Registration No. 33-37338 and 811-6198
As filed with the Securities and Exchange Commission on December 31, 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. 11 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 13 X
(Check appropriate box or boxes)
TEMPLETON CAPITAL ACCUMULATOR FUND, INC.
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(Exact Name of Registrant as Specified in Charter)
500 EAST BROWARD BLVD., FT. LAUDERDALE, FLORIDA 33394
--------------------------------------------------------
(Address of Principal Executive Offices) Zip Code)
Registrant's Telephone Number: (954) 527-7500
BARBARA J. GREEN, 500 EAST BROWARD BLVD., FT. 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
[X] on January 1, 1999 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) 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?"; "Distributions and Taxes"
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 Some
of 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(R).
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
SECURITIES DEALER, SALESMAN, 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.
P-1
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 the Glossary.
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
Distributions and Taxes ................................... P-11
How Is the Fund Organized? ................................ P-11
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ...................................... P-12
May I Exchange Shares for Shares of Another Fund? ......... P-12
How Do I Sell Shares? ..................................... P-14
What Distributions Might I Receive From the Fund? ......... P-15
Transaction Procedures and Special Requirements ........... P-15
Services to Help You Manage Your Account .................. P-19
What If I Have Questions About My Account? ................ P-21
GLOSSARY
Useful Terms and Definitions .............................. P-22
100 Fountain Parkway
P.O. Box 33030
St. Petersburg
FL 33733-8030
1-800/DIAL BEN(R)
P-2
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.
<TABLE>
<S> <C> <C>
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 ....................................................... 0.34%
Total Fund Operating Expenses ........................................ 1.09%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
C. EXAMPLE
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
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. $11 $35 $60 $133
</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 own 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. THE PLANS CHARGE
YOU 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 Plan prospectus.
P-3
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FINANCIAL HIGHLIGHTS
This table summarizes the fund's financial history. The information has
been audited by McGladrey & Pullen, LLP, 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
1-800/DIAL BEN(R).
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
PER SHARE OPERATING PERFORMANCE(2) ----------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR) 1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ............... $ 10.97 $ 9.08 $ 7.97
- -------------------------------------------------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ............................ .18 .18 .19
-------- -------- --------
Net realized and unrealized gains (losses) ....... ( 1.00) 2.03 1.10
-------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS ................. ( .82) 2.21 1.29
-------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income ............. ( .18) ( .18) ( .15)
Distributions from net realized gains ............ ( .28) ( .14) ( .03)
-------- -------- --------
TOTAL DISTRIBUTIONS .............................. ( .46) ( .32) ( .18)
- -------------------------------------------------- -------- -------- --------
NET ASSET VALUE, END OF YEAR ..................... $ 9.69 $ 10.97 $ 9.08
- -------------------------------------------------- -------- -------- --------
TOTAL RETURN(3) .................................... ( 7.87)% 25.06% 16.50%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000) .................... $ 191,913 $172,683 $108,019
RATIOS TO AVERAGE NET ASSETS
Expenses, excluding waiver and payments
by affiliates .................................. 1.09% 1.13% 1.16%
Expenses ......................................... 1.00% 1.00% 1.00%
Net investment income ............................ 1.77% 2.00% 2.56%
Portfolio turnover rate .......................... 11.92% 7.43% 11.08%
AVERAGE COMMISSION RATE PAID(5) ................. .0106 $ .0110 $ .0210
- -------------------------------------------------- --------- -------- --------
<CAPTION>
YEAR ENDED AUGUST 31
PER SHARE OPERATING PERFORMANCE(2) -----------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR) 1995 1994 1993 1992 1991(1)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ............... $ 8.10 $ 6.87 $ 5.48 $ 5.21 $ 5.00
- --------------------------------------------------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ............................ .14 .09 .10 .08 .07
------- ------- ------- ------- -------
Net realized and unrealized gains (losses) ....... .12 1.30 1.44 .28 .14
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS ................. .26 1.39 1.54 .36 .21
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income ............. ( .10) ( .07) ( .10) ( .09) --
Distributions from net realized gains ............ ( .29) ( .09) ( .05) -- --
------- ------- ------- -------- --------
TOTAL DISTRIBUTIONS .............................. ( .39) ( .16) ( .15) ( .09) --
- --------------------------------------------------- ------- ------- ------- -------- --------
Net Asset Value, end of year ..................... $ 7.97 $ 8.10 $ 6.87 $ 5.48 $ 5.21
- --------------------------------------------------- ------- ------- ------- -------- --------
TOTAL RETURN3 .................................... 3.40% 20.64% 29.11% 7.01% 4.20%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000) .................... $65,538 $38,323 $18,365 $ 8,690 $ 3,635
RATIOS TO AVERAGE NET ASSETS
Expenses, excluding waiver and payments
by affiliates .................................. 1.34% 1.58% 1.91% 1.84% 3.99%(4)
Expenses ......................................... 1.00% 1.00% 1.00% 1.00% 1.00%(4)
Net investment income ............................ 2.37% 1.58% 1.99% 2.06% 3.80%(4)
Portfolio turnover rate .......................... 12.91% 15.25% 14.97% 16.42% --
AVERAGE COMMISSION RATE PAID(5)................... -- -- -- -- --
- --------------------------------------------------- ------- ------- ------- -------- --------
<FN>
(1) For the period from March 1, 1991 (commencement of operations) to August
31, 1991
(2) Per share amounts for all periods prior 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.
</FN>
</TABLE>
P-4
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HOW DOES THE FUND INVEST ITS ASSETS?
WHAT IS THE FUND'S GOAL?
The investment goal of the fund is long-term capital growth. 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. Debt securities 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 lower than Baa by Moody's or lower than BBB
by S&P or to invest in any debt securities rated lower 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:
P-5
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 or must be issued by
a company which, at the date of investment, has an outstanding debt issue rated
AAA or AA by S&P or Aaa or Aa by Moody's;
/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 goal.
REPURCHASE AGREEMENTS. For temporary defensive purposes and for cash
management 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 broker dealer must transfer to the fund's custodian
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 CONTRACTS. To help protect its portfolio against
adverse changes in currency exchange rates, the fund may enter into forward
foreign currency contracts. These contracts 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.
SECURITIES LENDING. The fund may lend its portfolio securities to banks
and broker-dealers. Such loans may not exceed 331/3% of the value of the fund's
total assets (including the value of the collateral) 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.
