TEMPLETON AMERICAN TRUST, INC.
THIS STATEMENT OF ADDITIONAL INFORMATION DATED
MAY 1, 1995 IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS OF
TEMPLETON AMERICAN TRUST, INC. DATED
MAY 1, 1995, WHICH MAY BE OBTAINED WITHOUT CHARGE
UPON REQUEST TO THE PRINCIPAL UNDERWRITER,
FRANKLIN TEMPLETON DISTRIBUTORS, INC.,
700 CENTRAL AVENUE, P.O. BOX 33030,
ST. PETERSBURG, FLORIDA 33733-8030
TOLL FREE TELEPHONE: (800) 237-0738
TABLE OF CONTENTS
General Information and History
Investment Objective and
Policies
-Investment Policies
-Repurchase Agreements
-Debt Securities
-Futures Contracts
-Options on Securities or
Indices
-Foreign Currency Hedging
Transactions
-Investment Restrictions
-Risk Factors
-Trading Policies
-Personal Securities Transactions
Management of the Fund
Trustee Compensation
Principal Shareholders
Investment Management and Other
Services
-Investment Management
Agreement
-Management Fees
-The Investment Manager
-Business Manager
-Custodian and Transfer Agent
-Legal Counsel
-Independent Accountants
-Reports to Shareholders
Brokerage Allocation
Purchase, Redemption and
Pricing of Shares
-Ownership and Authority Disputes
-Tax-Deferred Retirement Plans
-Letter of Intent
-Special Net Asset Value Purchases
Tax Status
Principal Underwriter
Description of Shares
Performance Information
Financial Statements
GENERAL INFORMATION AND HISTORY
Templeton American Trust, Inc. (the "Fund") was organized as
a Maryland corporation on October 31, 1990, and is registered
under the Investment Company Act of 1940 (the "1940 Act") as an
open-end diversified management investment company.
INVESTMENT OBJECTIVE AND POLICIES
Investment Policies. The Fund's Investment Objective and
Policies are described in the Prospectus under the heading
"General Description -- Investment Objective and Policies." The
Fund may invest for defensive purposes in commercial paper which,
at the date of investment, must be rated A-1 by Standard & Poor's
Corporation ("S&P") or Prime-1 by Moody's Investors Service, Inc.
("Moody's") or, if not rated, be issued by a company which at the
date of investment has an outstanding debt issue rated AAA or AA
by S&P or Aaa or Aa by Moody's.
Repurchase Agreements. Repurchase agreements are contracts
under which the buyer of a security simultaneously commits to
resell the security to the seller at an agreed-upon price and
date. Under a repurchase agreement, the seller is required to
maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. Templeton
Investment Counsel, Inc. (the "Investment Manager") will monitor
the value of such securities daily to determine that the value
equals or exceeds the repurchase price. Repurchase agreements
may involve risks in the event of default or insolvency of the
seller, including possible delays or restrictions upon the Fund's
ability to dispose of the underlying securities. The Fund will
enter into repurchase agreements only with parties who meet
creditworthiness standards approved by the Board of Directors,
i.e., banks or broker-dealers which have been determined by the
Investment Manager to present no serious risk of becoming
involved in bankruptcy proceedings within the time frame
contemplated by the repurchase transaction.
Debt Securities. The Fund may invest in debt securities
which are rated at least C by Moody's or C by S&P or deemed to be
of comparable quality by the Investment Manager. As an operating
policy, the Fund will invest no more than 5% of its assets in
debt securities rated lower than Baa by Moody's or BBB by
S&P.<F1> 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.
[FN]
<F1> In the event that the Board of Directors 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. [FN]
Although they may offer higher yields than do higher rated
securities, low rated and unrated debt securities generally
involve greater volatility of price and risk of principal and
income, including the possibility of default by, or bankruptcy
of, the issuers of the securities. In addition, the markets in
which low rated and unrated debt securities are traded are more
limited than those in which higher rated securities are traded.
The existence of limited markets for particular securities may
diminish the Fund's ability to sell the securities at fair value
either to meet redemption requests or to respond to a specific
economic event such as a deterioration in the creditworthiness of
the issuer. Reduced secondary market liquidity for certain low
rated or unrated debt securities may also make it more difficult
for the Fund to obtain accurate market quotations for the
purposes of valuing the Fund's portfolio. Market quotations are
generally available on many low rated or unrated securities only
from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and
liquidity of low rated debt securities, especially in a thinly
traded market. Analysis of the creditworthiness of issuers of
low rated debt securities may be more complex than for issuers of
higher rated securities, and the ability of the Fund to achieve
its investment objective may, to the extent of investment in low
rated debt securities, be more dependent upon such creditworthi-
ness 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 recognize income currently for Federal income
tax purposes in the amount of the unpaid, accrued interest with
respect to high yield bonds structured as zero coupon bonds or
pay-in-kind securities, even though it receives no cash interest
until the security's maturity or payment date. In order to
qualify for beneficial tax treatment, the Fund must distribute
substantially all of its income to Shareholders (see "Tax
Status"). Thus, the Fund may have to dispose of its portfolio
securities under disadvantageous circumstances to generate cash
or leverage itself by borrowing cash, so that it may satisfy the
distribution requirement.
Recent legislation, which requires federally insured savings
and loan associations to divest their investments in low rated
debt securities, may have a material adverse effect on the Fund's
net asset value and investment practices.
Futures Contracts. The Fund may purchase and sell financial
futures contracts. Although some financial futures contracts
call for making or taking delivery of the underlying securities,
in most cases these obligations are closed out before the
settlement date. The closing of a contractual obligation is
accomplished by purchasing or selling an identical offsetting
futures contract. Other financial futures contracts by their
terms call for cash settlements.
The Fund may also buy and sell index futures contracts with
respect to any stock index traded on a recognized stock exchange
or board of trade. An index futures contract is a contract to
buy or sell units of an index at a specified future date at a
price agreed upon when the contract is made. 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.
At the time the Fund purchases a futures contract, an amount
of cash, U.S. Government securities, or other highly liquid debt
securities equal to the market value of the futures contract will
be deposited in a segregated account with the Fund's custodian.
When writing a 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 the
instruments underlying the contract (or, in the case of an index
futures contract, 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 or Indices. The Fund may write
covered call and put options and purchase call and put options on
securities or stock indices that are traded on United States and
foreign exchanges and in the over-the-counter markets. <FN2>
<FN2>
[FN]All option transactions entered into by the Fund will be traded
on a recognized exchange, or will be cleared through a recognized
formal clearing arrangement.[FN]
An option on a security is a contract that gives the
purchaser of the option, in return for the premium paid, the
right to buy a specified security (in the case of a call option)
or to sell a specified security (in the case of a put option)
from or to the writer of the option at a designated price during
the term of the option. An option on a securities index gives
the purchaser of the option, in return for the premium paid, the
right to receive from the seller cash equal to the difference
between the closing price of the index and the exercise price of
the option.
The Fund may write a call or put option only if the option
is "covered." A call option on a security written by the Fund is
"covered" if the Fund owns the underlying security covered by the
call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its
portfolio. A call option on a security is also "covered" if the
Fund holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call
held (1) is equal to or less than the exercise price of the call
written or (2) is greater than the exercise price of the call
written if the difference is maintained by the Fund in cash or
high grade U.S. Government securities in a segregated account
with its custodian. A put option on a security written by the
Fund is "covered" if the Fund maintains cash or fixed income
securities with a value equal to the exercise price in a
segregated account with its custodian, or else holds a put on the
same security and in the same principal amount as the put written
where the exercise price of the put held is equal to or greater
than the exercise price of the put written.
The Fund will cover call options on stock indices that it
writes by owning securities whose price changes, in the opinion
of the Investment Manager, are expected to be similar to those of
the index, or in such other manner as may be in accordance with
the rules of the exchange on which the option is traded and
applicable laws and regulations. Nevertheless, where the Fund
covers a call option on a stock index through ownership of
securities, such securities may not match the composition of the
index. In that event, the Fund will not be fully covered and
could be subject to risk of loss in the event of adverse changes
in the value of the index. The Fund will cover put options on
stock indices that it writes by segregating assets equal to the
option's exercise price, or in such other manner as may be in
accordance with the rules of the exchange on which the option is
traded and applicable laws and regulations.
The Fund will receive a premium from writing a put or call
option, which increases the Fund's gross income in the event the
option expires unexercised or is closed out at a profit. If the
value of a security or an index on which the Fund has written a
call option falls or remains the same, the Fund will realize a
profit in the form of the premium received (less transaction
costs) that could offset all or a portion of any decline in the
value of the portfolio securities being hedged. If the value of
the underlying security or index rises, however, the Fund will
realize a loss in its call option position, which will reduce the
benefit of any unrealized appreciation in the Fund's investments.
By writing a put option, the Fund assumes the risk of a decline
in the underlying security or index. To the extent that the
price changes of the portfolio securities being hedged correlate
with changes in the value of the underlying security or index,
writing covered put options on indices or securities will
increase the Fund's losses in the event of a market decline,
although such losses will be offset in part by the premium
received for writing the option.
The Fund may also purchase put options to hedge its
investments against a decline in value. By purchasing a put
option, the Fund will seek to offset a decline in the value of
the portfolio securities being hedged through appreciation of the
put option. If the value of the Fund's investments does not
decline as anticipated, or if the value of the option does not
increase, the Fund's loss will be limited to the premium paid for
the option plus related transaction costs. The success of this
strategy will depend, in part, on the accuracy of the correlation
between the changes in value of the underlying security or index
and the changes in value of the Fund's security holdings being
hedged.
The Fund may purchase call options on individual securities
to hedge against an increase in the price of securities that the
Fund anticipates purchasing in the future. Similarly, the Fund
may purchase call options on a securities index to attempt to
reduce the risk of missing a broad market advance, or an advance
in an industry or market segment, at a time when the Fund holds
uninvested cash or short-term debt securities awaiting
investment. When purchasing call options, the Fund will bear the
risk of losing all or a portion of the premium paid if the value
of the underlying security or index does not rise.
There can be no assurance that a liquid market will exist
when the Fund seeks to close out an option position. Trading
could be interrupted, for example, because of supply and demand
imbalances arising from a lack of either buyers or sellers, or
the options exchange could suspend trading after the price has
risen or fallen more than the maximum specified by the exchange.
Although the Fund may be able to offset to some extent any
adverse effects of being unable to liquidate an option position,
the Fund may experience losses in some cases as a result of such
inability.
Foreign Currency Hedging Transactions. In order to hedge
against foreign currency exchange rate risks, the Fund may enter
into forward foreign currency exchange contracts and foreign
currency futures contracts, as well as purchase put or call
options on foreign currencies, as described below. The Fund may
also conduct its foreign currency exchange transactions on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market.
