or when proceeds of the sale of shares
in U.S. dollars are used for the purchase of securities in foreign countries.
Also, some countries may adopt policies which would prevent the fund from
transferring cash out of the country or withhold portions of interest and
dividends at the source. There is the possibility of cessation of trading on
national exchanges, expropriation, nationalization or confiscatory taxation,
withholding and other foreign taxes on income or other amounts, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), default in foreign government securities, political, economic
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
PAGE
developments. Some countries in which the fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Further,
certain currencies may not be internationally traded. Certain of these
currencies have experienced a steady devaluation relative to the U.S. dollar.
Any devaluations in the currencies in which the fund's portfolio securities are
denominated may have a detrimental impact on the fund. Through the flexible
policy of the fund , Investment Counsel 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 Board considers 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 Board also considers the degree of risk
involved through the holding of portfolio securities in domestic and foreign
securities depositories (see "Investment Management and Other Services").
However, in the absence of willful misfeasance, bad faith or gross negligence on
the part of Investment Counsel, 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 Board's appraisal of the risks will always be correct or that such
exchange control restrictions or political acts of foreign governments might not
occur.
LOWER-RATED SECURITIES. At present, the fund does not intend to invest more than
5% of its total assets in investment grade securities (rated lower than BBB
by S&P or Baa by Moody's)./1/ Although they may offer higher yields than do
higher rated securities, low rated and unrated debt securities generally involve
greater volatility of price and risk of principal and income, including the
possibility of default by, or bankruptcy of, the issuers of the securities. In
addition, the markets in which low rated and unrated debt securities are traded
are more limited than those in which higher rated securities are traded. The
existence of limited markets for particular securities may diminish the fund's
ability to sell the securities at fair value either to meet redemption requests
or to respond to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
low rated or unrated debt securities may also make it more difficult for the
fund to obtain accurate market quotations for the purposes of valuing the fund's
portfolio. Market quotations are generally available on many low rated or
unrated securities only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of low rated debt securities,
especially in a thinly traded market. Analysis of the creditworthiness of
issuers of low rated debt securities may be more complex than for issuers of
higher rated securities, and the ability of the fund to achieve its investment
goal 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
- -------------------------
/1/ In the event that the Board should raise the percentage limitation on
investment in lower rated securities, investors will receive 30 days' notice
prior to the investment in lower rated securities rising above the current 5%
limit.
PAGE
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 recognize income currently for federal income tax purposes in the
amount of the unpaid, accrued interest with respect to high yield bonds
structured as zero coupon bonds or pay-in-kind securities, 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 or leverage
itself by borrowing cash, so that it may satisfy the distribution requirement.
STOCK INDEX FUTURES 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 Investment Counsel's ability to predict correctly
movements in the direction of the market, as to which no assurance can be given.
OPTIONS ON SECURITIES INDICES There are several risks associated with
transactions in options on securities indices. For example, there are
significant differences between the securities and options markets that could
result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. A decision as to whether, when and
how to use options involves the exercise of skill and judgment, and even a
well-conceived transaction may be unsuccessful to some degree because of market
behavior or unexpected events. There can be no assurance that a liquid market
will exist when the fund seeks to close out an option position. If the fund were
unable to close out an option that it had purchased on a securities index, it
would have to exercise the option in order to realize any profit or the option
may expire worthless. If trading were suspended in an option purchased by the
fund, it would not be able to close out the option. If restrictions on exercise
were imposed, the fund might be unable to exercise an option it has purchased.
Except to the extent that a call option on an index written by the fund is
covered by an option on the same index purchased by the fund, movements in the
index may result in a loss to the fund; however, such losses may be mitigated by
changes in the value of the fund's securities during the period the option was
outstanding.
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
PAGE
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 Investment Counsel, 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 lends 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./2/ (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 the American Stock Exchange, including no more than
2% of its total assets which may be invested in warrants that are not
listed on those exchanges. Warrants acquired by the fund in units or
attached to securities are not included in this investment restriction.
This investment restriction does not apply to options on securities
indices.
- --------------------------
/2/ 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.
PAGE
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. Participate on a joint or a joint and several 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.)
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the fund, the fund may receive stock, real estate, or other
investments that the fund would not, or could not buy. In this case, the fund
intends to dispose of the investment as soon as practicable while maximizing the
return to shareholders.
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 or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions. 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
NAME, ADDRESS AND AGE WITH THE FUND PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS
<S> <C> <C>
- ---------------------------------- ------------------- --------------------------------------------------------------------------
HARRIS J. ASHTON Director Director, RBC Holdings Inc. (a bank holding company) and Bar-S Foods
191 Clapboard Ridge (a mea packing company); director or trustee, as the case may be, of
Greenwich, Connecticut 06830 49 of theinvestment companies in the Franklin Templeton Group of
Age 66 Funds; and FORMERLY, Chairman of the Board, President and Chief
Executive Officer, General Host Corporation (nursery and craft centers).
- --------------------------------------------------- ------------------- ---------------------------------------------------------
* NICHOLAS F. BRADY Director Chairman, Templeton Emerging Markets Investment Trust PLC, Templeton
The Bullitt House Latin America Investment Trust PLC, Darby Overseas Investments, Ltd.
102 East Dover Street and Darby Emerging Markets Investments LDC (investment firms)
Easton, Maryland 21601 (1994-present); Chairman and Director, Templeton Central and Eastern
Age 68 European Investment Company; Director, Templeton Global Strategy Funds,
Amerada Hess Corporation (crude oil and natural gas refining), Christiana
Companies Inc. (operating and investment companies), and H.J. Heinz
Company (packaged foods and allied products); director or trustee, aS
the case may be, of 21 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Secretary of the United
States Department of the Treasury (1988-1993) and Chairman of the Board,
Dillon, Read & Co., Inc. (investment banking) prior to 1988.
</TABLE>
PAGE
<TABLE>
<CAPTION>
POSITIONS AND
OFFICES
NAME, ADDRESS AND AGE WITH THE FUND PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS
- ---------------------------------- ------------------- ------------------------------------------------------------------------
<S> <C> <C>
S. JOSEPH FORTUNATO Director Member of the law firm of Pitney, Hardin, Kipp & Szuch; director
Park Avenue at Morris County or trustee, as of the case may be, of 51 of the investment companies
P.O. Box 1945 in the Franklin Templeton Group of Funds; and FORMERLY, Director,
Morristown, New York 07962-1945 General Host Corporation (nursery and craft centers).
Age 66
- ---------------------------------- ------------------- ---------------------------------------------------------------------------
JOHN Wm. GALBRAITH Director President, Galbraith Properties, Inc. (personal investment company);
360 Central Avenue Director, Gulf West Banks, Inc. (bank holding company) (1995-present);
Suite 1300 director or trustee, as the case may be, of 20 of the investment
St. Petersburg, Florida 33701 companies in the Franklin Templeton Group of Funds; and FORMERLY,
Age 77 Director, Mercantile Bank (1991-1995); Vice Chairman, Templeton,
Galbraith & Hansberger Ltd. (1986-1992) and Chairman, Templeton
Funds Management, Inc. (1974-1991).
- ---------------------------------- ------------------- ---------------------------------------------------------------------------
ANDREW H. HINES, JR. Director Consultant for the Triangle Consulting Group; Executive-in-Residence of
150 Second Avenue N. Eckerd College (1991-present); director or trustee, as the case may be,
St. Petersburg, Florida 33701 of 22 of the investment companies in the Franklin Templeton Group of
Age 75 Funds; and FORMERLY, Chairman and Director, Precise Power Corporation ;
(1990-1997) Director, Checkers Drive-In Restaurant, Inc. (1994-1997),
and Chairman of the Board and Chief Executive Officer, Florida Progress
Corporation (holding company in the energy area) (1982-1990) and director
of various of its subsidiaries.
- ---------------------------------- ------------------- ---------------------------------------------------------------------------
* CHARLES B. JOHNSON Chairman of the President, Chief Executive Officer and Director, Franklin Resources, Inc.;
777 Mariners Island Blvd. Board and Vice Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
San Mateo, California 94404 President Advisory Services, Inc., Franklin Investment Advisory Services, Inc. and
Age 65 Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton
Investor Services, Inc., and Franklin Templeton Services, Inc.; officer
and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc., and of 50 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY,
Director, General Host Corporation (nursery and craft centers).
- ---------------------------------- ------------------- ---------------------------------------------------------------------------
* CHARLES E. JOHNSON Director and Vice Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
500 East Broward Blvd. President President, Franklin Templeton Distributors, Inc.; President and Director
Fort Lauderdale, Florida Templeton Worldwide, Inc.; Chairman and Director, Templeton Investment
33394-3091 Counsel, Inc.; Vice President, Franklin Advisers, Inc.; officer and/or
Age 42 director of some of the other subsidiaries of Franklin Resources, Inc.
and officer and/or director or trustee, as the case may be, of 34 of the
investment companies in the Franklin Templeton Group of Funds.
- ---------------------------------- ------------------- ---------------------------------------------------------------------------
BETTY P. KRAHMER Director Director or trustee of various civic associations; director or trustee, as
2201 Kentmere Parkway the case may be, of 21 of the investment companies in the Franklin Templeton
Wilmington, Delaware 19806 Group of Funds; and FORMERLY, Economic Analyst, U.S. government.
Age 69
- ---------------------------------- ------------------- ---------------------------------------------------------------------------
GORDON S. MACKLIN Director Director, Fund American Enterprises Holdings, Inc., MCI Communications
8212 Burning Tree Road Corporation, MedImmune, Inc. (biotechnology), Spacehab, Inc. (aerospace
Bethesda, Maryland 20817 services) and Real 3D (software); director or trustee, as the case may
Age 70 be, of 49 of the investment companies in the Franklin Templeton Group
of Funds; and FORMERLY, Chairman, White River Corporation (financial
services) and Hambrecht and Quist Group (investment banking) and
President, National Association of Securities Dealers, Inc.
</TABLE>
PAGE
<TABLE>
<CAPTION>
POSITIONS AND
OFFICES
NAME, ADDRESS AND AGE WITH THE FUND PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS
<S> <C> <C>
- ---------------------------------- ------------------- --------------------------------------------------------------------------
FRED R. MILLSAPS Director Manager of personal investments (1978-present); director of various business
2665 N.E. 37th Drive and nonprofit organizations; director or trustee, as the case may be, of 22
Fort Lauderdale, Florida 33308 of the investment companies in the Franklin Templeton Group of Funds; and
Age 69 FORMERLY, Chairman and Chief Executive Officer, Landmark Banking Corporation
(1969-1978), Financial Vice President, Florida Power and Light (1965-1969),
and Vice President, Federal Reserve Bank of Atlanta (1958-1965).
- ---------------------------------- ------------------- ---------------------------------------------------------------------------
GARY P. MOTYL President Executive Vice President, Templeton Investment Counsel, Inc.; Security
500 East Broward Blvd. Analyst and Portfolio Manager, Templeton Investment Counsel, Inc. since 1981;
Fort Lauderdale, Florida officer of 2 of the investment companies in the Franklin Templeton Group of
33394-3091 Funds; and FORMERLY, Research Analyst and Portfolio Manager, Landmark First
Age 46 National Bank (1979-1981) and Security Analyst, Standard &Poor's Corporation
(1974-1979).
- ---------------------------------- ------------------- ----------------------------------------------------------------------------
MARK G. HOLOWESKO Vice President President, Templeton Global Advisors Limited; Chief Investment Officer,
Lyford Cay Global Equity Group; Executive Vice President and Director, Templeton
Nassau, Bahamas Worldwide, Inc.; officer of 21 of the investment companies in the Franklin
Age 38 Templeton Group of Funds.; and FORMERLY, Investment Administrator, RoyWest
Trust Corporation (Bahamas) Limited (1984-1985).