P-6
PAGE
SHORT-TERM TRADING AND PORTFOLIO TURNOVER. The fund invests for long-term
growth 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 are affected by general economic conditions and
individual company and industry earnings prospects. Foreign securities involve
additional risks that can increase the potential for losses in the fund. These
risks can be significantly greater for investments in emerging or developing
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
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.
P-7
PAGE
Some of the countries in which the fund may invest, such as Russia and
certain Asian, Latin American 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.
DEVELOPING OR EMERGING MARKETS RISK. These risks include 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. All of these factors make emerging market
securities' prices generally more volatile than those of developed markets.
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, and may decrease the value of fund
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, 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 investments are subject to the risk that the other
party to the transaction may fail to perform, resulting in losses to the fund.
EURO RISK. 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.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same reason,
it is not possible to predict the impact of the euro on the business or
financial condition of European issuers which the fund may hold in its
portfolio, and their impact on the value of fund shares. 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.
P-8
PAGE
YEAR 2000. When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
issuers about their Year 2000 readiness. Issuers in countries outside the U.S.,
particularly in emerging markets, may not be required to make the same level of
disclosure about Year 2000 readiness as is required in the U.S. The manager, of
course, cannot audit each issue and its major suppliers to verify their Year
2000 readiness.
If an issuer in which the fund is invested is adversely affected by Year
2000 problems, it is likely that the price of its securities 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 fund shares.
Please see "Year 2000 Problem" under "Who Manages the Fund?" for more
information.
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 $216 billion in
assets. The Templeton organization has been investing globally since 1940. The
manager and its affiliates have officers in Argentina, Australia, Bahamas,
Bermuda, Brazil, the British Virgin Islands, Canada, China, Cyprus, France,
German, Hong Kong, India, Italy, Japan, Korea, Luxembourg, Mauritius, the
Netherlands, Poland, Russia, Singapore, South Africa, Spain, Sweden,
Switzerland, Taiwan, United Kingdom and the U.S. 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
P-9
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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 Colombia and Peru.
MANAGEMENT FEES. During the fiscal year ended August 31, 1998, management
fees, before any advance waiver, totaled 0.75% of the fund's average daily net
assets. Total expenses, before any advance waiver, including fees paid to
Investment Counsel, were 1.09%. Under an agreement by Investment Counsel to
waive its fees, the fund paid management fees totaling 0.66% and the fund paid
total operating expenses of 1.00%. Effective September 1, 1998 the fee waiver
was terminated.
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 0.15% 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.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, the fund advertises its performance. A commonly used
measure of performance is total return. Total return is the change in value of
an investment over a given period. It assumes any dividends and capital gains
are reinvested. Total return and other performance figures may not include
sales charges associated with the purchase of the fund through the Plans. Of
course, these performance figures would be lower if Plan sales charges were
taken into account.
P-10
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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 CAPITAL 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 distribution will vary
and there is no guarantee the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date.
The record date for the fund's distributions will vary. Please keep in mind
that if you invest in the fund shortly before the record date of a
distribution, any distribution will lower the value of the fund's shares by the
amount of the distribution and you will receive some of your investment back in
the form of a taxable distribution. If you would like information on upcoming
record dates for the fund's distributions, please call 1-800/DIAL BEN.
TAX CONSIDERATIONS. In general, fund distributions are taxable to you 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 of the fund, you may have a capital gain or
loss. For tax purposes, an exchange of your shares of the fund 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. Any foreign taxes paid by
the fund on its investments may be passed through to you as a foreign tax
credit. Non-U.S. investors may be subject to U.S. withholding and estate tax.
You should consult your tax advisor about the federal, state, local or foreign
tax consequences of your investment in the fund.
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 the 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 A (formerly called 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.
P-11
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The fund does not intend to hold annual shareholder meetings. It may hold
special meetings, however, for matters requiring shareholder approval. A
meeting may be called by the Board to consider the removal of a Board member if
requested in writing by shareholders holding at least 10% of the outstanding
shares. In certain circumstances, the fund is required to help you communicate
with other shareholders about the removal of a Board member as required by law.
A special meeting may also be called by the Board in its discretion.
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 itself 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 goal 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 other Franklin Templeton 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 Plan 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.
P-12
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<TABLE>
<S> <C>
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)
/arrow/ 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
- -----------------------------------------------------------------------------------------------
</TABLE>
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 or more classes of shares, you would
receive Class A shares, which generally bear lower Rule 12b-1 distribution fees
than other classes of 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
Franklin Templeton Fund you are exchanging into, or exchange 100%
of your fund shares.
/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 Franklin Templeton 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.
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.
P-13
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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.
- -------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- -------------------------------------------------------------------------------
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 equal to or less than 90% of
your Plan account value and $50,000 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.
/bullet/ 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
- ------------------------------------------------------------------------------
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 cannot 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
P-14
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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 request 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 at least
annually representing 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
P-15
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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.
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 1:00
p.m. Pacific 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 Franklin Templeton 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.
P-16
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SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the
following situations:
1) You wish to sell over $50,000 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, or
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.
P-17
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To obtain any required forms or more information about distribution or
transfer procedures, please call 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.
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 ACCOUNT DOCUMENTS REQUIRED
- ------------------------------------------------------------------------------
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
P-18
PAGE
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.
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 distributions) 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 Transfers" below.
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
Program, 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 Program" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions or payments
under a Systematic Withdrawal Program sent directly to a checking or savings
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.
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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 the fund or any
other 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.
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
1-800/DIAL BEN(R) 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.
P-20
PAGE
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.
HOURS OF OPERATION
PACIFIC TIME
DEPARTMENT TELEPHONE (MONDAY THROUGH FRIDAY)
- ------------------------- --------------- --------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 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.
P-21
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 A, CLASS B AND CLASS C--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 A 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.
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
P-22
PAGE
OFFERING PRICE--The public offering price is based on the fund's Net Asset
Value per share. Shares of the fund may be initially acquired through an
investment in Templeton Capital Accumulation Plans. The sales 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
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.
P-23
PAGE
NOTES
PAGE
FRANKLIN TEMPLETON GROUP OF FUNDS
LITERATURE REQUEST - 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.