The Fund may enter into forward foreign currency exchange
contracts ("forward contracts") to attempt to minimize the risk
to the Fund from adverse changes in the relationship between the
U.S. dollar and foreign currencies. A forward contract is an
obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and
privately traded by currency traders and their customers. The
Fund may enter into a forward contract, for example, when it
enters into a contract for the purchase or sale of a security
denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security. In addition, for example, when the
Fund believes that a foreign currency may suffer a substantial
decline against the U.S. dollar, it may enter into a forward
contract to sell an amount of that foreign currency approximating
the value of some or all of the Fund's portfolio securities
denominated in such foreign currency, or when the Fund believes
that the U.S. dollar may suffer a substantial decline against a
foreign currency, it may enter into a forward contract to buy
that foreign currency for a fixed dollar amount. This second
investment practice is generally referred to as "cross-hedging."
Because in connection with the Fund's forward foreign currency
transactions an amount of the Fund's assets equal to the amount
of the purchase will be held aside or segregated to be used to
pay for the commitment, the Fund will always have cash, cash
equivalents or high quality debt securities available sufficient
to cover any commitments under these contracts or to limit any
potential risk. The segregated account will be marked-to-market
on a daily basis. While these contracts are not presently
regulated by the Commodity Futures Trading Commission ("CFTC"),
the CFTC may in the future assert authority to regulate forward
contracts. In such event, the Fund's ability to utilize forward
contracts in the manner set forth above may be restricted.
Forward contracts may limit potential gain from a positive change
in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result
in poorer overall performance for the Fund than if it had not
engaged in such contracts.
The Fund may purchase and write put and call options on
foreign currencies for the purpose of protecting against declines
in the dollar value of foreign portfolio securities and against
increases in the dollar cost of foreign securities to be
acquired. As is the case with other kinds of options, however,
the writing of an option on foreign currency will constitute only
a partial hedge, up to the amount of the premium received, and
the Fund could be required to purchase or sell foreign currencies
at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an
effective hedge against fluctuation in exchange rates, although,
in the event of rate movements adverse to the Fund's position,
the Fund may forfeit the entire amount of the premium plus
related transaction costs. Options on foreign currencies to be
written or purchased by the Fund will be traded on U.S. and
foreign exchanges or over-the-counter.
The Fund may enter into exchange-traded contracts for the
purchase or sale for future delivery of foreign currencies
("foreign currency futures"). This investment technique will be
used only to hedge against anticipated future changes in exchange
rates which otherwise might adversely affect the value of the
Fund's portfolio securities or adversely affect the prices of
securities that the Fund intends to purchase at a later date.
The successful use of foreign currency futures will usually
depend on the Investment Manager's ability to forecast currency
exchange rate movements correctly. Should exchange rates move in
an unexpected manner, the Fund may not achieve the anticipated
benefits of foreign currency futures or may realize losses.
Investment Restrictions. The Fund has imposed upon itself
certain Investment Restrictions which, together with its
Investment Objective, are fundamental policies except as
otherwise indicated. No changes in the Fund's Investment
Objective or these Investment Restrictions can be made without
the approval of the Fund's Shareholders. For this purpose, the
provisions of the 1940 Act require the affirmative vote of the
lesser of either (1) 67% or more of the Shares of the Fund
present at a Shareholder's meeting at which more than 50% of the
outstanding Shares are present or represented by proxy or (2)
more than 50% of the outstanding Shares of the Fund.
The Fund will not:
1. Invest in real estate, unlisted real estate limited
partnerships, or mortgages on real estate (although the
Fund may invest in readily 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 other open-end
investment companies except as permitted by the 1940
Act; invest in interests (other than debentures or
equity stock interests) in oil, gas or other mineral
leases, exploration or development programs; or
purchase or sell commodity contracts (except futures
contracts as described in the Fund's Prospectus).
2. Purchase or retain securities of any company in which
Directors or officers of the Fund or of its Investment
Manager, individually owning more than 1/2 of 1% of the
securities of such company, in the aggregate own more
than 5% of the securities of such company.
3. With respect to 75% of its total assets, purchase more
than 5% of any class of securities of any one company,
including more than 10% of its outstanding voting
securities,<FN3> or invest in any company for the
purpose of exercising control or management.
[FN]
<FN3>As a non-fundamental policy, with respect to 100% of its
total assets, the Fund will not purchase more than 10% of
any company's outstanding voting securities. In addition,
with respect to 75% of its total assets, the Fund will not
invest more than 5% of its total assets in securities issued
by any one company or government, exclusive of U.S.
government securities. [FN]
4. Act as an underwriter; issue senior securities except
as set forth in Investment Restriction 6 below; or
purchase on margin or sell short (but the Fund may make
margin payments in connection with options on
securities or securities indices, and foreign
currencies; futures contracts and related options; and
forward contracts and related options).
5. 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 buy from a bank or broker-dealer U.S. Government
obligations with a simultaneous agreement by the seller
to repurchase them within no more than seven days at
the original purchase price plus accrued interest and
may loan its portfolio securities.
6. Borrow money, except that the Fund may borrow money
from banks in an amount not exceeding 33-1/3% of the
value of its total assets (including the amount
borrowed).
7. Invest more than 5% of the value of its total assets in
securities of issuers which have been in continuous
operation less than three years.
8. Invest more than 5% of its total assets in warrants,
whether or not listed on the New York or American Stock
Exchanges, including no more than 2% of its total
assets which may be invested in warrants that are not
listed on those exchanges. Warrants acquired by the
Fund in units or attached to securities are not
included in this Investment Restriction.
9. Invest more than 25% of its total assets in a single
industry.
10. Participate on a joint or a joint and several basis in
any trading account in securities. (See "Investment
Objective and Policies -- Trading Policies" as to
transactions in the same securities for the Fund and/or
other mutual funds with the same or affiliated
advisers.)
Whenever any Investment Policy or Investment Restriction
states a maximum percentage of the Fund's assets which may be
invested in any security or other property, it is intended that
such maximum percentage limitation be determined immediately
after and as a result of the Fund's acquisition of such security
or property. Assets are calculated as described in the
Prospectus under the heading "How to Buy Shares of the Fund." If
the Fund receives from an issuer of securities held by the Fund
subscription rights to purchase securities of that issuer, and if
the Fund exercises such subscription rights at a time when the
Fund's portfolio holdings of securities of that issuer would
otherwise exceed the limits set forth in investment restrictions
3 or 9 above, it will not constitute a violation if, prior to
receipt of securities upon exercise of such rights, and after
announcement of such rights, the Fund has sold at least as many
securities of the same class and value as it would receive on
exercise of such rights.
Risk Factors. The Fund may invest up to 35% of its total
assets in securities in any foreign country, developed or
developing, if they are listed on a stock exchange, as well as a
limited right to purchase such securities if they are unlisted.
Investors should consider carefully the substantial risks
involved in securities of companies and governments of foreign
nations, which are in addition to the usual risks inherent in
domestic investments. There may be less publicly available
information about foreign companies comparable to the reports and
ratings published about companies in the United States. Foreign
companies are not generally subject to uniform accounting,
auditing and financial reporting standards, and auditing
practices and requirements may not be comparable to those
applicable to United States companies. 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 New York
Stock Exchange, and securities of some foreign companies are less
liquid and more volatile than securities of comparable United
States companies. Although the Fund may not invest more than 15%
of its total assets in unlisted foreign securities, including not
more than 10% of its total assets in securities with a limited
trading market, in the opinion of the Investment Manager such
securities with a limited trading market do not present a
significant liquidity problem. Commission rates in foreign
countries, which are generally fixed rather than subject to
negotiation as in the United States, are likely to be higher. In
many foreign countries there is less government supervision and
regulation of stock exchanges, brokers and listed companies than
in the United States.
Investments in companies domiciled in developing countries
may be subject to potentially higher risks than investments in
developed countries. These risks include (1) less social,
political and economic stability; (2) the small current size of
the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of
liquidity and in greater price volatility; (3) certain national
policies which may restrict the Fund's investment opportunities,
including restrictions on investment in issuers or industries
deemed sensitive to national interests; (4) the absence of
developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private
property; (5) the absence, until recently in certain Eastern
European countries, of a capital market structure or market-
oriented economy; and (6) the possibility that recent favorable
economic developments in Eastern Europe may be slowed or reversed
by unanticipated political or social events in such countries.
In addition, many countries in which the Fund may invest
have experienced substantial, and in some periods extremely high,
rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have
negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing
countries may differ favorably or unfavorably from the United
States economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments
position.
Despite the recent dissolution of the Soviet Union, the
Communist Party may continue to exercise a significant or, in
some countries, dominant role in certain Eastern European
countries. To the extent of the Communist Party's influence,
investments in such countries will involve risks of
nationalization, expropriation and confiscatory taxation. The
Communist governments of a number of Eastern European countries
expropriated large amounts of private property in the past, in
many cases without adequate compensation, and there can be no
assurance that such expropriation will not occur in the future.
In the event of such expropriation, the Fund could lose a
substantial portion of any investments it has made in the
affected countries. Further, no accounting standards exist in
Eastern European countries. Finally, even though certain Eastern
European currencies may be convertible into U.S. dollars, the
conversion rates may be artificial to the actual market values
and may be adverse to Fund Shareholders.
Investing in Russian companies involves a high degree of
risk and special considerations not typically associated with
investing in the United States securities markets, and should be
considered highly speculative. Such risks include: (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 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, or a
return to the centrally planned economy that existed prior to the
dissolution of the Soviet Union; (h) the financial condition of
Russian companies, including large amounts of inter-company debt
which may create a payments crisis on a national scale; (i)
dependency on exports and the corresponding importance of
international trade; (j) the risk that the Russian tax system
will not be reformed to prevent inconsistent, retroactive and/or
exorbitant taxation; and (k) possible difficulty in identifying a
purchaser of securities held by the Fund due to the
underdeveloped nature of the securities markets.
There is little historical data on Russian securities
markets because they are relatively new and a substantial
proportion of securities transactions in Russia are privately
negotiated outside of stock exchanges. Because of the recent
formation of the securities markets as well as the underdeveloped
state of the banking and telecommunications systems, settlement,
clearing and registration of securities transactions are subject
to significant risks. Ownership of shares (except where shares
are held through depositories that meet the requirements of the
1940 Act) is defined according to entries in the company's share
register and normally evidenced by extracts from the register or
by formal share certificates. However, there is no central
registration system for shareholders and these services are
carried out by the companies themselves or by registrars located
throughout Russia. These registrars are not necessarily subject
to effective state supervision and it is possible for the Fund to
lose its registration through fraud, negligence or even mere
oversight. While the Fund will endeavor to ensure that its
interest continues to be appropriately recorded either itself or
through a custodian or other agent inspecting the share register
and by obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability and it
is possible that subsequent illegal amendment or other fraudulent
act may deprive the Fund of its ownership rights or improperly
dilute its interests. In addition, while applicable Russian
regulations impose liability on registrars for losses resulting
from their errors, it may be difficult for the Fund to enforce
any rights it may have against the registrar or issuer of the
securities in the event of loss of share registration.