- ---------------------------------- ------------------- ----------------------------------------------------------------------------
HARMON E. BURNS Vice President Executive Vice President and Director, Franklin Resources, Inc., Franklin
777 Mariners Island Blvd. Templeton Distributors, Inc. and Franklin Templeton Services, Inc.;
San Mateo, California 94404 Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/
Age 53 Templeton Investor Services, Inc.; and officer and/or director or trustee,
as the case may be, of most of the other subsidiaries of Franklin Resources,
Inc. and of 53 of the investment companies in the Franklin Templeton
Group of Funds.
- ---------------------------------- ------------------- ---------------------------------------------------------------------------
RUPERT H. JOHNSON, JR. Vice President Executive Vice President and Director, Franklin Resources, Inc. and Franklin
777 Mariners Island Blvd. Templeton Distributors, Inc.; President and Director, Franklin Advisers,
San Mateo, California 94404 Inc.; Senior Vice President and Director, Franklin Advisory Services, Inc.
Age 58 and Franklin Investment Advisory Services, Inc.; Director, Franklin/
Templeton Investor Services, Inc.; and officer and/or director or trustee,
as the case may be, of most other subsidiaries of Franklin Resources, Inc.
and of 53 of the investment companies in the Franklin Templeton Group of
Funds.
- ---------------------------------- ------------------- ---------------------------------------------------------------------------
DEBORAH R. GATZEK Vice President Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
777 Mariners Island Blvd. Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
San Mateo, California 94404 Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
Age 49 President, Franklin Advisory Services, Inc.; Vice President, Chief Legal
Officer and Chief Operating Officer, Franklin Investment Advisory Services,
Inc.; and officer of 53 of the investment companies in the Franklin
Templeton Group of Funds.
- ---------------------------------- ------------------- ----------------------------------------------------------------------------
MARTIN L. FLANAGAN Vice President Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
777 Mariners Island Blvd. Executive Vice President and Director,empleton Worldwide, Inc.; Executive
San Mateo, California 94404 Vice President, Chief Operating Officer and Director, Templeton Investment
Age 38 Counsel, Inc.; Executive Vice President and Chief Financial Officer,
Franklin Advisers, Inc.; Chief Financial Officer, Franklin Advisory
Services, Inc. and Franklin Investment Advisory Services, Inc.; President
and Director, Franklin Templeton Services, Inc.; Senior Vice President
and Chief Financial Officer, Franklin/Templeton Investor Services, Inc.;
and officer and/or director or trustee, as the case may be, of 53 of the
investment companies in the Franklin Templeton Group of Funds.
</TABLE>
PAGE
<TABLE>
<CAPTION>
POSITIONS AND
OFFICES
NAME, ADDRESS AND AGE WITH THE FUND PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS
<S> <C> <C>
- ---------------------------------- ------------------- --------------------------------------------------------------------------
JOHN R. KAY Vice President Vice president and Treasurer, Templeton Worldwide, Inc.; Assistant Vice
500 East Broward Blvd. President, Franklin Templeton Distributors, Inc.; officer of 25 of the
Fort Lauderdale, Florida investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
33394-3091 Vice President and Controller of the Keystone Group, Inc.
Age 58
- ---------------------------------- ------------------- ---------------------------------------------------------------------------
ELIZABETH M. KNOBLOCK Vice President- General Counsel, Secretary and Senior Vice President, Templeton Investment
500 East Broward Blvd. Compliance Counsel, Inc.; Senior Vice President, Templeton Global Investors, Inc.;
Fort Lauderdale, Florida officer of 21 of the investment companies in the Franklin Templeton Group of
33394-3091 Funds; and FORMERLY, Vice President and Associate General Counsel Kidder
Age 43 Peabody & Co. Inc. (1989-1990), Assistant General Counsel, Gruntal & Co.,
Inc. (1988), Vice President and Associate General Counsel, Shearson Lehman
Hutton Inc. (1988), Vice President and Assistant General Counsel,
E.F. Hutton & Co. Inc. (1986-1988), and Special Counsel of the
Division of Investment Management, U.S. Securities and Exchange
Commission (1984-1986).
- ---------------------------------- ------------------- ---------------------------------------------------------------------------
JAMES R. BAIO Treasurer Certified Public Accountant; Treasurer, Franklin Mutual Advisers, Inc.;
500 East Broward Blvd. Senior Vice President, Templeton Worldwide, Inc., Templeton Global
Fort Lauderdale, Florida Investors, Inc. and Templeton Funds Trust Company; officer of 22 of the
33394-3091 investment companies in the Franklin Templeton Group of Funds; and
Age 44 FORMERLY, Senior Tax Manager, Ernst & Young (certified public accountants)
(1977-1989).
- ---------------------------------- ------------------- ----------------------------------------------------------------------------
BARBARA J. GREEN Secretary Senior Vice President, Templeton Worldwide, Inc. and Templeton Global
500 East Broward Blvd. Investors, Inc.; officer of 21 of the investment companies in the Franklin
Fort Lauderdale, Florida Templeton Group of Funds; and FORMERLY, Deputy Director of the Division of
33394-3091 Investment Management, Executive Assistant and Senior Advisor to the
Age 51 Chairman, Counselor 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).
- ---------------------------------- ------------------- ----------------------------------------------------------------------------
</TABLE>
* Nicholas F. Brady, status as an interested persons from his business
affiliations with Resources and Templeton Global Advisors Limited. Mr. Brady
and Resources are both limited partners of Darby Overseas Partners, L.P.
("Darby Overseas"). In addition, Darby Overseas and Templeton Global
Advisors Limited are limited partners of Darby Emerging Markets Fund, L.P.
The table above shows the officers and Board members who are affiliated with
Distributors and Investment Counsel. 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
attended. Members of the Board serving on the audit committee of the fund and
other investment companies in the Franklin Templeton Group of Funds receive a
flat fee of $2,000 per meeting attended, a portion of which is allocated to the
PAGE
fund. Members of the nominating and compensation committee meeting are not
compensated for any committee meeting that is held in conjunction with a Board
meeting. As shown above, the nonaffiliated Board members also serve as directors
or trustees 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 NUMBER OF BOARDS IN
TOTAL FEES RECEIVED FROM THE THE FRANKLIN TEMPLETON
RECEIVED FROM FRANKLIN TEMPLETON GROUP OF FUNDS ON
NAME THE FUND* GROUP OF FUNDS** WHICH EACH SERVES***
- -------------------------- ---------------- ----------------------- -----------------------
<S> <C> <C> <C>
Harris J. Ashton $ $339,842 49
Nicholas F. Brady 119,675 21
S. Joseph Fortunato 356,762 51
John Wm. Galbraith. 117,675 20
Andrew H. Hines, Jr 144,175 22
Betty P. Krahmer 119,675 21
Gordon S. Macklin 332,492 49
Fred R. Millsaps 144,175 22
</TABLE>
- ------------------------
* For the fiscal year ended August 31, 1998.
** For the calendar year ended December 31, 1997.
*** 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 currently
includes 54 registered investment companies, with approximately 170 U.S. based
funds or series.
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 or
trustee. 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.
PAGE
Board members historically have followed a policy of having substantial
investments in one or more of the Frankli Templeton Funds, as is consistent with
their individual financial goals. In February 1998, this policy was formally
adopted. Each board member is required to invest one-third of fees received for
serving as a director or trustee of a Templeton fund in shares of one or more
Templeton funds and one-thrid of fees received for serving as a director or
trustee of a Franklin fund in shares of one or more Franklin funds. This is
required until the value of such investments equals or exceeds five times the
board member's annual fees. For purposes of this policy, a board member's
investments inlcude those in the name of family members or entities controlled
by the board member and, for investments made after February 27, 1998, are
valued at cost. Investments that existed on February 27, 1998, were valued as of
that date. There is a three year phase-in period for newly elected board
members.
As of [ ], the officers and Board members, as a group, 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
Investment Counsel. Investment Counsel 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. Investment Counsel's activities are subject
to the review and supervision of the Board to whom Investment Counsel renders
periodic reports of the fund's investment activities. Investment Counsel and its
officers, directors and employees are covered by fidelity insurance for the
protection of the fund.
Investment Counsel and its affiliates act as investment manager to numerous
other investment companies and accounts. Investment Counsel 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 Investment Counsel on behalf of
the fund. Similarly, with respect to the fund, Investment Counsel is not
obligated to recommend, buy or sell, or to refrain from recommending, buying or
selling any security that Investment Counsel 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. Investment Counsel 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 Investment Counsel 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 Investment
Counsel a management fee equal to a annual rate of 0.75% of the fund's average
daily net assets.
For the fiscal years ended August 31, 1998, 1997 and 1996, management fees
totaled $[ ], $1,072,883 and $656,146, respectively. Under an agreement by
Investment Counsel, that was terminated as of January 1, 1998, to limit its
fees, the fund paid management fees totaling $[ ], $888,512 and $512,356,
respectively.
MANAGEMENT AGREEMENT. The management agreement is in effect until December 31,
1999. 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 Investment Counsel on 60 days' written notice to the fund, and
will automatically terminate in the event of its assignment, as defined in the
1940 Act.
ADMINISTRATIVE SERVICES. Since October 1, 1996, FT Services has provided certain
administrative services and facilities for the fund. Prior to that date,
Templeton Global Investors, Inc., provided the same services to 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.
PAGE
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, 1998, 1997 and 1996, the fund paid
administration fees totaling $[ ],$214,577 and $131,231, respectively
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. The fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the fund. The amount of reimbursements for these services
per benefit plan participant fund account per year may not exceed the per
account fee payable by the fund to Investor Services in connection with
maintaining shareholder accounts.
CUSTODIAN. The Chase Manhattan Bank, at its principal office at MetroTech
Center, Brooklyn, New York, 11245, and at the offices of its branches and
agencies throughout the world, acts as custodian and foreign custody manager of
the fund's assets. As foreign custody manager, the bank is responsible for the
selection and monitoring of foreign sub-custodian banks, as well as the
selection and evaluation of non-compulsory foreign depositories. As foreign
custody manager, the bank also furnishes information relevant to the selection
of compulsory depositories. The custodian does not participate in decisions
relating to the purchase and sale of portfolio securities.
AUDITORS. [ ], is the fund's independent auditors. During the fiscal year ended
August 31, 1998, 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, 1998, and review of the fund's
filings with the SEC.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
Investment Counsel selects brokers and dealers to execute transactions in the
fund's portfolio transactions in accordance with criteria set forth in the
management agreement and any directions that the Board may give.
When placing a portfolio transaction, Investment Counsel seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid by the fund is
negotiated between Investment Counsel and the broker executing the transaction.
The determination and evaluation of the reasonableness of the brokerage
commissions paid 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. Investment Counsel
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 Investment Counsel, 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.
PAGE
Investment Counsel may pay certain brokers commissions that are higher than
those another broker may charge, if Investment Counsel determines in good faith
that the amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or Investment Counsel's overall responsibilities to
client accounts over which it exercises investment discretion. The services that
brokers may provide to Investment Counsel include, among others, supplying
information about particular companies, markets, countries, or local, regional,
national or transnational economies, statistical data, quotations and other
securities pricing information, and other information that provides lawful and
appropriate assistance to Investment Counsel in carrying out its investment
advisory responsibilities. These services may not always directly benefit the
fund. They must, however, be of value to Investment Counsel 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 Investment Counsel receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order to
obtain additional research services permits Investment Counsel 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, Investment Counsel 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 Investment Counsel 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 Investment Counsel 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
Investment Counsel, 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 may improve execution and reduce transaction
costs to the fund.
During the fiscal years ended August 31, 1998, 1997 and 1996 the fund paid
brokerage commissions totaling $[ ], $139,387, and $102,000, respectively.
[As of August 31, 1998, the fund owned securities issued by ABN Amro NV, valued
in aggregate at $1,177,860. Except as noted, the fund did not own any securities
issued by its regular broker-dealers as of the end of the fiscal year.]
PAGE
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 Plan. (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 advised by Investment Counsel, 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 seventh business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that seventh 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 in which the fund's shares may be redeemed
by investors who hold shares directly. See "How Do I Sell Shares?"