<TABLE>
<CAPTION>
<S> <C> <C>
FRANKLIN FUNDS SEEKING
GLOBAL GROWTH GROWTH AND INCOME TAX-FREE INCOME
Franklin Global Health Care Fund Franklin Asset Allocation Fund Federal Intermediate-Term
Mutual Discovery Fund Franklin Balance Sheet Tax-Free Income Fund
Templeton Developing Markets Investment Fund* Federal Tax-Free Income Fund
Trust Franklin Convertible Securities High Yield Tax-Free Income Fund
Templeton Foreign Fund Fund Insured Tax-Free Income Fund
Templeton Foreign Smaller Franklin Equity Income Fund Puerto Rico Tax-Free Income Fund
Companies Fund Franklin Income Fund Tax-Exempt Money Fund
Templeton Global Franklin MicroCap Value Fund*
Infrastructure Fund Franklin Natural Resources Fund FRANKLIN STATE-SPECIFIC
Templeton Global Franklin Real Estate Securities FUNDS SEEKING TAX-FREE
Opportunities Trust Fund INCOME
Templeton Global Real Estate Fund Franklin Rising Dividends Fund Alabama
Templeton Global Smaller Franklin Strategic Income Fund Arizona*
Companies Fund Franklin Utilities Fund Arkansas**
Templeton Greater European Fund Franklin Value Fund California*
Templeton Growth Fund Mutual Beacon Fund Colorado
Templeton Latin America Fund Mutual Financial Services Fund Connecticut
Templeton Pacific Growth Fund Mutual Qualified Fund Florida*
Templeton World Fund Mutual Shares Fund Georgia
Hawaii**
GLOBAL GROWTH AND INCOME FUND ALLOCATOR SERIES Indiana
Franklin Global Utilities Fund Franklin Templeton Kentucky
Mutual European Fund Conservative Target Fund Louisiana
Templeton Global Bond Fund Franklin Templeton Maryland
Templeton Growth and Income Moderate Target Fund Massachusetts***
Fund Franklin Templeton Michigan*
Growth Target Fund Minnesota***
GLOBAL INCOME Missouri
Franklin Global Government INCOME New Jersey
Income Fund Franklin Adjustable Rate New York*
Franklin Templeton Securities Fund North Carolina
Global Currency Fund Franklin Adjustable U.S. Ohio***
Franklin Templeton Hard Government Securities Fund Oregon
Currency Fund Franklin's AGE High Income Fund Pennsylvania
Templeton Americas Franklin Bond Fund Tennessee**
Government Securities Fund Franklin Floating Rate Trust Texas
Franklin Investment Virginia
GROWTH Grade Income Fund Washington**
Franklin Biotechnology Franklin Short-Intermediate U.S.
Discovery Fund Government Securities Fund VARIABLE ANNUITIES/dagger/
Franklin Blue Chip Fund Franklin U.S. Government Franklin Valuemark(R)
Franklin California Growth Fund Securities Fund Franklin Templeton
Franklin DynaTech Fund Franklin Money Fund Valuemark Income Plus
Franklin Equity Fund Franklin Federal Money Fund (an immediate annuity)
Franklin Gold Fund
Franklin Growth Fund
Franklin MidCap Growth Fund
Franklin Small Cap Growth Fund
<FN>
* 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.
/dagger/ 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.
</FN>
</TABLE>
PAGE
PART B
STATEMENT OF ADDITIONAL INFORMATION
PAGE
TEMPLETON CAPITAL
ACCUMULATOR FUND, INC.-
STATEMENT OF
ADDITIONAL INFORMATION
JANUARY 1, 1999 [GRAPHIC OMITTED]
FRANKLIN(R) TEMPLETON(R)
100 FOUNTAIN PARKWAY, P.O. BOX 33030
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 January 1, 1999,
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
(1-800/342-5236).
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
How Does the Fund Invest Its Assets?................................ 2
What Are Some of the Risks of Investing in the
Fund?............................................................... 6
Investment Restrictions.............................................. 10
Officers and Directors............................................... 11
Investment Management and Other Services ............................ 16
How Does the Fund Buy Securities
for Its Portfolio?.................................................. 17
How Do I Buy, Sell and Exchange Shares?.............................. 18
How Are Fund Shares Valued?.......................................... 20
Additional Information on
Distributions and Taxes............................................. 20
The Fund's Underwriter............................................... 22
How Does the Fund Measure Performance? .............................. 22
Miscellaneous Information............................................ 25
Financial Statements................................................. 26
Glossary............................................................. 26
Appendix............................................................. 26
Description of Ratings............................................... 26
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.
1
TLCAP SAI 01/99
PAGE
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained in the Glossary.
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
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 lower 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.(1) 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, some of
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.
- -------------------------
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.
2
PAGE
Although they may offer higher yields than do higher rated securities, lower
rated and unrated debt securities generally involve greater volatility of price
and risk to principal and income, including the possibility of default by, or
bankruptcy of, the issuers of the securities. In addition, the markets in which
lower 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 its 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 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
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
3
PAGE
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 that 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 (including the value of the collateral). 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
the underlying instruments. Because structured investments of the type in which
the fund anticipates investing typically involve no credit enhancement, their
credit risk will generally be equivalent to that of the underlying instruments.
The fund is permitted to invest in a class of structured investments that is
either subordinated or unsubordinated to the right of payment of another class.
Subordinated structured investments typically have higher yields and present
greater risks than unsubordinated structured investments. Although the fund's
purchase of subordinated structured investments would have a similar economic
effect to that of borrowing against the underlying securities, the purchase will
not be deemed to be leverage for purposes of the limitations placed on the
extent of the fund's assets that may be used for borrowing activities.
Certain issuers of structured investments may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, the fund's investment in
these structured investments may be limited by the restrictions contained in the
1940 Act. Structured investments are typically sold in private placement
transactions, and there currently is no active trading market for structured
investments. To the extent such investments are illiquid, they will be subject
to the fund's restrictions on investments in illiquid securities.
FUTURES CONTRACTS. The fund's investment policies also permit it to buy and sell
stock index futures contracts with respect to any stock index traded on a
recognized stock exchange or board of trade, to an aggregate amount not
exceeding 20% of the fund's total assets at the time when such contracts are
entered into. Successful use of stock index futures is subject to 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
4
PAGE
(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 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 buys a stock index futures contract, an amount of cash,
U.S. government securities, or other highly liquid debt securities equal to the
market value of the contract will be deposited in a segregated account with the
fund's custodian. When selling a stock index futures contract, the fund will
maintain with its custodian liquid assets that, when added to the amounts
deposited with a futures commission merchant or broker as margin, are equal to
the market value of the instruments underlying the contract. Alternatively, the
fund may "cover" its position by owning a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based, or holding a call option permitting the fund to purchase the same futures
contract at a price no higher than the price of the contract written by the fund
(or at a higher price if the difference is maintained in liquid assets with the
fund's custodian).