Furthermore, although a Russian public enterprise with more than
1,000 shareholders is required by law to contract out the
maintenance of its shareholder register to an independent entity
that meets certain criteria, in practice this regulation has not
always been strictly enforced. Because of this lack of
independence, management of a company may be able to exert
considerable influence over who can purchase and sell the
company's shares by illegally instructing the registrar to refuse
to record transactions in the share register. This practice may
prevent the Fund from investing in the securities of certain
Russian companies deemed suitable by the Investment Manager.
Further, this also could cause a delay in the sale of Russian
company securities by the Fund if a potential purchaser is deemed
unsuitable, which may expose the Fund to potential loss on the
investment.
The Fund endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread in currency
exchange (to cover service charges) will be incurred, particu-
larly when the Fund changes investments from one country to
another or when proceeds of the sale of Shares in U.S. dollars
are used for the purchase of securities in foreign countries.
Also, some countries may adopt policies which would prevent the
Fund from transferring cash out of the country or withhold
portions of interest and dividends at the source. There is the
possibility of cessation of trading on national exchanges,
expropriation, nationalization or confiscatory taxation,
withholding and other foreign taxes on income or other amounts,
foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country), default in
foreign government securities, political or social instability,
or diplomatic developments which could affect investments in
securities of issuers in foreign nations.
The Fund may be affected either unfavorably or favorably by
fluctuations in the relative rates of exchange between the
currencies of different nations, by exchange control regulations
and by indigenous economic and political developments. Some
countries in which the Fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S.
dollar. Further, certain currencies have experienced a steady
devaluation relative to the U.S. dollar. Any devaluations in the
currencies in which a Fund's portfolio securities are denominated
may have a detrimental impact on the Fund. Through the flexible
policy of the Fund, the Investment Manager endeavors to avoid
unfavorable consequences and to take advantage of favorable
developments in particular nations where from time to time it
places the investments of the Fund.
The exercise of this flexible policy may include decisions
to purchase securities with substantial risk characteristics and
other decisions such as changing the emphasis on investments from
one nation to another and from one type of security to another.
Some of these decisions may later prove profitable and others may
not. No assurance can be given that profits, if any, will exceed
losses.
The Directors consider, at least annually, the likelihood of
the imposition by any foreign government of exchange control
restrictions which would affect the liquidity of the Fund's
assets maintained with custodians in foreign countries, as well
as the degree of risk from political acts of foreign governments
to which such assets may be exposed. The Directors also consider
the degree of risk involved through the holding of portfolio
securities in domestic and foreign securities depositories (see
"Investment Management and Other Services -- Custodian and
Transfer Agent"). However, in the absence of willful
misfeasance, bad faith or gross negligence on the part of the
Investment Manager, any losses resulting from the holding of the
Fund's portfolio securities in foreign countries and/or with
securities depositories will be at the risk of the Shareholders.
No assurance can be given that the Directors' appraisal of the
risks will always be correct or that such exchange control
restrictions or political acts of foreign governments might not
occur.
The Fund's ability to reduce or eliminate its futures and
related options positions will depend upon the liquidity of the
secondary markets for such futures and options. The Fund intends
to purchase or sell futures and related options 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 and related options for hedging may
involve risks because of imperfect correlations between movements
in the prices of the futures or related options and movements in
the prices of the securities being hedged. Successful use of
futures and related options by the Fund for hedging purposes also
depends upon the Investment Manager's ability to predict
movements in the direction of the market correctly, as to which
no assurance can be given.
Trading Policies. The Investment Manager and its affiliated
companies serve as investment adviser to other investment
companies and private clients. Accordingly, the respective
portfolios of these funds and clients may contain many or some of
the same securities. When any two or more of these funds or
clients are engaged simultaneously in the purchase or sale of the
same security, the transactions are placed for execution in a
manner designed to be equitable to each party. The larger size
of the transaction may affect the price of the security and/or
the quantity which may be bought or sold for each party. If the
transaction is large enough, brokerage commissions in certain
countries may be negotiated below those otherwise chargeable.
Sale or purchase of securities, without payment of brokerage
commissions, fees (except customary transfer fees) or other
remuneration in connection therewith, may be effected between any
of these funds, or between funds and private clients, under
procedures adopted by the Fund's Board of Directors pursuant to
Rule 17a-7 under the 1940 Act.
Personal Securities Transactions. Access persons of the
Franklin Templeton Group, as defined in SEC Rule 17(j) under the
1940 Act, who are employees of Franklin Resources, Inc. or their
subsidiaries, are permitted to engage in personal securities
transactions subject to the following general restrictions and
procedures: (1) The trade must receive advance clearance from a
Compliance Officer and must be completed within 24 hours after
this clearance; (2) Copies of all brokerage confirmations must be
sent to the Compliance Officer and within 10 days after the end
of each calendar quarter, a report of all securities transactions
must be provided to the Compliance Officer; (3) In addition to
items (1) and (2), access persons involved in preparing and
making investment decisions must file annual reports of their
securities holdings each January and also inform the Compliance
Officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction
or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other
client.
MANAGEMENT OF THE FUND
The name, address, principal occupation during the past five
years and other information with respect to each of the Directors
and Principal Executive Officers of the Fund are as follows:
Name, Address and Principal Occupation
Offices with Fund During Past Five Years
HARMON E. BURNS* Executive vice president,
777 Mariners Island Blvd. secretary, and director of
San Mateo, California Franklin Resources, Inc.;
Director executive vice president and
director of Franklin Templeton
Distributors, Inc.; executive
vice president of Franklin
Advisers, Inc.; officer and/or
director, as the case may be,
of other subsidiaries of
Franklin Resources, Inc.; and
officer and/or director,
trustee or general partner, as
the case may be, for 41 of the
investment companies in the
Franklin Templeton Group.
CONSTANTINE DEAN TSERETOPOULOS Physician, Lyford Cay Hospital
Lyford Cay Hospital (1987-present); cardiology
P.O. Box N-7776 fellow, University of Maryland
Nassau, Bahamas (1985-1987); Internal Medicine
Director Intern, Greater Baltimore
Medical Center (July 1982-July
1985); and director or trustee
of other Templeton Funds.
FRANK J. CROTHERS President and chief executive
P.O. Box N-3238 officer of Atlantic Equipment
Nassau, Bahamas & Power Ltd.; vice chairman of
Director Caribbean Utilities Co., Ltd.;
president of Provo Power
Corporation; director of
various other business and
nonprofit organizations; and
director or trustee of other
Templeton Funds.
WILLIAM YOUNG BOYD II** Owner and operator of Boyd
Apartado Postal 805 Steamship Corporation; and a
Panama 1, Panama director or trustee of other
Director Templeton Funds.
HARRIS J. ASHTON Chairman of the Board,
Metro Center, 1 Station Place president and chief executive
Stamford, Connecticut officer of General Host
Director Corporation (nursery and craft
centers); director of RBC
Holdings Inc. (a bank holding
company) and Bar-S Foods; and
director, trustee or managing
general partner, as the case
may be, for most of the
investment companies in the
Franklin Templeton Group.
S. JOSEPH FORTUNATO Member of the law firm of
200 Campus Drive Pitney, Hardin, Kipp & Szuch;
Florham Park, New Jersey director of General Host
Director Corporation; and director,
trustee or managing general
partner, as the case may be,
for most of the investment
companies in the Franklin
Templeton Group.
FRED R. MILLSAPS Manager of personal
2665 N.E. 37th Drive investments (1978-present);
Fort Lauderdale, Florida chairman and chief executive
Director officer of Landmark Banking
Corporation (1969-1978);
financial vice president of
Florida Power and Light (1965-
1969); vice president of
Federal Reserve Bank of
Atlanta (1958-1965); and
director of various other
business and nonprofit
organizations.
ANDREW H. HINES, JR. Consultant, Triangle
150 2nd Avenue N. Consulting Group; chairman of
St. Petersburg, Florida the board and chief executive
Director officer of Florida Progress
Corporation (1982-February,
1990) and director of various
of its subsidiaries; chairman
and director of Precise Power
Corporation; executive-in-
residence of Eckerd College
(1991-present); director of
Checkers Drive-In Restaurants,
Inc.; and a director or
trustee of other Templeton
Funds.
JOHN G. BENNETT, JR. Founder, chairman of the board
3 Radnor Corporate Center and president of the
Suite 150 Foundation for New Era
100 Matsonford Road Philanthropy; president and
Radnor, Pennsylvania chairman of the boards of
Director Evelyn M. Bennett Memorial
Foundation and NEP
International Trust; chairman
of the board and chief
executive officer of The
Bennett Group International,
LTD; chairman of the boards of
Human Service Systems, Inc.
and Multi-Media Communica-
tions, Inc.; director or
trustee of many national and
international organizations,
universities, and grantmaking
foundations serving in various
executive board capacities;
and member of the Public
Policy Committee of the
Advertising Council.
GORDON S. MACKLIN Chairman of White River
8212 Burning Tree Road Corporation (information
Bethesda, Maryland services); director of Fund
Director America Enterprises Holdings,
Inc., Lockheed Martin
Corporation, MCI
Communications Corporation,
Fusion Systems Corporation,
Infovest Corporation, and
Medimmune, Inc.; formerly,
chairman of Hambrecht and
Quist Group; director of H&Q
Healthcare Investors;
president of the National
Association of Securities
Dealers, Inc.; and director,
trustee, or managing general
partner, as the case may be,
of most of the investment
companies in the Franklin
Templeton Group.
NICHOLAS F. BRADY* Chairman, Templeton Emerging
The Bullitt House Markets Investment Trust PLC;
102 East Dover Street chairman, Templeton Latin
Easton, Maryland America Investment Trust PLC;
Director chairman of Darby Overseas
Investments, Ltd. (an
investment firm), (1994-
present); director of the
Amerada Hess Corporation,
Capital Cities/ABC, Inc.,
Christiana Companies, and the
H.J. Heinz Company; Secretary
of the United States
Department of the Treasury
(1988-January 1993); chairman
of the board of Dillon, Read &
Co. Inc. (investment banking)
prior thereto; and director or
trustee of other Templeton
Funds.
GARY P. MOTYL Senior vice president and
500 East Broward Blvd. director of Templeton
Fort Lauderdale, Florida Investment Counsel, Inc.;
President director of Templeton Global
Investors, Inc.; and president
or vice president of other
Templeton Funds.
CHARLES B. JOHNSON President, chief executive
777 Mariners Island Blvd. officer and director of
San Mateo, California Franklin Resources, Inc.;
Vice President chairman of the board and
director of Franklin Advisers,
Inc. and Franklin Templeton
Distributors, Inc.; director
of Franklin Administrative
Services, Inc., General Host
Corporation, and Templeton
Global Investors, Inc.; and
officer and director, trustee
or managing general partner,
as the case may be, of most
other subsidiaries of Franklin
Resources, Inc. and of most of
the investment companies in
the Franklin Templeton Group.