SYSTEMATIC WITHDRAWAL PROGRAM. There are no service charges for making regular
cash withdrawals under our systematic withdrawal program. Under this program,
any distributions paid by the fund will be automatically reinvested in your
account. Payments under the Systematic Withdrawal Program 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 next business day.
PAGE
Redeeming shares through the Systematic Withdrawal Program 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 Systematic Withdrawal Program may be more than your
actual yield or income, part of the payment may be a return of your investment.
The fund may discontinue the Systematic Withdrawal Program by notifying you in
writing and will automatically discontinue the progam 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
funds 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.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the check remains uncashed. Neither the fund nor its
affiliates will be liable for any loss caused by your failure to cash such
check. The fund is not responsible for tracking down uncashed checks, unless a
check is returned as undeliverable.
PAGE
In most cases, if mail is returned as undeliverable we are required to take
certain steps to find you free of charge. If these attempts are unsuccessful,
however, we may deduct the costs of any additional 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.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the close of the NYSE, normally
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, Martin Luther King Jr. 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 Investment Counsel.
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.
PAGE
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 use a pricing service, bank or Securities Dealer to perform any of the
above-described functions.
DISTRIBUTIONS AND TAXES
The fund calculates dividends and capital gains the same way for each class. The
amount of any income dividends per share will differ, however, generally due to
the difference in the distribution and service (Rule 12b-1) fees of each class.
The fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
PAGE
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in the
form of dividends and interest on its investments. This income, less expenses
incurred in the operation of the fund, constitute its net investment income from
which dividends may be paid to you. Any distributions by the fund from such
income will be taxable to you as ordinary income, whether you take them in cash
or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income. Distributions
paid from long-term capital gains realized by the fund will be taxable to you as
long-term capital gain, regardless of how long you have held your shares in the
fund. Any net short-term or long-term capital gains realized by the fund (net of
any capital loss carryovers) generally will be distributed once each year, and
may be distributed more frequently, if necessary, in order to reduce or
eliminate federal excise or income taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt instruments are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt instruments are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the fund's ordinary
income distributions to you, and may cause some or all of the fund's previously
distributed income to be classified as a return of capital.
The fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of the fund's total assets at the end
of the fiscal year are invested in securities of foreign corporations, the fund
may elect to pass-through to you your pro rata share of foreign taxes paid by
the fund. If this election is made, the year-end statement you receive from the
fund will show more taxable income than was actually distributed to you.
However, you will be entitled to either deduct your share of such taxes in
computing your taxable income or claim a foreign tax credit for such taxes
against your U.S. federal income tax. The fund will provide you with the
information necessary to complete your individual income tax return if such
election is made.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you of
the amount and character of your distributions at the time they are paid, and
will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held fund shares for a full year, you may have designated and distributed to you
as ordinary income or capital gain a percentage of income that is not equal to
the actual amount of such income earned during the period of your investment in
the fund.
PAGE
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The fund has elected to
be treated as a regulated investment company under Subchapter M of the tax code,
has qualified as such for its most recent fiscal year, and intends to so qualify
during the current fiscal year. As a regulated investment company, the fund
generally pays no federal income tax on the income and gains it distributes to
you. The board reserves the right not to maintain the qualification of the fund
as a regulated investment company if it determines such course of action to be
beneficial to you. In such case, the fund will be subject to federal, and
possibly state, corporate taxes on its taxable income and gains, and
distributions to you will be taxed as ordinary dividend income to the extent of
the fund's available earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS The tax code requires the fund to
distribute at least 98% of its taxable ordinary income earned during the
calendar year and 98% of its capital gain net income earned during the twelve
month period ending October 31 (in addition to undistributed amounts from the
prior year) to you by December 31 of each year in order to avoid federal excise
taxes. The fund intends to declare and pay sufficient dividends in December (or
in January that are treated by you as received in December) but does not
guarantee and can give no assurances that its distributions will be sufficient
to eliminate all such taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes that cause you to
recognize a gain or loss. If you hold your shares as a capital asset, the gain
or loss that you realize will be capital gain or loss. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated as
a long-term capital loss to the extent of any long-term capital gains
distributed to you by the fund on those shares.
All or a portion of any loss that you realize upon the redemption of your fund
shares will be disallowed to the extent that you purchase other shares in the
fund (through reinvestment of dividends or otherwise) within 30 days before or
after your share redemption. Any loss disallowed under these rules will be added
to your tax basis in the new shares you purchase.
DEFERRAL OF BASIS All or a portion of the sales charge that you paid for your
shares in the fund will be excluded from your tax basis in any of the shares
sold within 90 days of their purchase (for the purpose of determining gain or
loss upon the sale of such shares) if you reinvest the sales proceeds in the
fund or in another of the Franklin Templeton Funds, and the sales charge that
would otherwise apply to your reinvestment is reduced or eliminated. The portion
of the sales charge excluded from your tax basis in the shares sold will equal
the amount that the sales charge is reduced on your reinvestment. Any portion of
the sales charge excluded from your tax basis in the shares sold will be added
to the tax basis of the shares you acquire from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment requirements that must be met by
the fund. Investments in Government National Mortgage Association or Federal
National Mortgage Association securities, bankers' acceptances, commercial paper
and repurchase agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. The rules on exclusion of this income
are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS As a corporate shareholder, you
should note that 12.01% of the dividends paid by the fund for the most recent
fiscal year qualified for the dividends-received deduction. You will be
permitted in some circumstances to deduct these qualified dividends thereby
reducing the tax that you would otherwise be required to pay on these dividends.
The dividends-received deduction will be available only with respect to
dividends designated by the fund as eligible for such treatment. All dividends
(including the deducted portion) must be included in your alternative minimum
taxable income calculations.
INVESTMENT IN COMPLEX SECURITIES The fund may invest in complex securities. Such
investments may be subject to numerous special and complex tax rules. These
rules could affect whether gains and losses recognized by the fund are treated
as ordinary income or capital gain, accelerate the recognition of income to the
fund or defer the fund's ability to recognize losses, and, in limited cases,
subject the fund to U.S. federal income tax on income from certain of its
foreign securities. In turn, these rules may affect the amount, timing or
character of the income distributed to you by the fund.
For more information, please call 1-800/ DIAL BEN to request a free copy of the
Franklin Templeton Tax Information Handbook.
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 fund's shares, aggregate underwriting
commissions for the fiscal years ended August 31, 1998, 1997 and 1996 were $[ ],
$5,140,712 and $5,361,206 , respectively. After allowances to dealers,
Distributors retained $[ ], $529,236 and $610,774 in net underwriting discounts
and commissions. Except as noted, Distributors received no other compensation
from the fund for acting as underwriter.
PAGE
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 the periods indicated below 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 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 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 period and the deduction of all applicable fund charges and fees.
The fund's average annual total return for the one-and five-year periods ended
August 31, 1998, was []% and []%, and for the period March 1, 1991 (commencement
of operations) through August 31, 1998, was []%.
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, 1998, was [ ]% and [ ]%, and for the
period March 1, 1991 (commencement of operations) through August 31, 1998,
was [ ]%.
PAGE
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 goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Resources is the parent company of the advisors and
underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the fund may satisfy your
investment goal, 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 goals 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 Investment Counsel may also refer to the
following information:
(a) Investment Counsel'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(R) 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(R) or a similar financial organization.
PAGE
(d) The geographic and industry distribution of the fund's portfolio and its 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:
/bullet/ "Never follow the crowd. Superior performance is possible
only if you invest differently from the crowd."
- --------------------
* 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.
PAGE
/bullet/ "Diversify by company, by industry and by country."
/bullet/ "Always maintain a long-term perspective."
/bullet/ "Invest for maximum total real return."
/bullet/ "Invest -- don't trade or speculate."
/bullet/ "Remain flexible and open-minded about types of investment."
/bullet/ "Buy low."
/bullet/ "When buying stocks, search for bargains among quality stocks."
/bullet/ "Buy value, not market trends or the economic outlook."
/bullet/ "Diversify. In stocks and bonds, as in much else, there is safety
in numbers."
/bullet/ "Do your homework or hire wise experts to help you."
/bullet/ "Aggressively monitor your investments."
/bullet/ "Don't panic."
/bullet/ "Learn from your mistakes."
/bullet/ "Outperforming the market is a difficult task."
/bullet/ "An investor who has all the answers doesn't even understand all
the questions."
/bullet/ "There's no free lunch."
/bullet/ "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.
PAGE
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 50 years and
now services more than 3 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, a pioneer in international
investing. The Mutual Series team, known for its value-driven approach to
domestic equity investing, became part of the organization four years later.
Together, the Franklin Templeton Group has over $[236] billion in assets under
management for more than [6] million U.S. based mutual fund shareholders and
other accounts. The Franklin Templeton Group of Funds offers [119] U.S. based
open-end investment companies to the public. The fund may identify itself by its
NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the NYSE.
While may of them have similar investment objectives, no two are exactly alike.
As noted in the Prospectus, shares of the fund are generally sold through
Securities Dealers. Investment representatives of such Securities Dealers are
experienced professionals who can offer advice on the type of investment
suitable to your unique goals and needs, as well as the types of risks
associated with such investments.
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.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has already
begun making necessary software changes to help the computer systems that
service the fund and their shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests have been planned to verify
their effectiveness. Resources continues to seek reasonable assurances from all
major hardware, software or data-services suppliers that they will be Year 2000
compliant on a timely basis. Resources is also in the process of developing
contingency plans for Year 2000 failures. In an operation as complex and
geographically distributed as Resources' business, however, this means
identifying only those mission critical systems for which it is practical to
develop a contingency plan.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group 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 by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations and statements must be sent
to a compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) 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 fund's Annual Report to
Shareholders, for the fiscal year ended August 31, 1998, including the auditors'
report, are incorporated herein by reference.
PAGE
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
CLASS I - Certain funds in the Franklin Templeton Funds offer multiple classes
of shares. The different 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 TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable Products
Series Fund
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 Funds(R)and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the fund's administrator
INVESTMENT COUNSEL - Templeton Investment Counsel, Inc., the fund's investment
manager
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.
NASDAQ - National Association of Securities Dealers Automated Quotations
NET ASSET VALUE (NAV) - The value of a mutual fund is 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
PAGE
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 Plan. 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 December 31, 1998, as may be
amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, 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.
TFTC - Templeton Funds Trust Company, the custodian for the Plans as described
in the Plan prospectus
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.
PAGE
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt-
edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present that make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and, thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
PAGE
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC - rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
PLUS (+) OR MINUS (--): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
PAGE
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
PAGE
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS:
Not Applicable
(B) EXHIBITS
(1) Articles of Incorporation**
(2) By-laws (as amended and restated October 19, 1996)*
(3) Not Applicable
(4) Specimen of certificate of Common Stock ***
(5) Form of Investment Management Agreement**
(6) (A) Distribution Agreement**
(B) Form of Dealer Agreement
(C) Amendment of Dealer Agreement
(7) Not Applicable
(8) (A) Custody Agreement**
(B) Amendment dated March 3, 1998 to the
Custody Agreement
(C) Amendment No. 2 dated July 23, 1998 to the
Custody Agreement
(9) (A) Fund Administration Agreement*
(B) Form of Transfer Agent Agreement**
(10) Opinion and consent of counsel
(11) Not Applicable
(12) Not Applicable
(13) Initial capital agreement ***
(14) Not Applicable
(15) Not Applicable
(16) Schedule showing computation of performance
quotations provided in response to Item 22**
(17) Assistant Secretary's Certificate pursuant to
Rule 483(b)**
(27) Not Applicable
- --------------------
* Previously filed with Post-Effective Amendment No. 8 on December 31, 1996.