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.
5
PAGE
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 EXCHANGE CONTRACTS. 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 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 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 SOME OF 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
6
PAGE
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 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.
EURO RISK. 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. The transition and the elimination
of currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets.
Franklin Resources, Inc. 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 the implementation of the euro could have a negative effect on
the fund, the fund's manager and its affiliated services providers are taking
steps they believe are reasonably designed to address the euro issue.
EMERGING MARKETS. 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
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in many developing countries, of a capital market
structure or market-oriented economy; and (vii) the possibility that recent
favorable economic developments in some developing countries may be slowed or
reversed by unanticipated political or social events in such countries.
In addition, many countries in which the fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the evonomies and securities markets of
certain countries. Moreover, the economics of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Investments in developing countries may involve risks of nationalization,
expropriation and confiscatory taxation. For example, 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 expropriation, the fund could lose a substantial portion of any
investments it has made in the affected countries. Further, no accounting
standards exist in certain developing countries. Finally, even though the
currencies of some developing countries, such as certain Eastern European
countries may be convertible into U.S. dollars, the conversion rates may be
artificial to the actual market values and may be adverse to the fund's
shareholders.
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
Eastern European currencies may be artificial to the actual market values of the
currencies and may be adverse to fund share-
7
PAGE
holders. 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.
RUSSIAN SECURITIES. 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
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 disclosure 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 fraudu-
8
PAGE
lent 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.
CURRENCY RISK. The fund's manager 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
nationalexchanges, 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
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 buy 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.
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
9
PAGE
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. This
means they may only be changed if the change is approved by: (i) more than 50%
of the outstanding shares of the fund or (ii) 67% or more of the shares of the
fund present at a shareholder meeting if more than 50% of the outstanding shares
of the fund are represented at the meeting in person or by proxy, whichever is
less. The fund MAY NOT:
1. Invest in real estate or mortgages on real estate (although the fund may
invest in marketable securities secured by real estate or interests therein
or issued by companies or investment trusts which invest in real estate or
interests therein); invest in interests (other than debentures or equity
stock interests) in oil, gas or other mineral exploration or development
programs; purchase or sell commodity contracts (except forward contracts
and futures contracts as described in the fund's Prospectus); or invest in
other open-end investment companies.
2. Purchase or retain securities of any company in which directors or officers
of the fund or of 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 lend its
portfolio securities.
7. Borrow money for any purpose other than redeeming its shares or purchasing
its shares for cancellation, and then only as a temporary measure up to an
amount not exceeding 5% of the value of its total assets; or pledge,
mortgage, or hypothecate its assets for any purpose other than to secure
such borrowings, and then only up to such extent not exceeding 10% of the
value of its total assets as the Board may by resolution approve.(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.
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.
10
PAGE
12. Invest in "letter stocks" or securities on which there are any sales
restrictions under a puchase agreement. 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.)
- ------------
2. As an operating policy approved and subject to change or elimination solely
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.
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>
POSITION(S) AND
OFFICES WITH
NAME, AGE AND ADDRESS THE FUND PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Harris J. Ashton (66) Director Director, RBC Holdings, Inc. (bank holding company)
191 Clapboard Ridge Road and Bar-S Foods (meat packing company): director
Greenwich, CT 06830 or trustee, as the case may be, of 49 of the investment
companies in the Franklin Templeton Group of Funds; and
FORMERLY, President, Chief Executive Officer and Chairman
of the Board, General Host Corporation (nursery and craft
centers.)
- -----------------------------------------------------------------------------------------------------------------------------------
* Nicholas F. Brady (68) Director Chairman, Templeton Emerging Markets Investment Trust
The Bullitt House PLC, Templeton Latin America Investment Trust PLC,
102 East Dover Street Darby Overseas Investments, Ltd. and Darby Emerging
Easton, MD 21601 Markets Investments LDC (investment firms) (1994-present);
Director, Templeton Global Strategy Funds, Amerada Hess
Corporation (exploration and refining of natural gas),
Christiana Companies, Inc. (operating and investment
companies), and H.J. Heinz Company (processed 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>
11
PAGE
<TABLE>
<CAPTION>
POSITION(S) AND
OFFICES WITH
NAME, AGE AND ADDRESS THE FUND PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
S. Joseph Fortunato (66) Director Member of the law firm of Pitney, Hardin, Kipp & Szuch;
Park Avenue at Morris County director or trustee, as the case may be, of 51 of
P.O. Box 1945 the investment companies in the Franklin Templeton Group
Morristown, NJ 07962-1945 of Funds.
- -----------------------------------------------------------------------------------------------------------------------------------
John Wm. Galbraith (77) Director President, Galbraith Properties, Inc. (personal investment
360 Central Avenue company); Director Emeritus, Gulf West Banks, Inc. (bank holding
Suite 1300 company) (1995-present); director or trustee, as the case may be,
St. Petersburg, FL 33701 of 20 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, 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. (75) Director Consultant for the Triangle Consulting Group;
150 2nd Avenue N. Executive-in-Residence of Eckerd College (1991-present); director
St. Petersburg, FL 33701 or trustee, as the case may be, of 22 investment companies
in the Franklin Templeton Group of 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 and energy area)
(1982-1990) and director of various of its subsidiaries.
- -----------------------------------------------------------------------------------------------------------------------------------
* Charles B. Johnson (65) Chairman of the President, Chief Executive Officer and Director, Franklin
777 Mariners Island Blvd. Board and Vice Resources, Inc.; Chairman of the Board and Director, Franklin
San Mateo, CA 94404 President Advisers, Inc., Franklin Advisory Services, Inc., Franklin
Investment Advisory Services, Inc. and 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.
- -----------------------------------------------------------------------------------------------------------------------------------
Charles E. Johnson (42) Director and Senior Vice President and Director, Franklin Resources, Inc.;
500 East Broward Blvd. Vice President Senior Vice President, Franklin Templeton Distributors, Inc.;
Fort Lauderdale, FL President and Director, Templeton Worldwide, Inc.; Chairman and
33394-3091 Director, Templeton Investment Counsel, Inc.; Vice
President, Franklin Advisers, Inc.; officer and/or 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 (69) Director Director or trustee of various civic associations; director or
2201 Kentmere Parkway trustee, as the case may be, of 21 of the investment companies in
Wilmington, DE 19806 the investment companies in the Franklin Templeton Group of Funds;
and FORMERLY, Economic Analyst, U.S. Government.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
PAGE
<TABLE>
<CAPTION>
POSITION(S) AND
OFFICES WITH
NAME, AGE AND ADDRESS THE FUND PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gordon S. Macklin (70) Director Director, Fund American Enterprises Holdings, Inc., Martek
8212 Burning Tree Road Biosciences Corporation, MCI WorldCom (information services),
Bethesda, MD 20817 MedImmune, Inc. (biotechnology), Spacehab, Inc. (aerospace
services) and Real 3D (software); director or trustee, as the
case may 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.