MARTIN L. FLANAGAN Senior vice president,
777 Mariners Island Blvd. treasurer and chief financial
San Mateo, California officer of Franklin Resources,
Vice President Inc.; director, chief
executive officer, and
executive vice president of
Templeton Investment Counsel,
Inc.; director, president and
chief executive officer of
Templeton Global Investors,
Inc.; director or trustee and
president or vice president of
the Templeton Funds;
accountant, Arthur Andersen &
Company (1982-1983); and
member of the International
Society of Financial Analysts
and the American Institute of
Certified Public Accountants.
MARK G. HOLOWESKO President, chief executive
Lyford Cay officer and director of
Nassau, Bahamas Templeton, Galbraith &
Vice President Hansberger Ltd.; director of
global equity research for
Templeton, Galbraith &
Hansberger Ltd.; president or
vice president of the
Templeton Funds; and
investment administrator with
Roy West Trust Corporation
(Bahamas) Limited (1984-1985).
JOHN R. KAY Vice president of the
500 East Broward Blvd. Templeton Funds; vice
Fort Lauderdale, Florida president and treasurer of
Vice President Templeton Global Investors,
Inc. and Templeton Worldwide,
Inc.; assistant vice president
of Franklin Templeton
Distributors, Inc.; formerly,
vice president and controller
of the Keystone Group, Inc.
THOMAS M. MISTELE Senior vice president of
700 Central Avenue Templeton Global Investors,
St. Petersburg, Florida Inc.; vice president of
Secretary Franklin Templeton
Distributors, Inc.; secretary
of the Templeton Funds;
attorney, Dechert Price &
Rhoads (1985-1988) and
Freehill, Hollingdale & Page
(1988); and judicial clerk,
U.S. District Court (Eastern
District of Virginia) (1984-
1985).
JAMES R. BAIO Certified public accountant;
500 East Broward Blvd. treasurer of the Templeton
Fort Lauderdale, Florida Funds; senior vice president
Treasurer of Templeton Worldwide, Inc.,
Templeton Global Investors,
Inc., and Templeton Funds
Trust Company; formerly,
senior tax manager of Ernst &
Young (certified public
accountants)(1977-1989).
JACK L. COLLINS Assistant treasurer of
700 Central Avenue Templeton Funds Trust Company;
St. Petersburg, Florida and former partner of Grant
Assistant Treasurer Thornton, independent public
accountants.
JEFFREY L. STEELE Partner, Dechert Price &
1500 K Street, N.W. Rhoads.
Washington, D.C.
Assistant Secretary
____________________
* Messrs. Burns and Brady are Directors who are "interested
persons" of the Fund as that term is defined in the 1940 Act.
Messrs. Boyd, Crothers, Tseretopoulos, Ashton, Fortunato,
Millsaps, Macklin, Hines, and Bennett are Directors who are not
"interested persons" of the Fund. Mr. Brady and Franklin
Resources, Inc. are limited partners of Darby Overseas Partners,
L.P. ("Darby Overseas"). Mr. Brady established Darby Overseas in
February, 1994, and is Chairman and a shareholder of the
corporate general partner of Darby Overseas. In addition, Darby
Overseas and Templeton, Galbraith & Hansberger Ltd. are limited
partners of Darby Emerging Markets Fund, L.P.
** Mr. Boyd has tendered his resignation as a director. A
special meeting of Shareholders of the Fund has been called for
May 4, 1995, for the purpose of electing Directors of the Fund.
Betty P. Krahmer has been nominated to stand for election as a
director at that meeting to succeed Mr. Boyd.
TRUSTEE COMPENSATION
All of the Fund's Officers and Directors also hold positions
with other investment companies in the Franklin Templeton Group.
No compensation is paid by the Fund to any officer or Director
who is an officer, trustee or employee of the Investment Manager
or its affiliates. Each Templeton Fund pays its independent
directors and trustees and Mr. Brady an annual retainer and/or
fees for attendance at Board and Committee meetings, the amount
of which is based on the level of assets in each fund.
Accordingly, based upon the assets of the Fund as of December 31,
1994, the Trust currently pays the independent Directors and Mr.
Brady an annual retainer of $100 and a fee of $0 per meeting
attended of the Board and its Committees. The independent
Directors and Mr. Brady are reimbursed for any expenses incurred
in attending meetings, paid pro rata by each Franklin Templeton
Fund in which they serve. No pension or retirement benefits are
accrued as part of Fund expenses.
The following table shows the total compensation paid to the
Directors by the Fund and by all investment,companies in the
Franklin Templeton Group for the fiscal year ended December 31,
1994:
Number of Total
Aggregate Franklin Compensation
Name of Compensation Templeton from all
Director from the Fund Boards on Funds in
Fund Which Director Franklin
Serves Templeton
Group
Harris J. Ashton $1,525 54 $319,925
John G. Bennett, 1,525 23 105,625
Jr.
Nicholas F. Brady 1,525 23 86,125
Frank J. Crothers 2,025 4 12,850
S. Joseph
Fortunato 1,525 56 336,065
Andrew H. Hines,
Jr. 2,025 23 106,125
William Young Boyd
II 1,000 4 4,000
Gordon S. Macklin 1,525 51 303,685
Fred R. Millsaps 1,525 23 106,125
Constantine Dean
Tseretopoulos 2,025 4 12,850
PRINCIPAL SHAREHOLDERS
As of March 31, 1995, there were 3,242,187 Shares of the
Fund outstanding, of which 4,201 Shares (less than 1%) were owned
beneficially by all the Directors and Officers of the Fund as a
group. As of that date, to the knowledge of management, no
person owned beneficially or of record 5% or more of the Fund's
outstanding Shares, except Merrill Lynch, Pierce, Fenner & Smith
Inc., P.O. Box 45286, Jacksonville, Florida 32232-5286 owned of
record 333,033 Shares (representing 10% of the outstanding
Shares).
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Agreement. The Investment Manager of
the Fund is Templeton Investment Counsel, Inc., a Florida
corporation with offices in Fort Lauderdale, Florida. The
Investment Management Agreement dated October 30, 1992 was
approved by Shareholders of the Fund on October 30, 1992, was
last approved by the Board of Directors, including a majority of
the Directors who were not parties to the Agreement or interested
persons of any such party, at a meeting on February 24, 1995, and
will continue through April 30, 1996. The Investment Management
Agreement will continue from year to year thereafter, subject to
approval annually by the Board of Directors or by vote of the
holders of a majority of the outstanding shares of the Fund (as
defined in the 1940 Act) and also, in either event, with the
approval of a majority of those Directors who are not parties to
the Investment Management Agreement or interested persons of any
such party in person at a meeting called for the purpose of
voting on such approval.
The Investment Management Agreement requires the Investment
Manager to manage the investment and reinvestment of the Fund's
assets. The Investment Manager is not required to furnish any
personnel, overhead items or facilities for the Fund, including
daily pricing or trading desk facilities.
The Investment Management Agreement provides that the
Investment Manager will select brokers and dealers for execution
of the Fund's portfolio transactions consistent with the Fund's
brokerage policy (see "Brokerage Allocation"). Although the
services provided by broker-dealers in accordance with the
brokerage policy incidentally may help reduce the expenses of or
otherwise benefit the Investment Manager and other investment
advisory clients of the Investment Manager and of its affiliates,
as well as the Fund, the value of such services is indetermina-
ble, and the Investment Manager's fee is not reduced by any
offset arrangement by reason thereof.
When the Investment Manager determines to buy or sell the
same securities for the Fund that the Investment Manager or one
or more of its affiliates has selected for one or more of its
other clients or for clients of its affiliates, the orders for
all such securities transactions are placed for execution by
methods determined by the Investment Manager, with approval by
the Board of Directors, to be impartial and fair, in order to
seek good results for all parties (see "Investment Objective and
Policies -- Trading Policies"). Records of securities
transactions of persons who know when orders are placed by the
Fund are available for inspection at least four times annually by
the compliance officer of the Fund so that the non-interested
Directors (as defined in the 1940 Act) can be satisfied that the
procedures are generally fair and equitable for all parties.
The Investment Management Agreement further provides that
the Investment Manager shall have no liability to the Fund or any
Shareholder of the Fund for any error of judgment, mistake of
law, or any loss arising out of any investment or other act or
omission in the performance by the Investment Manager of its
duties under the Investment Management Agreement or for any loss
or damage resulting from the imposition by any government of
exchange control restrictions which might affect the liquidity of
the Fund's assets, or from acts or omissions of custodians or
securities depositories, or from any wars or political acts of
any foreign governments to which such assets might be exposed,
except for any liability, loss or damage resulting from willful
misfeasance, bad faith or gross negligence on the Investment
Manager's part or reckless disregard of its duties under the
Investment Management Agreement. The Investment Management
Agreement will terminate automatically in the event of its
assignment, and may be terminated by the Fund at any time without
payment of any penalty on 60 days' written notice, with the
approval of a majority of the Directors of the Fund in office at
the time or by vote of a majority of the outstanding Shares of
the Fund (as defined by the 1940 Act).
Management Fees. For its services, the Fund pays the
Investment Manager a monthly fee equal on an annual basis to
0.70% of its average daily net assets during the year. Each
class of Shares pays a portion of the fee, determined by the
proportion of the Fund that it represents. During the fiscal
years ended December 31, 1994, 1993 and 1992, the Investment
Manager (and, prior to October 30, 1992, TGH, the Fund's previous
Investment Manager) received from the Fund fees of $255,905,
$223,035, and $139,914, respectively. The Investment Manager
will comply with any applicable state regulations which may
require the Investment Manager to make reimbursements to the Fund
in the event that the Fund's aggregate operating expenses,
including the management fee, but generally excluding interest,
taxes, brokerage commissions and extraordinary expenses, are in
excess of specific applicable limitations. The strictest rule
currently applicable to the Fund is 2.5% of the first $30,000,000
of net assets, 2% of the next $70,000,000 of net assets and 1.5%
of the remainder.
The Investment Manager. The Investment Manager is an
indirect wholly owned subsidiary of Franklin Resources, Inc.
("Franklin"), a publicly traded company whose shares are listed
on the New York Stock Exchange. Charles B. Johnson (an officer
of the Fund), Rupert H. Johnson, Jr., and R. Martin Wiskemann are
principal shareholders of Franklin and own, respectively,
approximately 20%, 16% and 9.2% of its outstanding shares.
Messrs. Charles B. Johnson and Rupert H. Johnson, Jr. are
brothers.
Business Manager. Templeton Global Investors, Inc. performs
certain administrative functions for the Fund including:
o providing office space, telephone, office equipment and
supplies for the Fund;
o paying all compensation of the Fund's officers;
o authorizing expenditures and approving bills for
payment on behalf of the Fund;
o supervising preparation of annual and semiannual
reports to Shareholders, notices of dividends, capital
gains distributions and tax credits, and attending to
correspondence and other communications with individual
Shareholders;
o daily pricing of the Fund's investment portfolio and
preparing and supervising publication of daily
quotations of the bid and asked prices of the Fund's
Shares, earnings reports and other financial data;
o providing trading desk facilities for the Fund;
o monitoring relationships with organizations serving the
Fund, including the custodian and printers;
o supervising compliance by the Fund with recordkeeping
requirements under the 1940 Act and regulations
thereunder, and with state regulatory requirements,
maintaining books and records for the Fund (other than
those maintained by the custodian and transfer agent),
and preparing and filing tax reports other than the
Fund's income tax returns;
o monitoring the qualifications of the tax-deferred
retirement plans offered by the Fund; and
o providing executive, clerical and secretarial help
needed to carry out these responsibilities.