** Previously filed with Post-Effective Amendment No. 7 on December 29, 1995.
*** Previously filed with Pre-Effective Amendment No. 2 on February 28, 1991.
PAGE
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 26. NUMBER OF RECORD HOLDERS
Shares of common stock, par value $0.01 per Share: 38,901
record holders as of September 30, 1998
ITEM 27. INDEMNIFICATION
Article 5.2 of the Registrant's By-Laws, filed as Exhibit 2, the
Investment Management Agreement filed as Exhibit 5 and the
Distribution Agreement filed as Exhibit 6 which was previously filed
with Post-Effective Amendment No. 7 on December 29, 1995.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the Registrant by the Registrant pursuant to
the By-Laws or otherwise, the Registrant is aware that in the opinion
of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and, therefore, is
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by directors, officers or controlling persons of the
Registrant in connection with the successful defense of any act, suit
or proceeding) is asserted by such directors, officers or controlling
person in connection with the shares being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by
the final adjudication of such issues.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The business and other connections of Registrant's investment manager,
Templeton Investment Counsel, Inc., are described in Parts A and B.
For information relating to the investment manager's officers and
directors, reference is made to Form ADV filed under the Investment
Advisers Act of 1940 by Templeton Investment Counsel, Inc.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Franklin Templeton Distributors, Inc. also acts as principal
underwriter of shares of:
Templeton American Trust, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund, Inc.
Templeton Global Real Estate Fund
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
Franklin Asset Allocation Fund
Franklin California Tax Free Income Fund, Inc.
Franklin California Tax Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Municipal Securities Trust
Franklin Mutual Series Fund, Inc.
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton International Trust
Franklin Templeton Money Fund
Franklin Templeton Global Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
(b) The information required by this Item 29 with respect to each director
and officer of Distributors is incorporated by reference to Part B of
this Form N-1A and Schedule A of Form BD filed by Distributors with
the Securiteis and Exchange Commission pursuant to the Securities Act
of 1934 (SEC File No. 8-5889).
(c) Not applicable. Registrant's principal underwriter is an affliated
person of Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Certain accounts, books, and other documents required to be maintained
by the Registrant pursuant to Section 31(a) of the Investment Company
Act and the rules thereunder are located at 500 East Broward
Boulevard, Fort Lauderdale, Florida 33394. Other records are
maintained at the offices of Franklin Templeton Investor Services,
Inc., 100 Fountain Parkway, St. Petersburg, Florida 33716-1205 and
Franklin Resources, Inc., 777 Mariners Island Blvd., San Mateo,
California 94404.
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS
(a) Not Applicable.
(b) Not Applicable.
(c) Registrant undertakes to furnish to each person to whom
a Prospectus is provided a copy of such Fund's latest
Annual Report, upon request and without charge.
(d) Registrant undertakes to call a meeting of the
shareholders, if requested to do so by the holders of at
least 10% of the Registrant's outstanding shares, for the
purpose of voting upon the question of removal of a
director or directors, and will assist communications
among shareholders as set forth within Section 16(c) of
the 1940 Act.
PAGE
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Ft. Lauderdale, Florida on this 28th
day of October, 1998.
TEMPLETON CAPITAL ACCUMULATOR FUND, INC.
(Registrant)
By:
Gary P. Motyl*
President
*By:/s/BARBARA J. GREEN
Barbara J. Green
as attorney-in-fact**
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
- -------------------------
Gary P. Motyl* President (Chief Executive October 28, 1998
Officer)
- ------------------------ Director, Chairman and
Charles B. Johnson* Vice President October 28, 1998
- -------------------------
Betty P. Krahmer* Director October 28, 1998
- -------------------------
Fred R. Millsaps* Director October 28, 1998
- -------------------------
John Wm. Galbraith* Director October 28, 1998
- -------------------------
Charles E. Johnson* Director October 28, 1998
- -------------------------
Harris J. Ashton* Director October 28, 1998
- -------------------------
S. Joseph Fortunato* Director October 28, 1998
- -------------------------
Andrew H. Hines, Jr.* Director October 28, 1998
- -------------------------
Gordon S. Macklin* Director October 28, 1998
- -------------------------
Nicholas F. Brady* Director October 28, 1998
- -------------------------
James R. Baio* Treasurer (Chief Financial October 28, 1998
and Accounting Officer)
</TABLE>
*By:/s/BARBARA J. GREEN
Barbara J. Green
as attorney-in-fact**
- -------------------
** Powers of Attorney were previously filed in Post-Effective Amendment No. 8 to
the Registration Statement on Form N-1A of Templeton Capital Accumulator Fund,
Inc. (File No. 33-37338), filed on December 31, 1996.
PAGE
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS FILED WITH
POST-EFFECTIVE AMENDMENT NO. 10 TO
REGISTRATION STATEMENT ON
FORM N-1A
TEMPLETON CAPITAL ACCUMULATOR FUNDS, INC.
PAGE
EXHIBIT LIST
EXHIBIT NUMBER NAME OF EXHIBIT
--------------- ----------------
( 6) (B) Form of Dealer Agreement dated
March 1, 1998
(C) Amendment of Dealer Agreement dated
May 15, 1998
( 6) (B) Amendment dated March 3, 1998 to the
Custody Agreement
(C) Amendment No. 2 dated July 23, 1998 to
the Custody Agreement
(10) Opinion and Consent of Counsel
DEALER AGREEMENT
Effective: March 1, 1998
Dear Securities Dealer:
Franklin/Templeton Distributors, Inc. ("we" or "us") invites you to participate
in the distribution of shares of the Franklin Templeton investment companies
(the "Funds") for which we now or in the future serve as principal underwriter,
subject to the terms of this Agreement. We will notify you from time to time of
the Funds which are eligible for distribution and the terms of compensation
under this Agreement. This Agreement supersedes any prior dealer agreements
between us, as stated in Section 18, below.
1. LICENSING.
(a) You represent that you are (i) a member in good
standing of the National Association of Securities Dealers, Inc. ("NASD") and
are presently licensed to the extent necessary by the appropriate regulatory
agency of each jurisdiction in which you will offer and sell shares of the
Funds, or (ii) a broker, dealer or other company licensed, registered or
otherwise qualified to effect transactions in securities in a country (a
"foreign country") other than the United States of America (the "U.S.") where
you will offer or sell shares of the Funds. You agree that termination or
suspension of such membership with the NASD, or of your license to do business
by any regulatory agency having jurisdiction, at any time shall terminate or
suspend this Agreement forthwith and shall require you to notify us in writing
of such action. If you are not a member of the NASD but are a broker, dealer or
other company subject to the laws of a foreign country, you agree to conform to
the Conduct Rules of the NASD. This Agreement is in all respects subject to the
Conduct Rules of the NASD, particularly Conduct Rule 2830 of the NASD, which
shall control any provision to the contrary in this Agreement.
(b) You agree to notify us immediately in writing if at
any time you are not a member in good standing of the Securities Investor
Protection Corporation ("SIPC").
2. SALES OF FUND SHARES. You may offer and sell shares of each
Fund and class of each Fund only at the public offering price which shall be
applicable to, and in effect at the time of, each transaction. The procedures
relating to all orders and the handling of them shall be subject to the terms of
the applicable then current prospectus and statement of additional information
(hereafter, the "prospectus") and new account application, including amendments,
for each such Fund and each class of such Fund, and our written instructions
from time to time. This Agreement is not exclusive, and either party may enter
into similar agreements with third parties.
3. DUTIES OF DEALER: You agree:
(a) To act as principal, or as agent on behalf of your
customers, in all transactions in shares of the Funds except as provided in
Section 4 hereof. You shall not have any authority to act as agent for the
issuer (the Funds), for the Principal Underwriter, or for any other dealer in
any respect, nor will you represent to any third party that you have such
authority or are acting in such capacity.
(b) To purchase shares only from us or from your
customers.
(c) To enter orders for the purchase of shares of the
Funds only from us and only for the purpose of covering purchase orders you have
already received from your customers or for your own bona fide investment.
(d) To maintain records of all sales, redemptions and
repurchases of shares made through you and to furnish us with copies of such
records on request.
(e) To distribute prospectuses and reports to your
customers in compliance with applicable legal requirements, except to the extent
that we expressly undertake to do so on your behalf.
PAGE
(f) That you will not withhold placing customers'
orders for shares so as to profit yourself as a result of such withholding or
place orders for shares in amounts just below the point at which sales charges
are reduced so as to benefit from a higher sales charge applicable to an amount
below the breakpoint.
(g) That if any shares confirmed to you hereunder are
repurchased or redeemed by any of the Funds within seven business days after
such confirmation of your original order, you shall forthwith refund to us the
full concession, allowed to you on such orders, including any payments we made
to you from our own resources as provided in Section 6(b) hereof with respect to
such orders. We shall forthwith pay to the appropriate Fund the share, if any,
of the sales charge we retained on such order and shall also pay to such Fund
the refund of the concession we receive from you as herein provided (other than
the portion of such concession we paid to you from our own resources as provided
in Section 6(b) hereof). We shall notify you of such repurchase or redemption
within a reasonable time after settlement. Termination or suspension of this
Agreement shall not relieve you or us from the requirements of this subsection.
(h) That if payment for the shares purchased is not
received within the time customary or the time required by law for such payment,
the sale may be canceled without notice or demand and without any responsibility
or liability on our part or on the part of the Funds, or at our option, we may
sell the shares which you ordered back to the Funds, in which latter case we may
hold you responsible for any loss to the Funds or loss of profit suffered by us
resulting from your failure to make payment as aforesaid. We shall have no
liability for any check or other item returned unpaid to you after you have paid
us on behalf of a purchaser. We may refuse to liquidate the investment unless we
receive the purchaser's signed authorization for the liquidation.
(i) That you shall assume responsibility for any loss
to the Funds caused by a correction made subsequent to trade date, provided such
correction was not based on any error, omission or negligence on our part, and
that you will immediately pay such loss to the Funds upon notification.
(j) That if on a redemption which you have ordered,
instructions in proper form, including outstanding certificates, are not
received within the time customary or the time required by law, the redemption
may be canceled forthwith without any responsibility or liability on our part or
on the part of any Fund, or at our option, we may buy the shares redeemed on
behalf of the Fund, in which latter case we may hold you responsible for any
loss to the Fund or loss of profit suffered by us resulting from your failure to
settle the redemption.
(k) To obtain from your customers all consents required
by applicable privacy laws to permit us, any of our affiliates or the Funds to
provide you either directly or through a service established for that purpose
with confirmations, account statements and other information about your
customers' investments in the Funds.
4. DUTIES OF DEALER: RETIREMENT ACCOUNTS. In connection with
orders for the purchase of shares on behalf of an Individual Retirement Account,
Self-Employed Retirement Plan or other retirement accounts, by mail, telephone,
or wire, you shall act as agent for the custodian or trustee of such plans
(solely with respect to the time of receipt of the application and payments),
and you shall not place such an order until you have received from your customer
payment for such purchase and, if such purchase represents the first
contribution to such a plan, the completed documents necessary to establish the
plan and enrollment in the plan. You agree to indemnify us and Franklin
Templeton Trust Company and/or Templeton Funds Trust Company as applicable for
any claim, loss, or liability resulting from incorrect investment instructions
received from you which cause a tax liability or other tax penalty.
5. CONDITIONAL ORDERS; CERTIFICATES. We will not accept from
you any conditional orders for shares of any of the Funds. Delivery of
certificates or confirmations for shares purchased shall be made by the Funds
only against constructive receipt of the purchase price, subject to deduction
for your concession and our portion of the sales charge, if any, on such sale.
No certificates for shares of the Funds will be issued unless specifically
requested.
PAGE
6. DEALER COMPENSATION.
(a) On each purchase of shares by you from us, the
total sales charges and your dealer concessions shall be as stated in each
Fund's then current prospectus, subject to NASD rules and applicable laws. Such
sales charges and dealer concessions are subject to reductions under a variety
of circumstances as described in the Funds' prospectuses. For an investor to
obtain these reductions, we must be notified at the time of the sale that the
sale qualifies for the reduced charge. If you fail to notify us of the
applicability of a reduction in the sales charge at the time the trade is
placed, neither we nor any of the Funds will be liable for amounts necessary to
reimburse any investor for the reduction which should have been effected.