- -----------------------------------------------------------------------------------------------------------------------------------
Fred R. Millsaps (69) Director Manager of personal investments (1978-present); director of
2665 NE 37th Drive various business and nonprofit organizations; director or
Fort Lauderdale, FL 33308 trustee, as the case may be, of 22 of the investment companies in
the Franklin Templeton Group of Funds; and 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 (46) President Executive Vice President, Templeton Investment Counsel, Inc.;
500 East Broward Blvd. Security Analyst and Portfolio Manager, Templeton Investment
Fort Lauderdale, FL Counsel, Inc. since 1981; officer of 2 of the investment companies
33394-3091 in the Franklin Templeton Group of Funds; and FORMERLY, Research
Analyst and Portfolio Manager, Landmark First National Bank
(1979-1981) and Security Analyst, Standard & Poor's Corporation
(1974-1979).
- -----------------------------------------------------------------------------------------------------------------------------------
Mark G. Holowesko (38) Vice President President, Templeton Global Advisors Limited; Chief Investment
Lyford Cay Officer, Global Equity Group; Executive Vice President and
Nassau, Bahamas Director, Templeton Worldwide, Inc.; officer of 21 of the
investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Investment Administrator, RoyWest Trust Corporation
(Bahamas) Limited (1984-1985).
- -----------------------------------------------------------------------------------------------------------------------------------
Harmon E. Burns (53) Vice President Executive Vice President and Director, Franklin Resources, Inc.,
777 Mariners Island Blvd. Franklin Templeton Distributors, Inc. and Franklin Templeton
San Mateo, CA 94404 Services, Inc.; Executive Vice President, Franklin Advisers, Inc.;
Director, Franklin/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 53 of the
investment companies in the Franklin Templeton Group of Funds.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
PAGE
<TABLE>
<CAPTION>
POSITION(S) AND
OFFICES WITH
NAME, AGE AND ADDRESS THE FUND PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Rupert H. Johnson, Jr. (58) Vice President Executive Vice President and Director, Franklin Resources, Inc.
777 Mariners Island Blvd. and Franklin Templeton Distributors, Inc.; President and Director,
San Mateo, CA 94404 Franklin Advisers, Inc; Senior Vice President and Director,
Franklin Advisory Services, Inc. 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 of the other subsidiaries of Franklin Resources, Inc. and
of 53 of the investment companies in the Franklin Templeton Group
of Funds.
- -----------------------------------------------------------------------------------------------------------------------------------
Deborah R. Gatzek (50) Vice President Senior Vice President and General Counsel, Franklin Resources,
777 Mariners Island Blvd. Inc.; Senior Vice President, Franklin Templeton Services, Inc. and
San Mateo, CA 94404 Franklin Templeton Distributors, Inc.; Executive Vice President,
Franklin Advisers, Inc.; Vice 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 (38) Vice President Senior Vice President and Chief Financial Officer, Franklin
777 Mariners Island Blvd. Resources, Inc.; Executive Vice President and Director, Templeton
San Mateo, CA 94404 Worldwide, Inc.; Executive Vice President, Chief Operating Officer
and Director, Templeton Investment Counsel, Inc.; Executive Vice
President and Chief Financial Officer, Franklin Advisers, Inc.;
Chief Financial Officer, Franlin 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.; officer and/or director of some of the other subsidiaries
of Franklin Resources, 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.
- -----------------------------------------------------------------------------------------------------------------------------------
John R. Kay (58) Vice President Vice President and Treasurer, Templeton Worldwide, Inc.,; Assistant
500 East Broward Blvd. Vice President, Franklin Templeton Distributors, Inc.; officer
Fort Lauderdale, FL of 25 of the investment companies in the Franklin Templeton Group
33394-3091 Group of Funds; and FORMERLY, Vice President and Controller,
Keystone Group, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
PAGE
<TABLE>
<CAPTION>
POSITION(S) AND
OFFICES WITH
NAME, AGE AND ADDRESS THE FUND PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Elizabeth M. Knoblock (43) Vice President- General Counsel, Secretary and Senior Vice President, Templeton
500 East Broward Blvd. Compliance Investment Counsel, Inc.; Senior Vice President, Templeton Global
Fort Lauderdale, FL Investors, Inc.; officer of 21 of the investment companies in the
33394-3091 Franklin Templeton Group of Funds; and FORMERLY, Vice President
and Associate General Counsel, Kidder Peabody & Co. (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 (44) Treasurer Certified Public Accountant; Treasurer, Franklin Mutual Advisers,
500 East Broward Blvd. Inc.; Senior Vice President, Templeton Worldwide, Inc., Templeton
Fort Lauderdale, FL Global Investors, Inc. and Templeton Funds Trust Company; officer
33394-3091 of 22 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Senior Tax Manager, Ernst & Yount
(certified public accountants) (1977-1989).
- -----------------------------------------------------------------------------------------------------------------------------------
Barbara J. Green (51) Secretary Senior Vice President, Templeton Worldwide, Inc. and Templeton
500 East Broward Blvd. Global Investors, Inc.; officer of 21 of the investment companies
Fort Lauderdale, FL in the Franklin Templeton Group of Funds; and FORMERLY, Deputy
33394-3091 Director of the Division of Investment Management, Executive
Assistant and Senior Advisor to the Chairman, Counselor to the
Chairman, Special Counsel and Attorney Fellow, U.S. Securities and
Exchange Commission (1986-1995), Attorney, Roger & Wells, and
Judicial Clerk, U.S. District Court (District of Massachusetts).
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
* This board member is considered an "interested person" under federal
securities laws. Mr. Brady's status as an interested person results from his
business affiliations with Resources, Inc. and Templeton Global Advisors
Limited. Mr. Brady and Resources, Inc. 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.
</FN>
</TABLE>
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, and 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 committee meeting attended, a portion of which is
allocated to the fund. Members of a committee are not compensated for any
committee meeting held on the day of a Board meeting. As shown above, the
nonaffiliated Board members may 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 the
Franklin Templeton Group of Funds.