For its services, the Business Manager receives a monthly
fee equal on an annual basis to 0.15% of the first $200,000,000
of the Fund's average daily net assets, reduced to 0.135%
annually of the Fund's net assets in excess of $200,000,000,
further reduced to 0.1% annually of such net assets in excess of
$700,000,000, and further reduced to 0.075% annually of such net
assets in excess of $1,200,000,000. Each class of Shares pays a
portion of the fee, determined by the proportion of the Fund that
it represents. Since the Business Manager's fee covers services
often provided by investment advisers to other funds, the Fund's
combined expenses for advisory and administrative services are
higher than those of most other investment companies. During the
fiscal years ended December 31, 1994, 1993 and 1992, the Fund
paid business management fees of $54,836, $47,794 and $29,983,
respectively.
The Business Manager is relieved of liability to the Fund
for any act or omission in the course of its performance under
the Business Management Agreement in the absence of willful
misfeasance, bad faith or gross negligence. The Business
Management Agreement may be terminated by the Fund at any time on
60 days' written notice without payment of penalty, provided that
such termination by the Fund shall be directed or approved by
vote of a majority of the Directors of the Fund in office at the
time or by vote of a majority of the outstanding voting
securities of the Fund (as defined by the 1940 Act), and shall
terminate automatically and immediately in the event of its
assignment.
Templeton Global Investors, Inc. is an indirect wholly owned
subsidiary of Franklin.
Custodian and Transfer Agent. The Chase Manhattan Bank,
N.A. serves as custodian of the Fund's assets, which are
maintained at the custodian's principal office, MetroTech Center,
Brooklyn, New York 11245, and at the offices of its branches and
agencies throughout the world. The custodian has entered into
agreements with foreign sub-custodians approved by the Directors
pursuant to Rule 17f-5 under the 1940 Act. The custodian, its
branches and sub-custodians generally do not hold certificates
for the securities in their custody, but instead have book
records with domestic and foreign securities depositories, which
in turn have book records with the transfer agents of the issuers
of the securities. Compensation for the services of the
custodian is based on a schedule of charges agreed on from time
to time.
Franklin Templeton Investor Services, Inc. serves as the
Fund's transfer agent. Services performed by the transfer agent
include processing purchase, transfer and redemption orders;
making dividend payments, capital gain distributions and
reinvestments; and handling routine communications with
Shareholders. The transfer agent receives from the Fund an
annual fee of $13.74 per Shareholder account plus out-of-pocket
expenses, such fee to be adjusted each year to reflect changes in
the Department of Labor Consumer Price Index.
Legal Counsel. Dechert Price & Rhoads, 1500 K Street, N.W.,
Washington, D.C. 20005, is legal counsel for the Fund.
Independent Accountants. The firm of McGladrey & Pullen,
LLP, 555 Fifth Avenue, New York, New York 10017, serves as
independent accountants for the Fund. In addition to reporting
annually on the financial statements of the Fund, the Fund's
accountants review certain filings of the Fund with the
Securities and Exchange Commission and prepare the Fund's Federal
and state corporation tax returns.
Reports to Shareholders. The Fund's fiscal year ends on
December 31. Shareholders will be provided at least semiannually
with reports showing the portfolio of the Fund and other
information, including an annual report with financial statements
audited by independent accountants.
BROKERAGE ALLOCATION
The Investment Management Agreement provides that the
Investment Manager is responsible for selecting members of
securities exchanges, brokers and dealers (such members, brokers
and dealers being hereinafter referred to as "brokers") for the
execution of the Fund's portfolio transactions and, when
applicable, the negotiation of commissions in connection
therewith. It is not the duty of the Investment Manager, nor
does it have any obligation, to provide a trading desk for the
Fund's portfolio transactions. All decisions and placements are
made in accordance with the following principles:
1. Purchase and sale orders will usually be placed with
brokers who are selected by the Investment Manager as
able to achieve "best execution" of such orders. "Best
execution" means prompt and reliable execution at the
most favorable securities price, taking into account
the other provisions hereinafter set forth. The
determination of what may constitute best execution and
price in the execution of a securities transaction by a
broker involves a number of considerations, including
without limitation, the overall direct net economic
result to the Fund (involving both price paid or
received and any commissions and other costs paid), the
efficiency with which the transaction is effected, the
ability to effect the transaction at all where a large
block is involved, availability of the broker to stand
ready to execute possibly difficult transactions in the
future, and the financial strength and stability of the
broker. Such considerations are judgmental and are
weighed by the Investment Manager in determining the
overall reasonableness of brokerage commissions.
2. In selecting brokers for portfolio transactions, the
Investment Manager takes into account its past
experience as to brokers qualified to achieve "best
execution," including brokers who specialize in any
foreign securities held by the Fund.
3. The Investment Manager is authorized to allocate
brokerage business to brokers who have provided
brokerage and research services, as such services are
defined in Section 28(e) of the Securities Exchange Act
of 1934 (the "1934 Act"), for the Fund and/or other
accounts, if any, for which the Investment Manager
exercises investment discretion (as defined in Section
3(a)(35) of the 1934 Act) and, as to transactions as to
which fixed minimum commission rates are not
applicable, to cause the Fund to pay a commission for
effecting a securities transaction in excess of the
amount another broker would have charged for effecting
that transaction, if the Investment Manager determines
in good faith that such amount of commission is
reasonable in relation to the value of the brokerage
and research services provided by such broker, viewed
in terms of either that particular transaction or the
Investment Manager's overall responsibilities with
respect to the Fund and the other accounts, if any, as
to which it exercises investment discretion. In
reaching such determination, the Investment Manager is
not required to place or attempt to place a specific
dollar value on the research or execution services of a
broker or on the portion of any commission reflecting
either of said services. In demonstrating that such
determinations were made in good faith, the Investment
Manager shall be prepared to show that all commissions
were allocated and paid for purposes contemplated by
the Fund's brokerage policy; that commissions were paid
only for products or services which provide lawful and
appropriate assistance to the Investment Manager in the
performance of its investment decision-making
responsibilities; and that the commissions paid were
within a reasonable range. The determination that
commissions were within a reasonable range shall be
based on any available information as to the level of
commissions known to be charged by other brokers on
comparable transactions, but there shall be taken into
account the Fund's policies that (a) obtaining a low
commission is deemed secondary to obtaining a favorable
securities price, since it is recognized that usually
it is more beneficial to the Fund to obtain a favorable
price than to pay the lowest commission; and (b) the
quality, comprehensiveness and frequency of research
studies which are provided for the Fund and the
Investment Manager are useful to the Investment Manager
in performing its advisory services under its
Investment Management Agreement with the Fund.
Research services provided by brokers to the Investment
Manager are considered to be in addition to, and not in
lieu of, services required to be performed by the
Investment Manager under its Investment Management
Agreement. Research furnished by brokers through whom
the Fund effects securities transactions may be used by
the Investment Manager for any of its accounts, and not
all such research may be used by the Investment Manager
for the Fund. When execution of portfolio transactions
is allocated to brokers trading on exchanges with fixed
brokerage commission rates, account may be taken of
various services provided by the broker, including
quotations outside the United States for daily pricing
of foreign securities held in the Fund's portfolio.
4. Purchases and sales of portfolio securities within the
United States other than on a securities exchange shall
be executed with primary market makers acting as
principal except where, in the judgment of the
Investment Manager, better prices and execution may be
obtained on a commission basis or from other sources.
5. Sales of the Fund's Shares (which shall be deemed to
include also shares of other investment companies
registered under the 1940 Act which have either the
same investment adviser or an investment adviser
affiliated with the Fund's Investment Manager) made by
a broker are one factor among others to be taken into
account in deciding to allocate portfolio transactions
(including agency transactions, principal transactions,
purchases in underwritings or tenders in response to
tender offers) for the account of the Fund to that
broker; provided that the broker shall furnish "best
execution" as defined in paragraph 1 above, and that
such allocation shall be within the scope of the Fund's
policies as stated above; and provided further, that in
every allocation made to a broker in which the sale of
Shares is taken into account there shall be no increase
in the amount of the commissions or other compensation
paid to such broker beyond a reasonable commission or
other compensation determined, as set forth in
paragraph 3 above, on the basis of best execution alone
or best execution plus research services, without
taking account of or placing any value upon such sale
of Shares.
Insofar as known to management, no Director or officer of
the Fund, nor the Investment Manager or the Principal Underwriter
or any person affiliated with any of them, has any material
direct or indirect interest in any broker employed by or on
behalf of the Fund. Franklin Templeton Distributors, Inc., the
Principal Underwriter for the Fund, is a registered broker-
dealer, but has never executed any purchase or sale transactions
for the Fund's portfolio or participated in commissions on any
such transactions, and has no intention of doing so in the
future. During the fiscal years ended December 31, 1994, 1993
and 1992, the Fund paid brokerage commissions of $34,622, $20,620
and $42,000, respectively. All portfolio transactions are
allocated to broker-dealers only when their prices and execution,
in the good faith judgment of the Investment Manager, are equal
to the best available within the scope of the Fund's policies.
There is no fixed method used in determining which broker-dealers
receive which order or how many orders.
PURCHASE, REDEMPTION AND PRICING OF SHARES
The Prospectus describes the manner in which the Fund's
Shares may be purchased and redeemed. See "How to Buy Shares of
the Fund" and "How to Sell Shares of the Fund."
Net asset value per Share is determined as of the scheduled
closing of the New York Stock Exchange (generally 4:00 p.m., New
York time) every Monday through Friday (exclusive of national
business holidays). The Fund's offices will be closed, and net
asset value will not be calculated, on those days on which the
New York Stock Exchange is closed, which currently are: New
Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Trading in securities on European and Far Eastern securities
exchanges and over-the-counter markets is normally completed well
before the close of business in New York on each day on which the
New York Stock Exchange is open. Trading of European or Far
Eastern securities generally, or in a particular country or
countries, may not take place on every New York business day.
Furthermore, trading takes place in various foreign markets on
days which are not business days in New York and on which the
Fund's net asset value is not calculated. The Fund calculates
net asset value per Share, and therefore effects sales,
redemptions and repurchases of its Shares, as of the close of the
New York Stock Exchange once on each day on which that Exchange
is open. Such calculation does not take place contemporaneously
with the determination of the prices of many of the portfolio
securities used in such calculation, and if events occur which
materially affect the value of those foreign securities, they
will be valued at fair market value as determined by the
management and approved in good faith by the Board of Directors.