(b) In accordance with the Funds' prospectuses, we or
our affiliates may, but are not obligated to, make payments to you from our own
resources as compensation for certain sales which are made at net asset value
("Qualifying Sales"). If you notify us of a Qualifying Sale, we may make a
contingent advance payment up to the maximum amount available for payment on the
sale. If any of the shares purchased in a Qualifying Sale are repurchased or
redeemed within twelve months of the month of purchase, we shall be entitled to
recover any advance payment attributable to the repurchased or redeemed shares
by reducing any account payable or other monetary obligation we may owe to you
or by making demand upon you for repayment in cash. We reserve the right to
withhold advances to you, if for any reason we believe that we may not be able
to recover unearned advances from you. Termination or suspension of this
Agreement shall not relieve you or us from the requirements of this subsection.
7. REDEMPTIONS OR REPURCHASES. Redemptions or repurchases of
shares of the Funds will be made at the net asset value of such shares, less any
applicable deferred sales or redemption charges, in accordance with the
applicable prospectuses. Except as permitted by applicable law, you agree not to
purchase any shares from your customers at a price lower than the net asset
value of such shares next computed by the Funds after the purchase (the
"Redemption/Repurchase Price"). You shall, however, be permitted to sell shares
of the Funds for the account of the record owner to the Funds at the
Redemption/Repurchase Price for such shares.
8. EXCHANGES. Telephone exchange orders will be effective only
for uncertificated shares or for which share certificates have been previously
deposited and may be subject to any fees or other restrictions set forth in the
applicable prospectuses. Exchanges from a Fund sold with no sales charge to a
Fund which carries a sales charge, and exchanges from a Fund sold with a sales
charge to a Fund which carries a higher sales charge may be subject to a sales
charge in accordance with the terms of the applicable Fund's prospectus. You
will be obligated to comply with any additional exchange policies described in
the applicable Fund's prospectus, including without limitation any policy
restricting or prohibiting "Timing Accounts" as therein defined.
9. TRANSACTION PROCESSING. All orders are subject to acceptance
by us and by the Fund or its transfer agent, and become effective only upon
confirmation by us. If required by law, each transaction shall be confirmed in
writing on a fully disclosed basis and if confirmed by us, a copy of each
confirmation shall be sent simultaneously to you if you so request. All sales
are made subject to receipt of shares by us from the Funds. We reserve the right
in our discretion, without notice, to suspend the sale of shares of the Funds or
withdraw the offering of shares of the Funds entirely. Orders will be effected
at the price(s) next computed on the day they are received if, as set forth in
the applicable Fund's current prospectus, the orders are received by us, an
agent appointed by us or the Funds prior to the time the price of the Fund's
shares is calculated. Orders received after that time will be effected at the
price(s) computed on the next business day. All orders must be accompanied by
payment in U.S. Dollars. Orders payable by check must be drawn payable in U.S.
Dollars on a U.S. bank, for the full amount of the investment.
10. MULTIPLE CLASSES. We may from time to time provide to you
written compliance guidelines or standards relating to the sale or distribution
of Funds offering multiple classes of shares (each, a "Class") with different
sales charges and distribution related operating expenses. In addition, you will
PAGE
be bound by any applicable rules or regulations of government agencies or
self-regulatory organizations generally affecting the sale or distribution of
shares of investment companies offering multiple classes of shares.
11. RULE 12B-1 PLANS. You are invited to participate in all
distribution plans (each, a "Plan") adopted for a Class of a Fund or for a Fund
that has only a single Class (each, a "Plan Class") pursuant to Rule 12b-1 under
the Investment Company Act of 1940, as amended (the "1940 Act").
To the extent you provide administrative and other services,
including, but not limited to, furnishing personal and other services and
assistance to your customers who own shares of a Plan Class, answering routine
inquiries regarding a Fund or Class, assisting in changing account designations
and addresses, maintaining such accounts or such other services as a Fund may
require, to the extent permitted by applicable statutes, rules, or regulations,
we shall pay you a Rule 12b-1 servicing fee. To the extent that you participate
in the distribution of Fund shares that are eligible for a Rule 12b-1
distribution fee, we shall also pay you a Rule 12b-1 distribution fee. All Rule
12b-1 servicing and distribution fees shall be based on the value of shares
attributable to customers of your firm and eligible for such payment, and shall
be calculated on the basis and at the rates set forth in the compensation
schedule then in effect for the applicable Plan (the "Schedule"). Without prior
approval by a majority of the outstanding shares of a particular Class of a Fund
which has a Plan, the aggregate annual fees paid to you pursuant to such Plan
shall not exceed the amounts stated as the "annual maximums" in such Plan Class'
prospectus, which amount shall be a specified percent of the value of such Plan
Class' net assets held in your customers' accounts which are eligible for
payment pursuant to this Agreement (determined in the same manner as such Plan
Class uses to compute its net assets as set forth in its effective prospectus).
You shall furnish us and each Fund that has a Plan Class
(each, a "Plan Fund") with such information as shall reasonably be requested by
the Board of Directors, Trustees or Managing General Partners (hereinafter
referred to as "Directors") of such Plan Fund with respect to the fees paid to
you pursuant to the Schedule of such Plan Fund. We shall furnish to the Boards
of Directors of the Plan Funds, for their review on a quarterly basis, a written
report of the amounts expended under the Plans and the purposes for which such
expenditures were made.
Each Plan and the provisions of any agreement relating to such
Plan must be approved annually by a vote of the Directors of the Fund that has
such Plan, including such persons who are not interested persons of such Plan
Fund and who have no financial interest in such Plan or any related agreement
("Rule 12b-1 Directors"). Each Plan or the provisions of this Agreement relating
to such Plan may be terminated at any time by the vote of a majority of the Rule
12b-1 Directors, or by a vote of a majority of the outstanding shares of the
Class that has such Plan, on sixty (60) days' written notice, without payment of
any penalty. A Plan or the provisions of this Agreement may also be terminated
by any act that terminates the Underwriting Agreement between us and the Fund
that has such Plan, and/or the management or administration agreement between
Franklin Advisers, Inc. or Templeton Investment Counsel, Inc. or their
affiliates and such Plan Fund. In the event of the termination of a Plan for any
reason, the provisions of this Agreement relating to such Plan will also
terminate.
Continuation of a Plan and provisions of this Agreement
relating to such Plan are conditioned on Rule 12b-1 Directors being ultimately
responsible for selecting and nominating any new Rule 12b-1 Directors. Under
Rule 12b-1, Directors of any of the Plan Funds have a duty to request and
evaluate, and persons who are party to any agreement related to a Plan have a
duty to furnish, such information as may reasonably be necessary to an informed
determination of whether the Plan or any agreement should be implemented or
continued. Under Rule 12b-1, a Plan Fund is permitted to implement or continue a
Plan or the provisions of this Agreement relating to such Plan from year-to-year
only if, based on certain legal considerations, the Board of Directors of such
Plan Fund is able to conclude that such Plan will benefit the Plan Class. Absent
such yearly determination, such Plan and the provisions of this Agreement
relating to such Plan must be terminated as set forth above. In addition, any
obligation assumed by a Fund pursuant to this Agreement shall be limited in all
cases to the assets of such Fund and no person shall seek satisfaction thereof
from shareholders of a Fund. You agree to waive payment of any amounts payable
PAGE
to you by us under a Fund's Plan until such time as we are in receipt of such
fee from the Fund.
The provisions of the Plans between the Plan Funds and us
shall control over the provisions of this Agreement in the event of any
inconsistency.
12. REGISTRATION OF SHARES. Upon request, we shall notify you of
the states or other jurisdictions in which each Fund's shares are currently
noticed, registered or qualified for offer or sale to the public. We shall have
no obligation to make notice filings of, register or qualify, or to maintain
notice filings of, registration of or qualification of, Fund shares in any state
or other jurisdiction. We shall have no responsibility, under the laws
regulating the sale of securities in any U.S. or foreign jurisdiction, for the
registration, qualification or licensed status of persons offering or selling
Fund shares or for the manner of offering or sale of Fund shares. If it is
necessary to file notice of, register or qualify Fund shares in any foreign
jurisdictions in which you intend to offer the shares of any Funds, it will be
your responsibility to arrange for and to pay the costs of such notice filing,
registration or qualification; prior to any such notice filing, registration or
qualification, you will notify us of your intent and of any limitations that
might be imposed on the Funds, and you agree not to proceed with such notice
filing, registration or qualification without the written consent of the
applicable Funds and of ourselves. Except as stated in this section, we shall
not, in any event, be liable or responsible for the issue, form, validity,
enforceability and value of such shares or for any matter in connection
therewith, and no obligation not expressly assumed by us in this Agreement shall
be implied. Nothing in this Agreement shall be deemed to be a condition,
stipulation or provision binding any person acquiring any security to waive
compliance with any provision of the Securities Act of 1933, as amended (the
"1933 Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act"),
the 1940 Act, the rules and regulations of the U.S. Securities and Exchange
Commission, or any applicable laws or regulations of any government or
authorized agency in the U.S. or any other country having jurisdiction over the
offer or sale of shares of the Funds, or to relieve the parties hereto from any
liability arising under such laws, rules and regulations.
13. CONTINUOUSLY OFFERED CLOSED-END FUNDS. This Section 13
relates solely to shares of Funds that represent a beneficial interest in the
Franklin Floating Rate Trust and shares issued by any other continuously offered
closed-end investment company registered under the 1940 Act for which we or an
affiliate of ours serve as principal underwriter and that periodically
repurchases its shares (each, a "Trust"). Shares of a Trust that are offered to
the public will be registered under the 1933 Act, and are expected to be offered
during an offering period that may continue indefinitely ("Continuous Offering
Period"). There is no guarantee that such a continuous offering will be
maintained by a Trust. The Continuous Offering Period, shares of a Trust and
certain of the terms on which such shares are offered shall be as described in
the prospectus of the Trust.
As set forth in a Trust's then current prospectus, we may, but
are not obligated to, provide you with appropriate compensation for selling
shares of the Trust. In addition, you may be entitled to a fee for servicing
your clients who are shareholders in a Trust, subject to applicable law and NASD
Conduct Rules. You agree that any repurchases of shares of a Trust that were
originally purchased as Qualifying Sales shall be subject to Subsection 6(b)
hereof.
You expressly acknowledge and understand that, notwithstanding
anything to the contrary in this Agreement:
(a) No Trust has a Rule 12b-1 Plan and in no event will
a Trust pay, or have any obligation to pay, any compensation directly or
indirectly to you.
(b) Shares of a Trust will not be repurchased by either
the Trust (other than through repurchase offers by the Trust from time to time,
if any) or by us and no secondary market for such shares exists currently, or is
expected to develop. Any representation as to a repurchase or tender offer by a
Trust, other than that set forth in the Trust's then current prospectus,
notification letters, reports or other related material provided by the Trust,
is expressly prohibited.
PAGE
(c) An early withdrawal charge payable by shareholders
of a Trust to us may be imposed on shares accepted for repurchase by the Trust
that have been held for less than a stated period, as set forth in the Trust's
then current Prospectus.
(d) In the event your customer cancels his or her order for
shares of a Trust after confirmation, such shares will not be repurchased,
remarketed or otherwise disposed of by or though us.
14. FUND INFORMATION. No person is authorized to give any
information or make any representations concerning shares of any Fund except
those contained in the Fund's then current prospectus or in materials issued by
us as information supplemental to such prospectus. We will supply reasonable
quantities of prospectuses, supplemental sales literature, sales bulletins, and
additional information as issued by the Fund or us. You agree not to use other
advertising or sales material relating to the Funds except that which (a)
conforms to the requirements of any applicable laws or regulations of any
government or authorized agency in the U.S. or any other country having
jurisdiction over the offering or sale of shares of the Funds, and (b) is
approved in writing by us in advance of such use. Such approval may be withdrawn
by us in whole or in part upon notice to you, and you shall, upon receipt of
such notice, immediately discontinue the use of such sales literature, sales
material and advertising. You are not authorized to modify or translate any such
materials without our prior written consent.