15
PAGE
<TABLE>
NUMBER OF BOARDS
TOTAL FEES IN THE FRANKLIN
TOTAL FEES RECEIVED FROM THE TEMPLETON GROUP
RECEIVED FROM FRANKLIN TEMPLETON OF FUNDS ON WHICH
NAME THE FUND* GROUP OF FUNDS** EACH SERVES***
- ------------------------------ --------------- -------------------- ------------------
<S> <C> <C> <C>
Harris J. Ashton ............. $2,125 $339,842 49
Nicholas F. Brady ............ 2,125 119,675 21
S. Joseph Fortunato .......... 2,125 356,762 51
John Wm. Galbraith ........... 1,935 117,675 20
Andrew H. Hines, Jr. ......... 2,135 144,175 22
Betty P. Krahmer ............. 2,125 119,675 21
Gordon S. Macklin ............ 2,125 332,492 49
Fred R. Millsaps ............. 2,135 144,175 22
</TABLE>
*For the fiscal year ended August 31, 1998.
**For the calendar year ended December 31, 1998.
***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 168 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.
Board members historically have followed a policy of having substantial
investments in one or more of the Franklin Templeton Funds, as is consistent
with their individual financial goals. In February 1998, this policy was
formalized through adoption of a requirement that each board member 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-third of fees received for
serving as a director or trustee of a Franklin fund in shares of one or more
Franklin funds until the value of such investments equals or exceeds five times
the annual fees paid such board member. Investments in the name of family
members or entities controlled by a board member constitiute fund holdings of
such board member for purposes of this policy, and a three year phase-in period
applies to such investment requirements for newly elected board members. In
implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
As of December 14, 1998, 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
applicable federal securities laws, may buy or sell for its or their
16
PAGE
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 an 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 $1,530,273, $1,072,883 and $656,146, respectively. Under an agreement by
Investment Counsel, that was terminated as of September 1, 1998, to limit its
fees, the fund paid management fees totaling $1,334,912, $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.
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 $305,449, $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 monitors and furnishes information relevant to
the selection of compulsory depositories.
AUDITORS. McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, NY 10017, 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
17
PAGE
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.
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. 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 $210,451, $139,387, and $102,000, respectively.
As of August 31, 1998, the fund did not own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ON BUYING SHARES
The fund has entered into an agreement with Distributors, under which the fund
will issue shares at Net Asset Value to TFTC as custodian for the unit
investment trust entitled Templeton Capital Accumulation 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,
18
PAGE
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 Franklin
Templeton 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 how fund shares may be redeemed by investors who have
liquidated their Plans and 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.
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 program if all shares in your
account are withdrawn or if the fund receives notification of the shareholder's
death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
fund's net assets and you may incur brokerage fees and taxes 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 respon-
19
PAGE
sible for tracking down uncashed checks, unless a check is returned as
undeliverable.
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
1:00 p.m. pacific 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, Far Eastern and some other securities
exchanges and over-the-counter markets is normally completed well before the
close of business of the NYSE on each day that the NYSE is open. Trading in
European or Far Eastern securities generally, or in a particular country or
countries, may not take place on every NYSE business day. Furthermore, trading
takes place in various foreign markets on days that are not business days for
the NYSE and on which the fund's Net Asset Value is not calculated. Thus, the
calculation of the fund's Net Asset Value does not take place contemporaneously
with the determination of the prices of many of the portfolio securities used in
the calculation and, if events materially affecting the values of these foreign
securities occur, the securities will be valued at fair value as determined by
management and approved in good faith by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the 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 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.
ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
20
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, constitutes the fund's 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 from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in the fund. Any net capital gains realized by the fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate excise or income taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS. Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities 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 (subject to limitations) 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 it makes this election.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The fund will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held fund shares for a full year, the fund may designate and distribute 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.
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 Internal
Revenue 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 shareholders. 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 earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS. To avoid federal excise taxes, the
Internal Revenue Code requires the fund to distribute to you by December 31 or
each year, at a minimum, the following amounts: 98% of its taxable ordinary
income earned during the calendar year; 98% of its capital gain net income
earned during the twelve month period ending October 31; and 100% of any
undistributed amounts from the prior year. The fund intends to declare and pay
these amounts in December (or in January that are treated by you as received in
December) to avoid these excise taxes, but can give no assurances that its
distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. If you redeem your fund
shares, or exchange your fund shares for shares of a different Franklin
Templeton Fund, the IRS will require that you report a gain or loss on your
redemption or exchange. If you hold your shares as a capital asset, the gain or
loss that you realize will be capital gain or loss and will be long-term or
short-term generally depending on how long you hold your shares. 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
21
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the extent that you buy 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 buy.
DEFERRAL OF BASIS. If you redeem some or all of your shares in the fund, and
then reinvest the sales proceeds in the fund or in another Franklin Templeton
fund within 90 days of purchasing the original shares, the sales charge that
would otherwise apply to your reinvestment may be reduced or eliminated. You
will be required by the IRS to report gain or loss on the redemption of your
original shares in the fund. In so doing, all or a portion of the sales charge
that you paid for your original shares in the Plan will be excluded from your
tax basis in the shares sold (for the purpose of determining gain or loss upon
the sale of such shares). The portion of the sales charge excluded 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. If you are 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. In
some circumstances you will be allowed 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.
These 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 and/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.
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
$6,148,670, $5,140,712 and $5,361,206, respectively. After allowances to
dealers, Distributors retained $615,973, $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.
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
nonstandardized 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
22
PAGE
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 -7.87% and 10.83%, and for the period March 1, 1991
(commencement of operations) through August 31, 1998, was 12.35%.
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 charges associated with
the purchase of shares of the fund through the Plans; of course, cumulative
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. 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 -7.87% and 67.44%, and for the period March
1, 1991 (commencement of operations) through August 31, 1998, was 139.72%.
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 reflecting the Plan's sales
charge. Sales literature and advertising may quote a cumulative total return,
average annual total return and other measures of performance as described
elsewhere in this SAI with and/or without including the effect of paying the
sales charges associated with the purchase of fund shares through the Plans.
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:
23
PAGE
(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:
/bullet/ 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.
/bullet/ 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.
/bullet/ 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.
/bullet/ The geographic and industry distribution of the fund's portfolio and
its top ten holdings.
/bullet/ 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.
/bullet/ 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).
/bullet/ The major industries located in various jurisdictions as published by
the Morgan Stanley Index.