The Board of Directors may establish procedures under which
the Fund may suspend the determination of net asset value for the
whole or any part of any period during which (1) the New York
Stock Exchange is closed other than for customary weekend and
holiday closings, (2) trading on the New York Stock Exchange is
restricted, (3) an emergency exists as a result of which disposal
of securities owned by the Fund is not reasonably practicable or
it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (4) for such other period as the
Securities and Exchange Commission may by order permit for the
protection of the holders of the Fund's Shares.
Ownership and Authority Disputes. In the event of disputes
involving multiple claims of ownership or authority to control a
Shareholder's account, the Fund has the right (but has no
obligation) to: (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, prior to executing instructions
regarding the account; or (b) interplead disputed funds or
accounts with a court of competent jurisdiction. Moreover, the
Fund may surrender ownership of all or a portion of an account to
the Internal Revenue Service in response to a Notice of Levy.
In addition to the special purchase plans described in the
Prospectus, other special purchase plans also are available:
Tax-Deferred Retirement Plans. The Fund offers its
Shareholders the opportunity to participate in the following
types of retirement plans:
o For individuals, whether or not covered by other
qualified plans;
o For simplified employee pensions;
o For employees of tax-exempt organizations;
o For corporations, self-employed individuals and
partnerships.
Capital gains and income received by the foregoing plans
generally are exempt from taxation until distribution from the
plans. Investors considering participation in any such plan
should review specific tax laws relating thereto and should
consult their attorneys or tax advisers with respect to the
establishment and maintenance of any such plan. Additional
information, including the fees and charges with respect to all
of these plans, is available upon request to the Principal
Underwriter. No distribution under a retirement plan will be
made until Franklin Templeton Trust Company, the custodian of the
retirement plans, receives the participant's election on IRS Form
W-4P (available on request from Franklin Templeton Trust Company)
and such other documentation as it deems necessary, as to whether
or not U.S. income tax is to be withheld from such distribution.
Individual Retirement Account (IRA). All U.S. individuals
(whether or not covered by qualified private or governmental
retirement plans) may purchase Shares of the Fund pursuant to an
Individual Retirement Account. However, contributions to an IRA
by an individual who is covered by a qualified private or
governmental plan may not be tax-deductible depending on the
individual's income. Custodial services for Individual
Retirement Accounts are available through Franklin Templeton
Trust Company. Disclosure statements summarizing certain aspects
of Individual Retirement Accounts are furnished to all persons
investing in such accounts, in accordance with Internal Revenue
Service regulations.
Simplified Employee Pensions (SEP-IRA). For employers who
wish to establish a simplified form of employee retirement
program investing in Shares of the Fund, there are available
Simplified Employee Pensions invested in IRA plans. Details and
materials relating to these plans will be furnished upon request
to the Principal Underwriter.
Retirement Plan for Employees of Tax-Exempt Organizations
(403(b)). Employees of public school systems and certain types
of charitable organizations may enter into a deferred
compensation arrangement for the purchase of Shares of the Fund
without being taxed currently on the investment. Contributions
which are made by the employer through salary reduction are
excludable from the gross income of the employee. Such deferred
compensation plans, which are intended to qualify under Section
403(b) of the Internal Revenue Code of 1986, as amended (the
"Code"), are available through the Principal Underwriter.
Custodian services are provided by Franklin Templeton Trust
Company.
Qualified Plan for Corporations, Self-Employed Individuals
and Partnerships. For employers who wish to purchase Shares of
the Fund in conjunction with employee retirement plans, there is
a prototype master plan which has been approved by the Internal
Revenue Service. A "Section 401(k) Plan" is also available.
Franklin Templeton Trust Company furnishes custodial services for
these plans. For further details, including custodian fees and
plan administration services, see the master plan and related
material which is available from the Principal Underwriter.
Letter of Intent. Purchasers who intend to invest $50,000
or more in Class I Shares of the Fund or any other fund in the
Franklin Templeton Group within 13 months (whether in one lump
sum or in installments the first of which may not be less than 5%
of the total intended amount and each subsequent installment not
less than $25, including automatic investment and payroll
deduction plans), and to beneficially hold the total amount of
such Class I Shares fully paid for and outstanding simultaneously
for at least one full business day before the expiration of that
period, should execute a Letter of Intent ("LOI") on the form
provided in the Shareholder Application in the Fund's Prospectus.
Payment for not less than 5% of the total intended amount must
accompany the executed LOI. Those Class I Shares purchased with
the first 5% of the intended amount stated in the LOI will be
held as "Escrowed Shares" for as long as the LOI remains
unfulfilled. Although the Escrowed Shares are registered in the
investor's name, his full ownership of them is conditional upon
fulfillment of the LOI. No Escrowed Shares can be redeemed by
the investor for any purpose until the LOI is fulfilled or
terminated. If the LOI is terminated for any reason other than
fulfillment, the Transfer Agent will redeem that portion of the
Escrowed Shares required and apply the proceeds to pay any
adjustment that may be appropriate to the sales commission on all
Class I Shares (including the Escrowed Shares) already purchased
under the LOI and apply any unused balance to the investor's
account. The LOI is not a binding obligation to purchase any
amount of Shares, but its execution will result in the purchaser
paying a lower sales charge at the appropriate quantity purchase
level. A purchase not originally made pursuant to an LOI may be
included under a subsequent LOI executed within 90 days of such
purchase. In this case, an adjustment will be made at the end of
13 months from the effective date of the LOI at the net asset
value per Share then in effect, unless the investor makes an
earlier written request to the Principal Underwriter upon
fulfilling the purchase of Shares under the LOI. In addition,
the aggregate value of any Shares, including Class II Shares,
purchased prior to the 90-day period referred to above may be
applied to purchases under a current LOI in fulfilling the total
intended purchases under the LOI. However, no adjustment of
sales charges previously paid on purchases prior to the 90-day
period will be made.
If an LOI is executed on behalf of a benefit plan (such
plans are described under "How to Buy Shares of the Fund -- Net
Asset Value Purchases (Both Classes)" in the Prospectus), the
level and any reduction in sales charge for these employee
benefit plans will be based on actual plan participation and the
projected investments in the Franklin Templeton Funds (except
Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, Templeton Variable Products Series Fund, Franklin
Valuemark Funds and Franklin Government Securities Trust) under
the LOI. Benefit Plans are not subject to the requirement to
reserve 5% of the total intended purchase, or to any penalty as a
result of the early termination of a plan, nor are Benefit Plans
entitled to receive retroactive adjustments in price for
investments made before executing LOIs.
Special Net Asset Value Purchases. As discussed in the
Prospectus under "How to Buy Shares of the Fund - Description of
Special Net Asset Value Purchases," certain categories of
investors may purchase Class I Shares of the Fund at net asset
value (without a front-end or contingent deferred sales charge).
Franklin Templeton Distributors, Inc. ("FTD") or one of its
affiliates may make payments, out of its own resources, to
securities dealers who initiate and are responsible for such
purchases, as indicated below. FTD may make these payments in
the form of contingent advance payments, which may require
reimbursement from the securities dealers with respect to certain
redemptions made within 12 months of the calendar month following
purchase, as well as other conditions, all of which may be
imposed by an agreement between FTD, or its affiliates, and the
securities dealer.
The following amounts will be paid by FTD or one of its
affiliates, out of its own resources, to securities dealers who
initiate and are responsible for (i) purchases of most equity and
fixed-income Franklin Templeton Funds made at net asset value by
certain designated retirement plans (excluding IRA and IRA
rollovers): 1.00% on sales of $1 million but less than $2
millon, plus 0.80% on sales of $2 million but less than $3
million, plus 0.50% on sales of $3 million but less than $50
million, plus 0.25% on sales of $50 million but less than $100
million, plus 0.15% on sales of $100 million or more; and (ii)
purchases of most fixed-income Franklin Templeton Funds made at
net asset value by non-designated retirement plans: 0.75% on
sales of $1 million but less than $2 million, plus 0.60% on sales
of $2 million but less than $3 million, plus 0.50% on sales of $3
million but less than $50 million, plus 0.25% on sales of $50
million but less than $100 million, plus 0.15% on sales of $100
million or more. These payment breakpoints are reset every 12
months for purposes of additional purchases. With respect to
purchases made at net asset value by certain trust companies and
trust departments of banks and certain retirement plans of
organizations with collective retirement plan assets of $10
million or more, FTD, or one of its affiliates, out of its own
resources, may pay up to 1% of the amount invested.
TAX STATUS
The Fund intends normally to pay a dividend at least once
annually representing substantially all of its net investment
income (which includes, among other items, dividends and
interest) and any net realized capital gains. By so doing and
meeting certain diversification of assets and other requirements
of the Code, the Fund intends to qualify annually as a regulated
investment company under the Code. The status of the Fund as a
regulated investment company does not involve government
supervision of management or of its investment practices or
policies. As a regulated investment company, the Fund generally
will be relieved of liability for U.S. Federal income tax on that
portion of its net investment income and net realized capital
gains which it distributes to its Shareholders. Amounts not
distributed on a timely basis in accordance with a calendar year
distribution requirement also are subject to a nondeductible 4%
excise tax. To prevent application of the excise tax, the Fund
intends to make distributions in accordance with the calendar
year distribution requirement.
Dividends representing net investment income and short-term
capital gains (the excess of net short-term capital gains over
net long-term capital losses) are taxable to Shareholders as
ordinary income. Distributions representing net investment
income (not including short-term capital gains) may be eligible
for the dividends-received deduction available to corporations to
the extent attributable to the Fund's qualifying dividend income.
However, the alternative minimum tax applicable to corporations
may reduce the benefit of the dividends-received deduction.
Distributions of net long-term capital gains (the excess of net
long-term capital gains over net short-term capital losses)
designated by the Fund as capital gain dividends are taxable to
Shareholders as long-term capital gains, regardless of the length
of time the Fund's Shares have been held by a Shareholder, and
are not eligible for the dividends-received deduction.
Generally, dividends and distributions are taxable to
Shareholders, whether received in cash or reinvested in Shares of
the Fund. Any distributions that are not from a Fund's
investment company taxable income or net capital gain may be
characterized as a return of capital to Shareholders or, in some
cases, as capital gain. Shareholders will be notified annually
as to the Federal tax status of dividends and distributions they
receive and any tax withheld thereon.
Distributions by the Fund reduce the net asset value of the
Fund Shares. Should a distribution reduce the net asset value
below a Shareholder's cost basis, the distribution nevertheless
may be taxable to the Shareholder as ordinary income or capital
gain as described above, even though, from an investment
standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax
implication of buying Shares just prior to a distribution by the
Fund. The price of Shares purchased at that time includes the
amount of the forthcoming distribution, but the distribution will
generally be taxable to them.
Income received by the Fund from sources within foreign
countries may be subject to withholding and other taxes imposed
by such countries. Tax conventions between certain countries and
the United States may reduce or eliminate these taxes. It is
impossible to determine the rate of foreign tax in advance, since
the amount of the Fund's assets to be invested in various
countries is not known.