15. INDEMNIFICATION. You agree to indemnify, defend and hold
harmless us, the Funds, and the respective officers, directors and employees of
the Funds and us from any and all losses, claims, liabilities and expenses
arising out of (1) any alleged violation of any statute or regulation (including
without limitation the securities laws and regulations of the U.S. or any state
or foreign country) or any alleged tort or breach of contract, in or related to
the offer or sale by you of shares of the Funds pursuant to this Agreement
(except to the extent that our negligence or failure to follow correct
instructions received from you is the cause of such loss, claim, liability or
expense), (2) any redemption or exchange pursuant to telephone instructions
received from you or your agents or employees, or (3) the breach by you of any
of the terms and conditions of this Agreement. This Section 15 shall survive the
termination of this Agreement.
16. TERMINATION; SUCCESSION; ASSIGNMENT; AMENDMENT. Each party
to this Agreement may terminate its participation in this Agreement by giving
written notice to the other parties. Such notice shall be deemed to have been
given and to be effective on the date on which it was either delivered
personally to the other parties or any officer or member thereof, or was mailed
postpaid or delivered by electronic transmission to the other parties' chief
legal officers at the addresses shown herein or in the most recent NASD Manual.
This Agreement shall terminate immediately upon the appointment of a Trustee
under the Securities Investor Protection Act or any other act of insolvency by
you. The termination of this Agreement by any of the foregoing means shall have
no effect upon transactions entered into prior to the effective date of
termination. A trade placed by you subsequent to your voluntary termination of
this Agreement will not serve to reinstate the Agreement. Reinstatement, except
in the case of a temporary suspension of a dealer, will be effective only upon
written notification by us to you. This Agreement will terminate automatically
in the event of its assignment by us. For purposes of the preceding sentence,
the word "assignment" shall have the meaning given to it in the 1940 Act. This
Agreement may not be assigned by you without our prior written consent. This
Agreement may be amended by us at any time by written notice to you and your
placing of an order or acceptance of payments of any kind after the effective
date and receipt of notice of any such Amendment shall constitute your
acceptance of such Amendment.
17. SETOFF; DISPUTE RESOLUTION. Should any of your concession
accounts with us have a debit balance, we may offset and recover the amount owed
to us or the Funds from any other account you have with us, without notice or
demand to you. In the event of a dispute concerning any provision of this
Agreement, either party may require the dispute to be submitted to binding
arbitration under the commercial arbitration rules of the NASD or the American
Arbitration Association. Judgment upon any arbitration award may be entered by
any court having jurisdiction. This Agreement shall be construed in accordance
PAGE
with the laws of the State of California, not including any provision that would
require the general application of the law of another jurisdiction.
18. ACCEPTANCE; CUMULATIVE EFFECT. This Agreement is cumulative
and supersedes any agreement previously in effect. It shall be binding upon the
parties hereto when signed by us and accepted by you. If you have a current
dealer agreement with us, your first trade or acceptance of payments from us
after your receipt of this Agreement, as it may be amended pursuant to Section
16, above, shall constitute your acceptance of its terms. Otherwise, your
signature below shall constitute your acceptance of its terms.
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By /s/ GREG JOHNSON
Greg Johnson, President
777 Mariners Island Blvd.
San Mateo, CA 94404
Attention: Chief Legal Officer (for legal notices only)
415/312-2000
700 Central Avenue
St. Petersburg, Florida 33701-3628
813/823-8712
Dealer: If you have NOT previously signed a Dealer Agreement with us, please
complete and sign this section and return the original to us.
DEALER NAME:
By _________________
(Signature)
Name:
Title:
Address:
Telephone:
NASD CRD #
Franklin Templeton Dealer #
(Internal Use Only)
May 15, 1998
Re: Amendment of Dealer Agreement - Notice Pursuant to Section 16
Dear Securities Dealer:
This letter constitutes notice of amendment of the current Dealer Agreement (the
"Agreement") between Franklin/Templeton Distributors, Inc. ("we" or "us") and
you pursuant to Section 16 of the Agreement. The Agreement is hereby amended as
follows:
1. Defined terms in this amendment have the meanings as stated
in the Agreement unless otherwise indicated.
2. Section 6 is modified to add a subsection 6(c), as follows:
(c) The following limitations apply with respect to
shares of each Trust as described in Section 13 of this Agreement.
(1) Consistent with the NASD Conduct Rules, the total
compensation to be paid to us and selected dealers and their affiliates,
including you and your affiliates, in connection with the distribution of shares
of a Trust will not exceed the underwriting compensation limitation prescribed
by NASD Conduct Rule 2710. The total underwriting compensation to be paid to us
and selected dealers and their affiliates, including you and your affiliates,
may include: (i) at the time of purchase of shares a payment to you or another
securities dealer of 1% of the dollar amount of the purchased shares by the
Distributor; and (ii) a quarterly payment at an annual rate of .50% to you or
another securities dealer based on the value of such remaining shares sold by
you or such securities dealer, if after twelve (12) months from the date of
purchase, the shares sold by you or such securities dealer remain outstanding.
(2) The maximum compensation shall be no more
than as disclosed in the section "Payments to Dealers" of the prospectus of the
applicable Trust.
Pursuant to Section 16 of the Agreement, your placement of an order or
acceptance of payments of any kind after the effective date and receipt of
notice of this amendment shall constitute your acceptance of this amendment.
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By /s/GREG JOHNSON
Greg Johnson, President
777 Mariners Island Blvd.
San Mateo, CA 94404
Attention: Chief Legal Officer (for legal notices only)
650/312-2000
100 Fountain Parkway
St. Petersburg, FL 33716
813/299-8712
AMENDMENT, dated March 2, 1998 to the custody agreements (each an
"Agreement"), between the Templeton funds listed on Schedule A hereto (each a
"Fund"), with each having a place of business at 500 East Broward Blvd., Ft.
Lauderdale, FL 33394 and The Chase Manhattan Bank ("Chase"), having a place of
business at 270 Park Ave., New York, NY 10017-2070.
It is hereby agreed as follows:
Section 1. Except as modified hereby, the Agreement is confirmed in all
respects. Capitalized terms used herein without definition shall have the
meanings ascribed to them in the Agreement.
Section 2. The Agreement is amended as follows:
Delete all of Section 2 of the Agreement after subsection (B.) thereof, and
insert, in lieu thereof, the following:
(C.) Fund's board of directors (or equivalent body) (hereinafter "Board")
hereby delegates to Chase, and Chase hereby accepts the delegation to it, of the
obligation to perform as Fund's "Foreign Custody Manager" (as that term is
defined in SEC rule 17f-5(a)(2)), both for the purpose of selecting Eligible
Foreign Custodians (as that term is defined herein) to hold Securities and Cash
and of evaluating the contractual arrangements with such Eligible Foreign
Custodians (as set forth in SEC rule 17f-5(c)(2)); provided that, the term
Eligible Foreign Custodian shall not include any "Compulsory Depository." A
Compulsory Depository shall mean a Foreign Securities Depository or clearing
agency the use of which is compulsory because: (1) its use is required by law or
regulation, (2) securities cannot be withdrawn from the depository, or (3)
maintaining securities outside the depository is not consistent with prevailing
custodial practices in the country which the depository serves.
PAGE
Compulsory Depositories used by Chase as of the date hereof are set forth in
Appendix 1-A hereto, and as the same may be amended on notice to Fund from time
to time.
(i) In connection with the foregoing, Chase shall:
(1) provide written reports notifying Fund's Board of the placement of
Securities and Cash with particular Eligible Foreign Custodians and of
any material change in the arrangements with such Eligible Foreign
Custodians, with such reports to be provided to Fund's Board at such
times as the Board deems reasonable and appropriate based on the
circumstances of Fund's foreign custody arrangements;
(2) exercise such reasonable care, prudence and diligence in performing
as Fund's Foreign Custody Manager as a person having responsibility for
the safekeeping of Securities and Cash would exercise;
(3) in selecting an Eligible Foreign Custodian, first have determined
that Securities and Cash placed and maintained in the safekeeping of
such Eligible Foreign Custodian shall be subject to reasonable care,
based on the standards applicable to custodians in the relevant market,
after having considered all factors relevant to the safekeeping of such
Securities and Cash, including, without limitation, those factors set
forth in SEC rule 17f-5(c)(1)(i)-(iv);
(4) determine that the written contract with the Eligible Foreign
Custodian (or, in the case of an Eligible Foreign Custodian that is a
non-Compulsory Depository or clearing agency, such contract, the rules
or established practices or procedures of the Depository, or any
combination of the foregoing) requires that the Eligible Foreign
Custodian will provide reasonable care for Securities and Cash based on
the standards applicable to custodians in the relevant market; and
2
PAGE
(5) have established a system to monitor the continued appropriateness
of maintaining Securities and Cash with particular Eligible Foreign
Custodians and of the governing contractual arrangements. Chase shall
also monitor Compulsory Depositories and shall advise Fund of any
material negative change in the performance of, or arrangements with,
any Compulsory Depository as the same would adversely affect the
custody of assets.
Subject to (i)(1)-(5) above, Chase is hereby authorized to place and maintain
Securities and Cash on behalf of Fund with Eligible Foreign Custodians pursuant
to a written contract deemed appropriate by Chase.
(ii) Except as expressly provided herein, Fund shall be solely responsible
to assure that the maintenance of Securities and Cash hereunder complies with
the rules, regulations, interpretations and exemptive orders promulgated by or
under the authority of the SEC.
(iii) Chase represents to Fund that it is a U.S. Bank as defined in Rule
17f-5(a)(7). Fund represents to Chase that: (1) the Securities and Cash being
placed and maintained in Chase's custody are subject to the Investment Company
Act of 1940, as amended (the "1940 Act"), as the same may be amended from time
to time; (2) its Board has determined that it is reasonable to rely on Chase to
perform as Fund's Foreign Custody Manager; and (3) its Board or its investment
adviser shall have determined that Fund may maintain Securities and Cash in each
country in which Fund's Securities and Cash shall be held hereunder and
determined to accept the risks arising therefrom (including, but not limited to,
a country's financial infrastructure (and including any Compulsory Depository
operating in such country), prevailing custody and settlement practices, laws
applicable to the safekeeping and recovery of Securities and Cash held in
custody, and the likelihood of nationalization, currency controls and the like)
(collectively ("Country Risk")). Nothing contained herein shall require Chase to
make any selection that would entail consideration of Country Risk.
3
PAGE
(iv) Chase shall assist Fund in monitoring Country Risk by furnishing such
information relating to the Country Risk as is specified in Appendix 1-B hereto.
Fund hereby acknowledges that: (1) such information is solely designed to inform
Fund of market conditions and procedures and is not intended as a recommendation
to invest or not invest in particular markets; and (2) Chase has gathered the
information from sources it considers reliable, but that Chase shall have no
responsibility for inaccuracies or incomplete information except to the extent
negligently obtained by Chase.
Section 3. Add the following at the end of Section 3(d):
and which shall be limited to Eligible Foreign Custodians as defined in
(i)-(ii) and (v) of the definition of Eligible Foreign Custodians contained
herein; provided that, for purposes of the sections of this Agreement
addressing Chase liability (including, but not limited to, Sections 7, 10,
14, and 16-17), Foreign Bank shall not include any Foreign Bank as to which
Chase has not acted as Foreign Custody Manager.
Section 4. Add the following at the end of Section 3(e):
and which shall be limited to Eligible Foreign Custodians as
defined in (iii) and (iv)-(v) of the definition of Eligible
Foreign Custodians contained herein; provided that, for
purposes of the sections of this Agreement addressing Chase
liability (including, but not limited to, Sections 7, 10, 14,
and 16-17) the term Foreign Securities Depository shall not
include any Compulsory Depository or any non-compulsory
depository as to which Chase has not acted as Foreign Custody
Manager.
Section 5. Add the following definitions in appropriate alphabetic sequence
to Section 3 of the Agreement:
4
PAGE
(1) a "U.S. Bank," shall mean a U.S. bank as defined in SEC rule
17f-5(a)(7).