/bullet/ Rankings by DALBAR Surveys, Inc. with respect to mutual fund
shareholder services.
/bullet/ Allegorical stories illustrating the importance of persistent long-term
investing.
/bullet/ The fund's portfolio turnover rate and its ranking relative to industry
standards as published by Lipper Analytical Services, Inc. or
Morningstar, Inc.
/bullet/ 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.
/bullet/ 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.
/bullet/ Comparison of the characteristics of various emerging markets,
including population, financial and economic conditions.
/bullet/ Quotations from the Templeton organization's founder, Sir John
Templeton,* advocating the virtues of diversification and long-term
investing.
- -------------------------
* 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.
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.
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PAGE
In addition, there can be no assurance that the fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
- --------------------------------------------------------------------------------
The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
fund cannot guarantee that these goals will be met.
The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 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 $216 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 117 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 many 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 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 its shareholders
to be Year 2000 compliant. After completing these modifications, comprehensive
tests are conducted in one of Resources' U.S. test labs 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 beginning to develop a
contingency plan, including identification of those mission critical systems for
which it is practical to develop a contingency plan. However, in an operation as
complex and geographically distributed as Resources' business, the alternatives
to use of normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
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.
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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.
GLOSSARY
- --------------------------------------------------------------------------------
1940 Act - Investment Company Act of 1940, as amended
Board - The Board of Directors of the Fund
CD - Certificate of deposit
Class A, Class B and Class C - 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 A (formerly called 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
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 sales charges for the first year of a Plan can
amount to 50% of the amounts paid during that year under the Plan.
Prospectus - The prospectus for the fund dated January 1, 1999, 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.
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
26
PAGE
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.
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 andinterest 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.
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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:
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.
28
PAGE
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS:
Incorporated by reference from Registrant's 1998
Annual Report:
Independent Auditor's Report
Investment Portfolios as of August 31, 1998
Statements of Assets and Liabilities as of August 31, 1998
Statements of Operations for the year ended August 31, 1998
Statements of Changes in Net Assets for the years ended
August 31, 1998 and 1997
Notes to Financial Statements
(B) EXHIBITS
(1) Articles of Incorporation/2/
(2) By-laws (as amended and restated October 19, 1996)/3/
(3) Not Applicable
(4) Specimen of certificate of Common Stock /1/
(5) Form of Investment Management Agreement/2/
(6) (A) Distribution Agreement/2/
(B) Form of Dealer Agreement/4/
(C) Amendment of Dealer Agreement /4/
(7) Not Applicable
(8) Custody Agreement/2/
(9) (A) Fund Administration Agreement/3/
(B) Form of Transfer Agent Agreement/2/
(10) Opinion and consent of counsel/4/
(11) Not Applicable
(12) Not Applicable
(13) Initial capital agreement/1/
(14) Not Applicable
(15) Not Applicable
(16) Schedule showing computation of performance
quotations provided in response to Item 22 /2/
(17)(i) Assistant Secretary's Certificate pursuant to
Rule 483(b)/2/
(ii) Powers of Attorney
(27) Financial Data Schedule
- --------------------
1 Previously filed with Pre-Effective Amendment No. 2 on February 28, 1991.
2 Previously filed with Post-Effective Amendment No. 7 on December 29, 1995.
3 Previously filed with Post-Effective Amendment No. 8 on December 31, 1996.
4 Previously filed with Post-Effective Amendment No. 10 on October 28, 1998.
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: 39,944
record holders as of November 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 quetion 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 certifies that it meets all the
requirements for effectiveness of the Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and 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 31st
day of December, 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 December 31, 1998
Officer)
- ------------------------ Director, Chairman and
Charles B. Johnson* Vice President December 31, 1998
- -------------------------
Betty P. Krahmer* Director December 31, 1998
- -------------------------
Fred R. Millsaps* Director December 31, 1998
- -------------------------
John Wm. Galbraith* Director December 31, 1998
- -------------------------
Charles E. Johnson* Director December 31, 1998
- -------------------------
Harris J. Ashton* Director December 31, 1998
- -------------------------
S. Joseph Fortunato* Director December 31, 1998
- -------------------------
Andrew H. Hines, Jr.* Director December 31, 1998
- -------------------------
Gordon S. Macklin* Director December 31, 1998
- -------------------------
Nicholas F. Brady* Director December 31, 1998
- -------------------------
James R. Baio* Treasurer (Chief Financial December 31, 1998
and Accounting Officer)
</TABLE>
*By:/s/BARBARA J. GREEN
-----------------------
Barbara J. Green
as attorney-in-fact**
- -------------------
** Powers of Attorney are filed herewith.
PAGE
POWER OF ATTORNEY
The undersigned Officers and Directors of TEMPLETON CAPITAL
ACCUMULATOR FUND, INC. (the "Registrant") hereby appoint Allan S. Mostoff,
Jeffrey L. Steele, Mark H. Plafker, Bruce G. Leto, Deborah R. Gatzek, Barbara J.
Green, Larry L. Greene, and Leiann Nuzum (with full power to each of them to act
alone) his/her attorney-in-fact and agent, in all capacities, to execute, and to
file any of the documents referred to below relating to Post-Effective
Amendments to the Registrant's registration statement on Form N-1A under the
Investment Company Act of 1940, as amended, and under the Securities Act of
1933, as amended, covering the sale of shares by the Registrant under
prospectuses becoming effective after this date, including any amendment or
amendments increasing or decreasing the amount of securities for which
registration is being sought, with all exhibits and any and all documents
required to be filed with respect thereto with any regulatory authority. Each of
the undersigned grants to each of said attorneys, full authority to do every act
necessary to be done in order to effectuate the same as fully, to all intents
and purposes as he/she could do if personally present, thereby ratifying all
that said attorneys-in-fact and agents, may lawfully do or cause to be done by
virtue hereof.
This Power of Attorney may be executed in one or more
counterparts, each of which shall be deemed to be an original, and all of which
shall be deemed to be a single document.
The undersigned Officers and Directors hereby execute this
Power of Attorney as of the 11th day of December, 1998.