If, at the close of any fiscal year, more than 50% of the
value of the Fund's total assets are invested in securities of
foreign corporations, the Fund generally may elect pursuant to
Section 853 of the Code to pass through to its Shareholders the
foreign income and similar taxes paid by the Fund in order to
enable such Shareholders to take a credit (or deduction) for
foreign income and similar taxes paid by the Fund. In that case,
a Shareholder must include in his gross income on his Federal
income tax return both dividends received by him from the Fund
and the amount which the Fund advises him is his pro rata portion
of foreign income and similar taxes paid with respect to, or
withheld from, dividends, interest, or other income of the Fund
from its foreign investments. The Shareholder may then subtract
from his Federal income tax the amount of such taxes, or else
treat such foreign taxes as an itemized deduction in computing
taxable income; however, the above-described tax credit or
deduction is subject to certain limitations which may reduce
significantly the value of a credit or deduction. Foreign taxes
generally may not be deducted by a Shareholder that is an
individual in computing alternative taxable income and may at
most offset (as a credit) 90% of the alternative minimum tax.
The foregoing is only a general description of the foreign
tax credit. Because application of the credit depends on the
particular circumstances of each Shareholder, Shareholders are
advised to contact their own tax advisers.
Since the Fund currently anticipates that its investments in
foreign securities will be limited, the Fund does not expect to
be eligible to make this election. If the Fund is ineligible to
do so, the foreign income and similar taxes incurred by it
generally will reduce the Fund's income that is distributable to
Shareholders.
The Fund may invest in shares of foreign corporations which
may be classified under the Code as passive foreign investment
companies ("PFICs"). In general, a foreign corporation is
classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross
income is investment-type income. If the Fund receives a so-
called "excess distribution" with respect to PFIC stock, the Fund
itself may be subject to a tax on a portion of the excess
distribution, whether or not the corresponding income is
distributed by the Fund to Shareholders. In general, under the
PFIC rules, an excess distribution is treated as having been
realized ratably over the period during which the Fund held the
PFIC shares. The Fund itself will be subject to tax on the
portion, if any, of an excess distribution that is so allocated
to prior Fund taxable years and an interest factor will be added
to the tax, as if the tax had been payable in such prior taxable
years. Certain distributions from a PFIC as well as gain from
the sale of PFIC shares are treated as excess distributions.
Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess
distributions might have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment
with respect to PFIC shares. Under an election that currently is
available in some circumstances, the Fund generally would be
required to include in its gross income its share of the earnings
of a PFIC on a current basis, regardless of whether distributions
are received from the PFIC in a given year. If this election
were made, the special rules, discussed above, relating to the
taxation of excess distributions, would not apply. In addition,
another election may be available that would involve marking to
market the Fund's PFIC shares at the end of each taxable year
(and on certain other dates prescribed in the Code), with the
result that unrealized gains are treated as though they were
realized. If this election were made, tax at the Fund level
under the PFIC rules would generally be eliminated, but the Fund
could, in limited circumstances, incur nondeductible interest
charges. The Fund's intention to qualify annually as a regulated
investment company may limit its elections with respect to PFIC
shares.
Because the application of the PFIC rules may affect, among
other things, the character of gains, the amount of gain or loss
and the timing of the recognition of income with respect to PFIC
shares, as well as subject the Fund itself to tax on certain
income from PFIC shares, the amount that must be distributed to
Shareholders and which will be taxed to Shareholders as ordinary
income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not invest in PFIC
shares.
Under the Code, gains or losses attributable to fluctuations
in foreign currency exchange rates which occur between the time
the Fund accrues income or other receivables or accrues expenses
or other liabilities denominated in a foreign currency and the
time the Fund actually collects such receivables or pays such
liabilities generally are treated as ordinary income or ordinary
loss. Similarly, on disposition of debt securities denominated
in a foreign currency and on disposition of certain forward
contracts, futures contracts and options, gains or losses
attributable to fluctuations in the value of foreign currency
between the date of acquisition of the security or contract and
the date of disposition also are treated as ordinary gain or
loss. These gains and losses, referred to under the Code as
"section 988" gains and losses, may increase or decrease the
amount of the Fund's net investment income to be distributed to
its Shareholders as ordinary income. For example, fluctuations
in exchange rates may increase the amount of income that the Fund
must distribute in order to qualify for treatment as a regulated
investment company and to prevent application of an excise tax on
undistributed income. Alternatively, fluctuations in exchange
rates may decrease or eliminate income available for distribu-
tion. If section 988 losses exceed other net investment income
during a taxable year, the Fund generally would not be able to
make ordinary dividend distributions, or distributions made
before the losses were realized would be recharacterized as
return of capital to Shareholders for Federal income tax
purposes, rather than as an ordinary dividend, reducing each
Shareholder's basis in his Fund Shares, or as capital gain.
Certain of the options, futures contracts, and forward
contracts in which the Fund may invest may be "section 1256
contracts." With certain exceptions, gains or losses on section
1256 contracts generally are considered 60% long-term and 40%
short-term capital gains or losses ("60/40"). Also, section 1256
contracts held by the Fund at the end of each taxable year (and
on certain other dates prescribed by the Code) are "marked-to-
market" with the result that unrealized gains or losses are
treated as though they were realized and the resulting gain or
loss treated as 60/40 gain or loss.
The hedging transactions undertaken by the Fund may result
in "straddles" for Federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by
the Fund. In addition, losses realized by the Fund on positions
that are part of a straddle may be deferred under the straddle
rules, rather than being taken into account in calculating the
taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the
straddle rules have been promulgated, the tax consequences to the
Fund of hedging transactions are not entirely clear. The hedging
transactions may increase the amount of short-term capital gain
realized by the Fund which is taxed as ordinary income when
distributed to Shareholders.
The Fund may make one or more of the elections available
under the Code which are applicable to straddles. If the Fund
makes any of the elections, the amount, character and timing of
the recognition of gains or losses from the affected straddle
positions will be determined under rules that vary according to
the elections(s) made. The rules applicable under certain of the
elections may operate to accelerate the recognition of gains or
losses from the affected straddle positions.
Because application of the straddle rules may affect the
character of gains or losses, defer losses and/or accelerate the
recognition of gains or losses from the affected straddle
positions, the amount which must be distributed to Shareholders,
and which will be taxed to Shareholders as ordinary income or
long-term capital gain may be increased or decreased
substantially as compared to a Fund that did not engage in such
hedging transactions.
Certain requirements that must be met under the Code in
order for the Fund to qualify as a regulated investment company
may limit the extent to which the Fund will be able to engage in
transactions in options, futures, and forward contracts.
Some of the debt securities that may be acquired by the Fund
may be treated as debt securities that are issued originally at a
discount. Original issue discount can generally be defined as
the difference between the price at which a security was issued
and its stated redemption at maturity. Generally, the amount of
the original issue discount ("OID") is treated as interest income
and is included in income over the term of the debt security,
even though payment of that amount is not received until a later
time, usually when the debt security matures. A portion of the
OID includable in income with respect to certain high-yield
corporate debt securities may be treated as a dividend for
Federal income tax purposes.
Some of the debt securities (with a fixed maturity date of
more than one year from the date of issuance) that may be
acquired by the Fund in the secondary market may be treated as
having market discount. Generally, any gain recognized on the
disposition of, and any partial payment of principal on, a debt
security having market discount is treated as ordinary income to
the extent the gain does not exceed the "accrued market discount"
on such debt security. In addition, the deduction of any
interest expenses attributable to debt securities having market
discount may be deferred. Market discount generally accrues in
equal daily installments. The Fund may make one or more of the
elections applicable to debt securities having market discount,
which could affect the character and timing of recognition of
income.
Some debt securities (with a fixed maturity date of one year
or less from the date of issuance) that may be acquired by the
Fund may be treated as having acquisition discount, or OID in the
case of certain types of debt securities. Generally, the Fund
will be required to include the acquisition discount, or OID, in
income over the term of the debt security, even though payment of
that amount is not received until a later time, usually when the
debt security matures. The Fund may make one or more of the
elections application to debt securities having acquisition
discount, or OID, which could affect the character and timing of
recognition of income.
The Fund generally will be required to distribute dividends
to Shareholders representing discount on debt securities that is
currently includable in income, even though cash representing
such income may not have been received by the Fund. Cash to pay
such dividends may be obtained from sales proceeds of securities
held by the Fund.
Upon the sale or exchange (including a redemption) of
Shares, a Shareholder will realize a taxable gain or loss
depending upon the basis in the Shares. Such gain or loss will
be treated as capital gain or loss if the Shares are capital
assets in the Shareholder's hands, and will be long-term if the
Shareholder's holding period for the Shares is more than one
year. Any loss realized on a sale will be disallowed to the
extent that the Shares disposed of are replaced (including
replacement through the reinvesting of dividends and capital
gains distributions in the Fund) within a period of 61 days
beginning 30 days before and ending 30 days after the disposition
of the Shares. In such a case, the basis of the Shares acquired
will be adjusted to reflect the disallowed loss. Any loss
realized by a Shareholder on the sale of Fund Shares held by the
Shareholder for six months or less will be treated for Federal
income tax purposes as a long-term capital loss to the extent of
any distributions of long-term capital gains received by the
Shareholder with respect to such Shares.
In some cases, Shareholders will not be permitted to take
sales charges into account for purposes of determining the amount
of gain or loss realized on the disposition of their Shares.
This prohibition generally applies where (1) the Shareholder
incurs a sales charge in acquiring the stock of a regulated
investment company, (2) the stock is disposed of before the 91st
day after the date on which it was acquired, and (3) the
Shareholder subsequently acquires Shares of the same or another
regulated investment company and the otherwise applicable sales
charge is reduced or eliminated under a "reinvestment right"
received upon the initial purchase of Shares of stock. In that
case, the gain or loss recognized will be determined by excluding
from the tax basis of the Shares exchanged all or a portion of
the sales charge incurred in acquiring those Shares. This
exclusion applies to the extent that the otherwise applicable
sales charge with respect to the newly acquired Shares is reduced
as a result of having incurred a sales charge initially. Sales
charges affected by this rule are treated as if they were
incurred with respect to the stock acquired under the
reinvestment right. This provision may be applied to successive
acquisitions of stock.
The Fund generally will be required to withhold Federal
income tax at a rate of 31% ("backup withholding") from dividends
paid, capital gain distributions, and redemption proceeds to
Shareholders if (1) the Shareholder fails to furnish the Fund
with the Shareholder's correct taxpayer identification number or
Social Security number and to make such certifications as the
Fund may require, (2) the Internal Revenue Service notifies the
Shareholder or the Fund that the Shareholder has failed to report
properly certain interest and dividend income to the Internal
Revenue Service and to respond to notices to that effect, or
(3) when required to do so, the Shareholder fails to certify that
he is not subject to backup withholding. Corporate Shareholders
and certain other Shareholders specified in the Code generally
are exempt from backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against the
Shareholder's Federal income tax liability.