(2) an "Eligible Foreign Custodian," shall mean (i) a banking institution
or trust company, incorporated or organized under the laws of a country
other than the United States, that is regulated as such by that country's
government or an agency thereof, (ii) a majority-owned direct or indirect
subsidiary of a U.S. Bank or bank holding company which subsidiary is
incorporated or organized under the laws of a country other than the United
States; (iii) a securities depository or clearing agency, incorporated or
organized under the laws of a country other than the United States, that
acts as a system for the central handling of securities or equivalent
book-entries in that country and that is regulated by a foreign financial
regulatory authority as defined under section 2(a)(50) of the 1940 Act,
(iv) a securities depository or clearing agency organized under the laws of
a country other than the United States when acting as a transnational
system ("Transnational Depository") for the central handling of securities
or equivalent book-entries, and (v) any other entity that shall have been
so qualified by exemptive order, rule or other appropriate action of the
SEC.
Section 6. Delete existing Section 5 of the Agreement and, insert, in lieu
thereof, the following:
At the request of Fund, Chase may, but need not, add an Eligible
Foreign Custodian that is a U.S. Bank, a Foreign Bank or Foreign
Securities Depository where Chase has not acted as Foreign Custody
Manager with respect to the selection thereof; provided that, any such
entities shall not be included for purposes of the sections of this
Agreement addressing Chase liability (including, but not limited to,
Sections 7, 10, 14, and 16-17). Chase shall notify Fund in the event
that it elects to add any such entity.
*********************
5
PAGE
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
TEMPLETON THE CHASE MANHATTAN BANK
By:/s/BARBARA J. GREEN By:/s/LENORE VANDEN HANDEL
----------------------- -------------------------------
Name: Barbara J. Green Name: Lenore Vanden Handel
Title: Secretary Title: Vice President
6
PAGE
Appendix 1-A
LIST OF COMPULSORY DEPOSITORIES APPROVED BY THE BOARD
PAGE
Appendix 1-B
INFORMATION REGARDING COUNTRY RISK
1. To aid Fund's board in its determinations regarding Country Risk,
Chase shall furnish board annually and upon the initial placing of Securities
and Cash into a country the following information (check items applicable):
A Opinions of local counsel concerning:
___ i. Whether applicable foreign law would restrict the access
afforded Fund's independent public accountants to books and
records kept by an eligible foreign custodian located in that
country.
___ ii. Whether applicable foreign law would restrict the Fund's ability
to recover its assets in the event of the bankruptcy of an
Eligible Foreign Custodian located in that country.
___ iii. Whether applicable foreign law would restrict the Fund's ability
to recover assets that are lost while under the control of an
Eligible Foreign Custodian located in the country.
B. Written information concerning:
___ i. The likelihood of expropriation, nationalization, freezes, or
confiscation of Fund's assets.
2
PAGE
___ ii. Whether difficulties in converting Fund's cash and cash
equivalents to U.S. dollars are reasonably foreseeable.
C. A market report with respect to the following topics:
(i) securities regulatory environment, (ii) foreign ownership
restrictions, (iii) foreign exchange, (iv) securities settlement and
registration, (v) taxation, and (vi) compulsory depositories (including
depository evaluation).
2. To aid Fund's board in monitoring Country Risk, Chase shall furnish
board the following additional information:
As more fully described in the FCM procedures, market flashes,
including with respect to changes in the information in market reports.
3
PAGE
Schedule A
TEMPLETON U.S. FUNDS
As of February 28, 1998
TEMPLETON GROWTH FUND, INC. ("TGF") - 12/31/86
TEMPLETON FUNDS, INC. ("TFI") - 2/11/86
Templeton World Fund
Templeton Foreign Fund
TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC. ("TGSCF") - 5/15/96
TEMPLETON INCOME TRUST ("TIT") - 5/15/96
Templeton Global Bond Fund
TEMPLETON GLOBAL REAL ESTATE FUND ("TGREF") - 5/15/96
TEMPLETON CAPITAL ACCUMULATOR FUND, INC. ("TCAF") - 1/14/91
TEMPLETON DEVELOPING MARKETS TRUST ("TDMT") - 10/16/91
TEMPLETON AMERICAN TRUST, INC. ("TAT") - 2/26/91
TEMPLETON INSTITUTIONAL FUNDS, INC. ("TIFI") - 1/29/96
Templeton Foreign Equity Series
Templeton Growth Series
Templeton Emerging Markets Series
Templeton Emerging Fixed Income Series
TEMPLETON GLOBAL OPPORTUNITIES TRUST ("TGOT") - 1/18/90
TEMPLETON GLOBAL INVESTMENT TRUST ("TGIT") - 5/7/95
Templeton Growth and Income Fund
Templeton Global Infrastructure Fund
Templeton Americas Government Securities Fund
Templeton Greater European Fund
Templeton Latin America Fund
TEMPLETON EMERGING MARKETS FUND, INC. ("TEMF") - 2/1/87
TEMPLETON GLOBAL INCOME FUND, INC. ("TGIF") - 2/29/88
TEMPLETON GLOBAL GOVERNMENTS INCOME TRUST ("TGG") - 10/22/88
TEMPLETON EMERGING MARKETS INCOME FUND, INC. ("TEMIF") - 9/17/93
TEMPLETON CHINA WORLD FUND, INC. ("TCWF") - 9/7/93
TEMPLETON EMERGING MARKETS APPRECIATION FUND, INC. ("TEMAF") - 4/22/94
TEMPLETON DRAGON FUND, INC. ("TDF") - 8/30/94
TEMPLETON VIETNAM AND SOUTHEAST ASIA FUND, INC. ("TVF") - 9/15/94
TEMPLETON RUSSIA FUND, INC. ("TRF") - 6/15/95
TEMPLETONVARIABLE PRODUCTS SERIES FUND ("TVPSF") - 8/31/88 (amended & restated
2/23/96)
Templeton Money Market Fund
Templeton Bond Fund
Templeton Stock Fund
Templeton Asset Allocation Fund
Templeton International Fund
Templeton Developing Markets Fund
Mutual Discovery Investments Fund
Mutual Shares Investments Fund
Franklin Growth Investments Fund
Franklin Small Cap Investments Fund
FRANKLIN/TEMPLETON JAPAN FUND - 6/24/94
TEMPLETON VARIABLE ANNUITY FUND - 1/27/88
4
AMENDMENT No. 2, dated July 23, 1998 to the custody agreements (each an
"Agreement"), between each of the Templeton finds listed on Schedule A hereto
(each a "Fund"), with each having a place of business at 500 East Broward Blvd.,
Ft. Lauderdale, FL 33394, and The Chase Manhattan Bank ("Chase"), having a place
of business at 270 Park Ave., New York, NY 10017-2070.
It is hereby agreed as follows:
Section 1. Except as modified hereby, the Agreement is confirmed in all
respects. Capitalized terms used herein without definition shall have the
meanings ascribed to them in the Agreement. This Amendment supersedes in all
respects the Amendment between the parties, dated March 2, 1998, which shall
have no further force or effect as of the date hereof.
Section 2. The Agreement is amended as follows:
Delete all of Section 2 of the Agreement after subsection (B.) thereof, and
insert, in lieu thereof, the following:
(C.) Fund's board of directors (or equivalent body) (hereinafter "Board")
hereby delegates to Chase, and Chase hereby accepts the delegation to it of, the
obligation to perform as Fund's "Foreign Custody Manager" (as that term is
defined in Securities and Exchange Commission ("SEC") rule 17f-5(a)(2)), both
for the purpose of selecting Eligible Foreign Custodians (as that term is
defined herein) to hold Securities and Cash and of evaluating the contractual
arrangements with such Eligible Foreign Custodians (as set forth in SEC rule
17f-5(c)(2)); provided that, the term Eligible Foreign Custodian shall not
include any "Compulsory Depository." A Compulsory Depository shall mean a
Foreign Securities Depository or clearing agency the use of which is compulsory
because: (1) its use is required by law or regulation, (2) securities cannot be
withdrawn from the depository, or (3) maintaining securities outside the
depository is not consistent with prevailing custodial practices in the country
which the depository serves. Compulsory Depositories used by Chase as of the
date hereof are set forth in Appendix 1-A hereto, and as the same may be amended
on notice to Fund from time to time.
(i) In connection with the foregoing, Chase shall:
PAGE
(1) provide written reports notifying Fund's Board of the placement of
Securities and Cash with particular Eligible Foreign Custodians and of any
material change in the arrangements with such Eligible Foreign Custodians,
with such reports to be provided to Fund's Board at such times as the Board
deems reasonable and appropriate based on the circumstances of Fund's
foreign custody arrangements;
(2) exercise such reasonable care, prudence and diligence in performing as
Fund's Foreign Custody Manager as a person having responsibility for the
safekeeping of Securities and Cash would exercise;
(3) in selecting an Eligible Foreign Custodian, first have determined that
Securities and Cash placed and maintained in the safekeeping of such
Eligible Foreign Custodian shall be subject to reasonable care, based on
the standards applicable to custodians in the relevant market, after having
considered all factors relevant to the safekeeping of such Securities and
Cash, including, without limitation, those factors set forth in SEC rule
17f-5(c)(1)(i)-(iv);
(4) determine that the written contract with the Eligible Foreign Custodian
requires that the Eligible Foreign Custodian will provide reasonable care
for Securities and Cash based on the standards applicable to custodians in
the relevant market; provided that, in the case of an Eligible Foreign
Custodian that is a non-Compulsory Depository or clearing agency, such
determination shall only be made to the extent required by SEC rule 17f-5
as in effect from time to time and where so required shall be made based on
such contract, the rules or established practices or procedures of the
Depository, or any combination thereof; and
(5) have established a system to monitor the continued appropriateness of
maintaining Securities and Cash with particular Eligible Foreign Custodians
and of the governing contractual arrangements. Chase shall also monitor
Compulsory Depositories and shall advise Fund of any material negative
change in the performance of, or arrangements with, any Compulsory
Depository as the same would adversely affect the custody of assets. With
respect to monitoring Compulsory Depositories, Chase shall use its
reasonable efforts to obtain the information with respect to the factors
set forth on Schedule 1-C hereto: (i) by November 20, 1998 with respect to
any Compulsory Depository in a country in which Securities are held as of
the date hereof; (ii)
PAGE
to the extent feasible in light of the circumstances then prevailing in a
given country in which Securities are held, no later than 90 days after the
establishment of, or a determination by Chase that a depository has become,
a Compulsory Depository in such country; and (iii) to the extent feasible
in light of the circumstances then prevailing in a given country, no later
than 90 days after the first placement of Securities after the date hereof
with a Subcustodian where such country has a Compulsory Depository. Chase
shall advise Fund when, to Chase's knowledge based on such reasonable
efforts, there is a negative answer with respect to a Compulsory Depository
as to any of such factors. In connection with the foregoing: (i) Fund
acknowledges and agrees that Chase's agreements with Eligible Foreign
Custodians do not, as of the date hereof, comply with factor (i) on
Schedule 1-C and that Chase shall not amend such agreements to so comply
unless Rule 17f-5 is amended or interpreted by the Securities and Exchange
Commission to incorporate such a factor into the Rule with respect to
Compulsory Depositories; and (ii) to the extent that Rule 17f-5 is amended
or interpreted by the Securities and Exchange Commission to incorporate
materially one or more of (i)-(viii), Chase shall be obligated to obtain
the relevant information on such incorporated factors rather than being
limited only to using its reasonable efforts to do so.
In the event that the SEC adopts standards or criteria different from those
set forth in Schedule 1-C, the above provisions and Schedule 1-C shall be
deemed to be amended to conform to the standards or criteria adopted by the
SEC, it being understood that the time within which Chase must furnish the
required information shall be a reasonable time in light of such
differences.
Subject to (i)(1)-(4) and the first sentence of (5) above, Chase is hereby
authorized to place and maintain Securities and Cash on behalf of Fund with
Eligible Foreign Custodians pursuant to a written contract deemed appropriate by
Chase.
(ii) Except as expressly provided herein, Fund shall be responsible to
assure that the maintenance of Securities and Cash hereunder complies with the
rules, regulations, interpretations and exemptive orders promulgated by or under
the authority of the SEC.