/s/HARRIS J. ASHTON /s/CHARLES E. JOHNSON
- ----------------------------------- ----------------------------------
Harris J. Ashton, Director Charles E. Johnson, Director
/s/NICHOLAS F. BRADY /s/BETTY P. KRAHMER
- ----------------------------------- ----------------------------------
Nicholas F. Brady, Director Betty P. Krahmer, Director
/s/S. JOSEPH FORTUNATO /s/GORDON S. MACKLIN
- ----------------------------------- ----------------------------------
S. Joseph Fortunato, Director Gordon S. Macklin, Director
/s/JOHN WM. GALBRAITH /s/FRED R. MILLSAPS
- ----------------------------------- ----------------------------------
John Wm. Galbraith, Director Fred R. Millsaps, Director
/s/ANDREW H. HINES, JR. /s/GARY P. MOTYL
- ----------------------------------- ----------------------------------
Andrew H. Hines, Jr., Director Gary P. Motyl, President
/s/CHARLES B. JOHNSON /s/JAMES R. BAIO
- ----------------------------------- ----------------------------------
Charles B. Johnson, Director James R. Baio, Treasurer
PAGE
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS FILED WITH
POST-EFFECTIVE AMENDMENT NO. 11 TO
REGISTRATION STATEMENT ON
FORM N-1A
TEMPLETON CAPITAL ACCUMULATOR FUNDS, INC.
PAGE
EXHIBIT LIST
EXHIBIT NUMBER NAME OF EXHIBIT
--------------- ----------------
(11) Consent of Independent Public Accountants
(17)(ii) Powers of Attorney
(27) Financial Data Schedules
McGLADREY & PULLEN, LLP
Certified Public Accountants and Consultants
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our report dated September 29, 1998 on the
financial statements of Templeton Capital Accumulator, Fund, Inc., referred to
therein, which appears in the 1998 Annual Report to Shareholders, and which is
incorporated herein by reference, in Post-Effective Amendment No. 11 to the
Registration Statement on Form N-1A, File No. 33-37338, as filed with the
Securities and Exchange Commission.
We also consent to the reference to our firm in the Prospectus under the
caption "Financial Highlights".
/s/MCGLADREY & PULLEN, LLP
McGladrey & Pullen, LLP
New York, New York
December 29, 1998
POWER OF ATTORNEY
The undersigned Officers and Directors of TEMPLETON CAPITAL ACCUMULATOR
FUND, INC. (the "Registrant") hereby appoint Allan S. Mostoff, Jeffrey L.
Steele, Mark H. Plafker, Bruce G. Leto, Deborah R. Gatzek, Barbara J. Green,
Larry L. Greene, and Leiann Nuzum (with full power to each of them to act alone)
his/her attorney-in-fact and agent, in all capacities, to execute, and to file
any of the documents referred to below relating to Post-Effective Amendments to
the Registrant's registration statement on Form N-1A under the Investment
Company Act of 1940, as amended, and under the Securities Act of 1933, as
amended, covering the sale of shares by the Registrant under prospectuses
becoming effective after this date, including any amendment or amendments
increasing or decreasing the amount of securities for which registration is
being sought, with all exhibits and any and all documents required to be filed
with respect thereto with any regulatory authority. Each of the undersigned
grants to each of said attorneys, full authority to do every act necessary to be
done in order to effectuate the same as fully, to all intents and purposes as
he/she could do if personally present, thereby ratifying all that said
attorneys-in-fact and agents, may lawfully do or cause to be done by virtue
hereof.
This Power of Attorney may be executed in one or more counterparts, each of
which shall be deemed to be an original, and all of which shall be deemed to be
a single document.
The undersigned Officers and Directors hereby execute this Power of
Attorney as of the 11th day of December, 1998.
/s/HARRIS J. ASHTON /s/CHARLES E. JOHNSON
- ----------------------------------- ----------------------------------
Harris J. Ashton, Director Charles E. Johnson, Director
/s/NICHOLAS F. BRADY /s/BETTY P. KRAHMER
- ----------------------------------- ----------------------------------
Nicholas F. Brady, Director Betty P. Krahmer, Director
/s/S. JOSEPH FORTUNATO /s/GORDON S. MACKLIN
- ----------------------------------- ----------------------------------
S. Joseph Fortunato, Director Gordon S. Macklin, Director
/s/JOHN WM. GALBRAITH /s/FRED R. MILLSAPS
- ----------------------------------- ----------------------------------
John Wm. Galbraith, Director Fred R. Millsaps, Director
/s/ANDREW H. HINES, JR. /s/GARY P. MOTYL
- ----------------------------------- ----------------------------------
Andrew H. Hines, Jr., Director Gary P. Motyl, President
/s/CHARLES B. JOHNSON /s/JAMES R. BAIO
- ----------------------------------- ----------------------------------
Charles B. Johnson, Director James R. Baio, Treasurer
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
TEMPLETON CAPITAL ACCUMULATOR FUND AUGUST 31, 1998 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000869313
<NAME> TEMPLETON CAPITAL ACCUMULATOR FUND, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 181935543
<INVESTMENTS-AT-VALUE> 192146455
<RECEIVABLES> 558045
<ASSETS-OTHER> 8956
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 192713456
<PAYABLE-FOR-SECURITIES> 582894
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 217490
<TOTAL-LIABILITIES> 800384
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 171312941
<SHARES-COMMON-STOCK> 19814350
<SHARES-COMMON-PRIOR> 15747924
<ACCUMULATED-NII-CURRENT> 3064216
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7325003
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10210912
<NET-ASSETS> 191913072
<DIVIDEND-INCOME> 4096363
<INTEREST-INCOME> 1538597
<OTHER-INCOME> 0
<EXPENSES-NET> (2030647)
<NET-INVESTMENT-INCOME> 3604313
<REALIZED-GAINS-CURRENT> 9816835
<APPREC-INCREASE-CURRENT> (31942765)
<NET-CHANGE-FROM-OPS> (18521617)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3044916)
<DISTRIBUTIONS-OF-GAINS> (4707546)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4444049
<NUMBER-OF-SHARES-REDEEMED> (1086763)
<SHARES-REINVESTED> 709140
<NET-CHANGE-IN-ASSETS> 19229779
<ACCUMULATED-NII-PRIOR> 2504819
<ACCUMULATED-GAINS-PRIOR> 2215714
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1530273)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (2226008)
<AVERAGE-NET-ASSETS> 204036422
<PER-SHARE-NAV-BEGIN> 10.97
<PER-SHARE-NII> 0.18
<PER-SHARE-GAIN-APPREC> (1.00)
<PER-SHARE-DIVIDEND> (0.18)
<PER-SHARE-DISTRIBUTIONS> (0.28)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.69
<EXPENSE-RATIO> 1.00<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1> EXPENSE RATIO EXCLUDING WAIVER AND PAYMENTS BY AFFILIATES IS 1.09%.
</FN>
</TABLE>