Ordinary dividends and capital gains distributions declared
by the Fund in October, November or December with a record date
in such a month and paid during the following January will be
treated as having been paid by the Fund and received by
Shareholders on December 31 of the calendar year in which
declared, rather than the calendar year in which the dividends
are actually received.
Distributions from the Fund and dispositions of Fund Shares
also may be subject to state, local and foreign taxes. Non-U.S.
Shareholders may be subject to U.S. tax rules that differ
significantly from those summarized above.
Shareholders are advised to consult their own tax advisers
for details with respect to the particular tax consequences to
them of an investment in the Fund.
PRINCIPAL UNDERWRITER
Franklin Templeton Distributors, Inc. ("FTD" or the
"Principal Underwriter"), P.O. Box 33030, St. Petersburg, Florida
33733-8030, toll free telephone (800) 237-0738, is the Principal
Underwriter of the Fund's Shares. FTD is a wholly owned
subsidiary of Franklin.
The Fund, pursuant to Rule 12b-1 under the 1940 Act, has
adopted a Distribution Plan with respect to each class of Shares
(the "Plans"). Under the Plan adopted with respect to Class I
Shares, the Fund may reimburse FTD or others quarterly (subject
to a limit of a 0.35% per annum of the Fund's average daily net
assets attributable to Class I Shares) for costs and expenses
incurred by FTD or others in connection with any activity that is
primarily intended to result in the sale of Fund Shares. Under
the Plan adopted with respect to Class II Shares, the Fund will
pay FTD or others quarterly (subject to a limit of 1.00% per
annum of the Fund's average daily net assets of which up to 0.25%
of such net assets may be paid to dealers for personal service
and/or the maintenance of Shareholder accounts) for costs and
expenses incurred by FTD or others in connection with any
activity which is primarily intended to result in the sale of
Fund Shares. Payments to FTD or others could be for various
types of activities, including (1) payments to broker-dealers who
provide certain services of value to the Fund's Shareholders
(sometimes referred to as a "trail fee") and advances of
commissions on sales of Fund Shares, and interest or carrying
charges in connection therewith; (2) expenses relating
to selling and servicing efforts; (3) expenses of organizing and
conducting sales seminars; (4) payments to employees or agents of
FTD who engage in or support distribution of Shares; (5) the
costs of preparing, printing and distributing prospectuses and
reports to prospective investors; (6) printing and advertising
expenses; and (7) such other similar services as the Fund's Board
of Directors determines to be reasonably calculated to result in
the sale of Shares.
During the fiscal year ended December 31, 1994, FTD
incurred costs and expenses (including advanced commissions) of
$393,018 in connection with distribution of Class II Shares
(Class I Shares were not offered during this period). During the
same period, the Fund made payments of $365,579 under the Plan
applicable to Class II Shares. As indicated above, unreimbursed
expenses, which amounted to $880,589 as of December 31, 1994, may
be reimbursed by the Fund during the fiscal year ending December
31, 1994 or in subsequent years. During the fiscal year ended
December 31, 1994, FTD spent, pursuant to the Plan, the following
amounts on: compensation to dealers, $89,820; wholesale costs
and expenses, $1,027; advanced commissions, $273,016; and
printing, $29,155.
The Distribution Agreement provides that the Principal
Underwriter will use its best efforts to maintain a broad and
continuous distribution of the Fund's Shares among bona fide
investors and may sign selling contracts with responsible
dealers, as well as sell to individual investors. The Principal
Underwriter in all cases buys Shares from the Fund acting as
principal for its own account. Dealers generally act as
principal for their own account in buying Shares from the
Principal Underwriter. No agency relationship exists between any
dealer and the Fund or the Principal Underwriter.
During the fiscal years ended December 31, 1994, 1993 and
1992, FTD received $59,594, $60,701, and $118,958, respectively,
from contingent deferred sales charges on Class II Shares.
The Distribution Agreement provides that the Fund shall pay
the costs and expenses incident to registering and qualifying the
Fund's Shares for sale under the Securities Act of 1933 and under
the applicable Blue Sky laws of the jurisdictions in which the
Principal Underwriter desires to distribute such Shares, and for
preparing, printing and distributing prospectuses and reports to
Shareholders. The Principal Underwriter pays the cost of
printing additional copies of prospectuses and reports to
Shareholders used for selling purposes. (The Fund pays costs of
preparation, set-up and initial supply of the Fund's Prospectus
for existing Shareholders.) The Distribution Plan is briefly
described in the Prospectus.
The Distribution Agreement is subject to renewal from year
to year in accordance with the provisions of the 1940 Act and
terminates automatically in the event of its assignment. The
Distribution Agreement may be terminated without penalty by
either party upon 60 days' written notice to the other, provided
termination by the Fund shall be approved by the Board of
Directors or a majority (as defined in the 1940 Act) of the
Shareholders. The Principal Underwriter is relieved of liability
for any act or omission in the course of its performance of the
Distribution Agreement, in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of its
obligations.
FTD is the Principal Underwriter for the other Templeton
Funds.
DESCRIPTION OF SHARES
The Shares have non-cumulative voting rights so that the
holders of a plurality of the Shares voting for the election of
Directors at a meeting at which 50% of the outstanding Shares are
present can elect all the Directors, and in such event, the
holders of the remaining Shares voting for the election of
Directors will not be able to elect any person or persons to the
Board of Directors.
The Fund's Bylaws provide that the President or Secretary of
the Fund will call a special meeting of Shareholders at the
request in writing by Shareholders owning 25% of the capital
stock of the Fund issued and outstanding at the time of the call.
The Directors are required to call a meeting for the purpose of
considering the removal of a person serving as Director if
requested in writing to do so by the holders of not less than 10%
of the outstanding Shares of the Fund. In addition, the Fund is
required to assist Shareholder communication in connection with
the calling of Shareholder meetings to consider removal of a
Director.
PERFORMANCE INFORMATION
The Fund may, from time to time, include its total return in
advertisements or reports to Shareholders or prospective
investors. Quotations of average annual total return for the
Fund will be expressed in terms of the average annual compounded
rate of return for periods in excess of one year or total return
for periods of less than one year of a hypothetical investment in
the Fund over periods of 1, 5 or 10 years (up to the life of the
Fund) calculated pursuant to the following formula: P (1 + T)n =
ERV (where P = a hypothetical initial payment of $1,000, T = the
average annual total return for periods of one year or more or
the total return for periods of less than one year, n = the
number of years, and ERV = the ending redeemable value of a
hypothetical $1,000 payment made at the beginning of the period).
All total return figures reflect the deduction of the maximum
contingent deferred sales charge and deduction of a proportional
share of Fund expenses on an annual basis, and assume that all
dividends and distributions are reinvested when paid. The Fund's
average annual total return for the one-year period ended
December 31, 1994 and for the period from February 27, 1991
(commencement of operations) to December 31, 1994 was (3.37)% and
9.59%, respectively.
Performance information for the Fund may be compared, in
reports and promotional literature, to: (1) the Standard & Poor's
500 Stock Index, Dow Jones Industrial Average, or other unmanaged
indices, so that investors may compare the Fund's results with
those of a group of unmanaged securities widely regarded by
investors as representative of the securities market in general;
(2) other groups of mutual funds tracked by Lipper Analytical
Services, Inc., a widely used independent research firm which
ranks mutual funds by overall performance, investment objectives
and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall
performance or other criteria; and (3) the Consumer Price Index
(measure for inflation) to assess the real rate of return from an
investment in the Fund. Unmanaged indices may assume the
reinvestment of dividends but generally do not reflect deductions
for administrative and management costs and expenses.
Performance information for the Fund reflects only the
performance of a hypothetical investment in the Fund during the
particular time period on which the calculations are based.
Performance information should be considered in light of the
Fund's Investment Objective and Policies, characteristics and
quality of the portfolio and the market conditions during the
given time period, and should not be considered as a
representation of what may be achieved in the future.
From time to time, the Fund and the Investment Manager may
also refer to the following information:
(1) The Investment Manager's and its affiliates' market
share of international equities managed in mutual funds
prepared or published by Strategic Insight or a similar
statistical organization.
(2) The performance of U.S. equity and debt markets
relative to foreign markets prepared or published by
Morgan Stanley Capital International or a similar
financial organization.
(3) The capitalization of U.S. and foreign stock markets as
prepared or published by the International Finance
Corporation, Morgan Stanley Capital International or a
similar financial organization.
(4) The geographic distribution of the Fund's portfolio.
(5) The gross national product and populations, including
age characteristics, literacy rates, foreign investment
improvements due to a liberalization of securities laws
and a reduction of foreign exchange controls, and
improving communication technology, of various
countries as published by various statistical
organizations.
(6) To assist investors in understanding the different
returns and risk characteristics of various
investments, the Fund may show historical returns of
various investments and published indices (e.g.,
Ibbotson Associates, Inc. Charts and Morgan Stanley
EAFE - Index).
(7) The major industries located in various jurisdictions
as published by the Morgan Stanley Index.
(8) Rankings by DALBAR Surveys, Inc. with respect to mutual
fund shareholder services.
(9) Allegorical stories illustrating the importance of
persistent long-term investing.
(10) The Fund's portfolio turnover rate and its ranking
relative to industry standards as published by Lipper
Analytical Services, Inc. or Morningstar, Inc.
(11) A description of the Templeton organization's
investment management philosophy and approach,
including its worldwide search for undervalued or
"bargain" securities and its diversification by
industry, nation and type of stocks or other
securities.
(12) Quotations from the Templeton organization's founder,
Sir John Templeton,* advocating the virtues of
diversification and long-term investing, including the
following:
o "Never follow the crowd. Superior performance is
possible only if you invest differently from the
crowd."
o "Diversify by company, by industry and by
country."
o "Always maintain a long-term perspective."
o "Invest for maximum total real return."
o "Invest - don't trade or speculate."
o "Remain flexible and open-minded about types of
investment."
____________________
* Sir John Templeton sold the Templeton organization to
Franklin Resources, Inc. in October, 1992 and resigned from
the Fund's Board on April 16, 1995. He is no longer
involved with the investment management process.
o "Buy low."
o "When buying stocks, search for bargains among
quality stocks."
o "Buy value, not market trends or the economic
outlook."
o "Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
o "Do your homework or hire wise experts to help
you."
o "Aggressively monitor your investments."
o "Don't panic."
o "Learn from your mistakes."
o "Outperforming the market is a difficult task.$'
o "An investor who has all the answers doesn't even
understand all the questions."
o "There's no free lunch."
o "And now the last principle: Do not be fearful or
negative too often."
In addition, the Fund and the Investment Manager may also refer
to the number of Shareholders in the Fund or the aggregate number
of shareholders of the Franklin Templeton Funds or the dollar
amount of fund and private account assets under management in
advertising materials.
FINANCIAL STATEMENTS
The financial statements contained in the Fund's Annual
Report to Shareholders dated December 31, 1994 are incorporated
herein by reference.