(iii) Chase represents to Fund that it is a U.S. Bank as defined in Rule
17f-5(a)(7). Fund represents to Chase that: (1) the Securities and Cash being
placed and maintained in Chase's custody are subject to the Investment Company
Act of 1940, as amended (the "1940 Act"), as the same may be amended from time
PAGE
to time; (2) its Board has determined that it is reasonable to rely on Chase to
perform as Fund's Foreign Custody Manager; and (3) its Board or its investment
adviser shall have determined that Fund may maintain Securities and Cash in each
country in which Fund's Securities and Cash shall be held hereunder and
determined to accept the risks arising therefrom (including, but not limited to,
a country's financial infrastructure (and including any Compulsory Depository
operating in such country), prevailing custody and settlement practices, laws
applicable to the safekeeping and recovery of Securities and Cash held in
custody, and the likelihood of nationalization, currency controls and the like)
(collectively ("Country Risk")). Nothing contained herein shall require Chase to
make any selection that would entail consideration of Country Risk.
(iv) Chase shall assist Fund in monitoring Country Risk by furnishing such
information relating to the Country Risk as is specified in Appendix 1-B hereto.
Fund hereby acknowledges that: (1) such information is solely designed to inform
Fund of market conditions and procedures and is not intended as a recommendation
to invest or not invest in particular markets; and (2) Chase has gathered the
information from sources it considers reliable, but that Chase shall have no
responsibility for inaccuracies or incomplete information except to the extent
negligently obtained by Chase.
Section 3. Add the following at the end of Section 3(d):
and which shall be limited to Eligible Foreign Custodians as defined in
(i)-(ii) and (v) of the definition of Eligible Foreign Custodians contained
herein; provided that, for purposes of the sections of this Agreement
addressing Chase liability (including, but not limited to, Sections 7, 10,
14, and 16-17), Foreign Bank shall not include any Foreign Bank as to which
Chase has not acted as Foreign Custody Manager.
Section 4. Add the following at the end of Section 3(e):
and which shall be limited to Eligible Foreign Custodians as defined
in (iii) and (iv)-(v) of the definition of Eligible Foreign Custodians
contained herein; provided that, for purposes of the sections of this
Agreement addressing Chase liability (including, but not limited to,
Sections 7, 10, 14, and 16-17) the term Foreign Securities Depository
shall not include any Compulsory Depository or any non-compulsory
depository as to which Chase has not acted as Foreign Custody Manager.
PAGE
Section 5. Add the following definitions in appropriate alphabetic sequence
to Section 3 of the Agreement:
(1) a "U.S. Bank," shall mean a U.S. bank as defined in SEC rule
17f-5(a)(7).
(2) an "Eligible Foreign Custodian," shall mean (i) a banking
institution or trust company, incorporated or organized under the laws
of a country other than the United States, that is regulated as such
by that country's government or an agency thereof, (ii) a
majority-owned direct or indirect subsidiary of a U.S. Bank or bank
holding company which subsidiary is incorporated or organized under
the laws of a country other than the United States; (iii) a securities
depository or clearing agency, incorporated or organized under the
laws of a country other than the United States, that acts as a system
for the central handling of securities or equivalent book-entries in
that country and that is regulated by a foreign financial regulatory
authority as defined under section 2(a)(50) of the 1940 Act, (iv) a
securities depository or clearing agency organized under the laws of a
country other than the United States when acting as a transnational
system ("Transnational Depository") for the central handling of
securities or equivalent book-entries, and (v) any other entity that
shall have been so qualified by exemptive order, rule or other
appropriate action of the SEC.
Section 6. Delete existing Section 5 of the Agreement and, insert, in lieu
thereof, the following:
At the request of Fund, Chase may, but need not, add an Eligible
Foreign Custodian that is a U.S. Bank, a Foreign Bank or Foreign
Securities Depository where Chase has not acted as Foreign Custody
Manager with respect to the selection thereof; provided that, any such
entities shall not be included for purposes of the sections of this
Agreement addressing Chase liability (including, but not limited to,
Sections 7, 10, 14, and 16-17). Chase shall notify Fund in the event
that it elects to add any such entity.
*********************
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
PAGE
TEMPLETON THE CHASE MANHATTAN BANK
(on behalf of each of the Funds
listed on Schedule A hereto)
By:/s/ BARBARA J. GREEN By:/s/LENORE VANDEN HANDEL
-------------------------- -------------------------------
Name: Barbara J. Green Name: Lenore Vanden Handel
Title: Secretary Title: Vice President
PAGE
Schedule A
TEMPLETON U.S. FUNDS
As of June 30, 1998
TEMPLETON GROWTH FUND, INC. ("TGF") - 12/31/86
TEMPLETON FUNDS, INC. ("TFI") - 2/11/86
Templeton World Fund
Templeton Foreign Fund
TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC. ("TGSCF") - 5/15/96
TEMPLETON INCOME TRUST ("TIT") - 5/15/96
Templeton Global Bond Fund
TEMPLETON GLOBAL REAL ESTATE FUND ("TGREF") - 5/15/96
TEMPLETON CAPITAL ACCUMULATOR FUND, INC. ("TCAF") - 1/14/91
TEMPLETON DEVELOPING MARKETS TRUST ("TDMT") - 10/16/91
TEMPLETON AMERICAN TRUST, INC. ("TAT") - 2/26/91
TEMPLETON INSTITUTIONAL FUNDS, INC. ("TIFI") - 1/29/96
Templeton Foreign Equity Series
Templeton Growth Series
Templeton Emerging Markets Series
Templeton Emerging Fixed Income Series
TEMPLETON GLOBAL OPPORTUNITIES TRUST ("TGOT") - 1/18/90
TEMPLETON GLOBAL INVESTMENT TRUST ("TGIT") - 5/7/95
Templeton Growth and Income Fund
Templeton Global Infrastructure Fund
Templeton Americas Government Securities Fund
Templeton Greater European Fund
Templeton Latin America Fund
TEMPLETON EMERGING MARKETS FUND, INC. ("TEMF") - 2/1/87
TEMPLETON GLOBAL INCOME FUND, INC. ("TGIF") - 2/29/88
TEMPLETON GLOBAL GOVERNMENTS INCOME TRUST ("TGG") - 10/22/88
TEMPLETON EMERGING MARKETS INCOME FUND, INC. ("TEMIF") - 9/17/93
TEMPLETON CHINA WORLD FUND, INC. ("TCWF") - 9/7/93
TEMPLETON EMERGING MARKETS APPRECIATION FUND, INC. ("TEMAF") - 4/22/94
TEMPLETON DRAGON FUND, INC. ("TDF") - 8/30/94
TEMPLETON VIETNAM AND SOUTHEAST ASIA FUND, INC. ("TVF") - 9/15/94
TEMPLETON RUSSIA FUND, INC. ("TRF") - 6/15/95
TEMPLETON VARIABLE PRODUCTS SERIES FUND ("TVPSF") - 8/31/88 (amended & restated
2/23/96)
Templeton Money Market Fund
Templeton Bond Fund
Templeton Stock Fund
Templeton Asset Allocation Fund
Templeton International Fund
Templeton Developing Markets Fund
Mutual Discovery Investments Fund
Mutual Shares Investments Fund
Franklin Growth Investments Fund
Franklin Small Cap Investments Fund
PAGE
Appendix 1-A
LIST OF COMPULSORY DEPOSITORIES APPROVED BY THE BOARD
PAGE
Appendix 1-B
INFORMATION REGARDING COUNTRY RISK
1. To aid Fund's board in its determinations regarding Country Risk,
Chase shall furnish board annually and upon the initial placing of Securities
and Cash into a country the following information (check items applicable):
A Opinions of local counsel concerning:
___ i. Whether applicable foreign law would restrict the access
afforded Fund's independent public accountants to books and
records kept by an eligible foreign custodian located in that
country.
___ ii. Whether applicable foreign law would restrict the Fund's ability
to recover its assets in the event of the bankruptcy of an
Eligible Foreign Custodian located in that country.
___ iii. Whether applicable foreign law would restrict the Fund's ability
to recover assets that are lost while under the control of an
Eligible Foreign Custodian located in the country.
B. Written information concerning:
___ i. The likelihood of expropriation, nationalization, freezes, or
confiscation of Fund's assets.
___ ii. Whether difficulties in converting Fund's cash and cash
equivalents to U.S. dollars are reasonably foreseeable.
C. A market report with respect to the following topics:
PAGE
(i) securities regulatory environment, (ii) foreign ownership
restrictions, (iii) foreign exchange, (iv) securities settlement and
registration, (v) taxation, and (vi) compulsory depositories (including
depository evaluation).
2. To aid Fund in monitoring Country Risk, Chase shall furnish the
following additional information:
As more fully described in the Foreign Custody Manager procedures,
market flashes, including with respect to changes in the information in market
reports.
PAGE
Appendix 1-C
FACTORS REGARDING COMPULSORY DEPOSITORIES
(i) Whether the Eligible Foreign Custodian which is participating in
the Compulsory Depository has undertaken to adhere to the roles,
practices and procedures of such Compulsory Depository;
(ii) Whether no regulatory authority with oversight responsibility for
the Compulsory Depository has issued a public notice that the
Compulsory Depository is not in compliance with any material capital,
solvency, insurance or other similar financial strength requirements
imposed by such authority or, in the case of such notice having been
issued, that such notice has been withdrawn or the remedy of such
noncompliance has been publicly announced by the Compulsory
Depository;
(iii) Whether no regulatory authority with oversight responsibility
over the Compulsory Depository has issued a public notice that the
Compulsory Depository is not in compliance with any material internal
controls requirement imposed by such authority or, in the case of such
notice having been issued, that such notice has been withdrawn or the
remedy of such noncompliance has been publicly announced by the
Compulsory Depository;
(iv) Whether the Compulsory Depository maintains Fund's assets
deposited with the Compulsory Depository by the Eligible Foreign
Custodian participant under no less favorable safekeeping conditions
than those that apply generally to other participants in the
Compulsory Depository;
(v) Whether the Compulsory Depository maintains records that segregate
the Compulsory Depository's own assets from the assets of participants
in the Compulsory Depository;
PAGE
(vi) Whether the Compulsory Depository maintains records that identify
the assets of each of its participants;
(vii) Whether the Compulsory Depository provides periodic reports to
its participants with respect to the safekeeping of assets maintained
by the Compulsory Depository including by way of example, notification
of any transfer to or from participant accounts; and
(viii) Whether the Compulsory Depository is subject to periodic
review, such as audits by independent accountants or inspections by
regulatory authorities.
DECHERT PRICE & RHOADS
1775 EYE STREET, N.W.
WASHINGTON, D.C. 20006-2401
TELEPHONE: (202) 261-3300
FACSIMILE: (202) 261-3333
October 28, 1998
Templeton Capital Accumulator Fund, Inc.
500 E. Broward Boulevard
Suite 2100
Ft. Lauderdale, Florida 33394
Dear Sirs:
As counsel for Templeton Capital Accumulator Fund, Inc. (the "Fund"), a
Maryland corporation, we are familiar with the Fund's registration under the
Investment Company Act of 1940 and with the registration statement relating to
its Common Shares (the "Shares") under the Securities Act of 1933 (File No.
33-37338) (the "Registration Statement"). We also have examined such other
corporate records, agreements, documents and instruments as we deemed
appropriate.
Based upon the foregoing, it is our opinion that the Shares registered
pursuant to the Fund's Registration Statement will, when sold at the public
offering price and delivered by the Fund against receipt of the net asset value
of the Shares in accordance with the terms of the Registration Statement, the
Fund's Articles of Incorporation (as amended, restated, or supplemented from
time to time), and the requirements of applicable law, have been duly and
validly authorized, legally and validly issued, and fully paid and
non-assessable.
We consent to the filing of this opinion in connection with Post-Effective
Amendment No. 10 which is filed under the Securities Act of 1933 on behalf of
the Fund with the Securities and Exchange Commission.
Very truly yours,
/s/Dechert Price & Rhoads
