TEMPLETON AMERICAN TRUST, INC.
THIS STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1996,
IS NOT A PROSPECTUS.
IT SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF
TEMPLETON AMERICAN TRUST, INC. DATED MAY 1, 1996,
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/DIAL BEN
TABLE OF CONTENTS
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General Information and History............. 1 -Management Fees............................. 19
Investment Objective and Policies........... 1 -The Investment Manager...................... 20
-Investment Policies....................... 1 -Business Manager............................ 20
-Repurchase Agreements..................... 2 -Custodian and Transfer Agent................ 21
-Debt Securities........................... 2 -Legal Counsel............................... 21
- -Structured Investments..................... 3 -Independent Accountants..................... 22
-Futures Contracts ........................ 4 -Reports to Shareholders..................... 22
-Options on Securities or Indices.......... 5 Brokerage Allocation.......................... 22
-Foreign Currency Hedging Purchase, Redemption and
Transactions............................ 6 Pricing of Shares.......................... 24
-Investment Restrictions................... 7 -Ownership and Authority Disputes..............25
-Risk Factors.............................. 9 -Tax-Deferred Retirement Plans.................25
-Trading Policies......................... 12 -Letter of Intent............................. 26
-Personal Securities Transactions..........12 -Special Net Asset Value Purchases.............27
Management of the Fund..................... 12 Redemptions in Kind............................ 28
Director Compensation.......................17 Tax Status.................................... 28
Principal Shareholders..................... 18 Principal Underwriter......................... 33
Investment Management and Other Description of Shares......................... 35
Services................................. 18 Performance Information....................... 35
- -Investment Management Agreement........... 18 Financial Statements........................... 38
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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.
/1/ 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.
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 creditworthiness analysis than
would be the case if the Fund were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low rated debt securities have been found to be less
sensitive to interest rate changes than higher rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in low rated debt securities prices because the
advent of a recession could lessen the ability of a highly leveraged company to
make principal and interest payments on its debt securities. If the issuer of
low rated debt securities defaults, the Fund may incur additional expenses to
seek recovery.
The Fund may 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.
STRUCTURED INVESTMENTS. Included among the issuers of debt securities
in which the Fund may invest are entities organized and operated solely for the
purpose of restructuring the investment characteristics of various securities.
These entities are typically organized by investment banking firms which receive
fees in connection with establishing each entity and arranging for the placement
of its securities. This type of restructuring involves the deposit with or
purchase by an entity, such as a corporation or trust, of specified instruments
and the issuance by that entity of one or more classes of securities
("Structures Investments") backed by, or representing interests in, the
underlying instruments. The cash flows on the underlying instruments may be
apportioned among the newly issued Structured Investments to create securities
with different investment characteristics such as varying maturities, payment
priorities or interest rate provisions; the extent of the payments made with
respect to structured investments is dependent on the extent of the cash flows
on the underlying instruments. Because Structured Investments of the type in
which the Fund anticipates investing typically involve no credit enhancement,
their credit risk will generally be equivalent to that of the underlying
instruments.
The Fund is permitted to invest in a class of Structured Investments
that is either subordinated or unsubordinated to the right of payment of another
class. Subordinated Structured Investments typically have higher yields and
present greater risks that unsubordinated Structured Investments. Although the
Fund's purchase of subordinated Structured Investments would have a similar
economic effect to that of borrowing against the underlying securities, the
purchase will not be deemed to be leveraged for purposes of the limitations
placed on the extent of the Fund's assets that may be used for borrowing
activities.
Certain issuers of Structured Investments may be deemed to be
"investment companies" as defined in the 1940 Act. As a result, the Fund's
investment in these Structured Investments may be limited by the restrictions
contained in the 1940 Act. Structured Investments are typically sold in private
placement transactions, and there currently is no active trading market for
Structured Investments. To the extent such investments are illiquid, they will
be subject to the Fund's restrictions on investments in illiquid securities.
FUTURES CONTRACTS. The Fund 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./2/
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 own more than 1/2 of 1% of the
securities of such company or, 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, /3/ or invest
in any company for the purpose of exercising control or
management.
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 ("NYSE"), 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.
Investments in Eastern Europe countries may involve risks of
nationalization, expropriation and confiscatory taxation. The Communist
governments of a number of Eastern European countries expropriated large amounts
of private property in the past, in many cases without adequate compensation,
and there can be no assurance that such expropriation will not occur in the
future. In the event of such expropriation, the Fund could lose a substantial
portion of any investments it has made in the affected countries. Further, no
accounting standards exist in Eastern European countries. Finally, even though
certain Eastern European currencies may be convertible into U.S. dollars, the
conversion rates may be artificial to the actual market values and may be
adverse to Fund Shareholders.
Investing in Russian securities involves a high degree of risk and
special considerations not typically associated with investing in the United
States securities markets, and should be considered highly speculative. Such
risks include: (1) delays in settling portfolio transactions and risk of loss
arising out of Russia's system of share registration and custody; (2) the risk
that it may be impossible or more difficult than in other countries to obtain
and/or enforce a judgment; (3) pervasiveness of corruption and crime in the
Russian economic system; (4) currency exchange rate volatility and the lack of
available currency hedging instruments; (5) higher rates of inflation (including
the risk of social unrest associated with periods of hyper-inflation); (6)
controls on foreign investment and local practices disfavoring foreign investors
and limitations on repatriation of invested capital, profits and dividends, and
on the Fund's ability to exchange local currencies for U.S. dollars; (7) the
risk that the government of Russia or other executive or legislative bodies may
decide not to continue to support the economic reform programs implemented since
the dissolution of the Soviet Union and could follow radically different
political and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, or a return to the centrally planned
economy that existed prior to the dissolution of the Soviet Union; (8) the
financial condition of Russian companies, including large amounts of
inter-company debt which may create a payments crisis on a national scale; (9)
dependency on exports and the corresponding importance of international trade;
(10) the risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation; and (11) possible
difficulty in identifying a purchaser of securities held by the Fund due to the
underdeveloped nature of the securities markets.
There is little historical data on Russian securities markets because
they are relatively new and a substantial proportion of securities transactions
in Russia are privately negotiated outside of stock exchanges. Because of the
recent formation of the securities markets as well as the underdeveloped state
of the banking and telecommunications systems, settlement, clearing and
registration of securities transactions are subject to significant risks.
Ownership of shares (except where shares are held through depositories that meet
the requirements of the 1940 Act) is defined according to entries in the
company's share register and normally evidenced by extracts from the register or
by formal share certificates. However, there is no central registration system
for shareholders and these services are carried out by the companies themselves
or by registrars located throughout Russia. These registrars are not necessarily
subject to effective state supervision and it is possible for the Fund to lose
its registration through fraud, negligence or even mere oversight. While the
Fund will endeavor to ensure that its interest continues to be appropriately
recorded either itself or through a custodian or other agent inspecting the
share register and by obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability and it is possible
that subsequent illegal amendment or other fraudulent act may deprive the Fund
of its ownership rights or improperly dilute its interests. In addition, while
applicable Russian regulations impose liability on registrars for losses
resulting from their errors, it may be difficult for the Fund to enforce any
rights it may have against the registrar or issuer of the securities in the
event of loss of share registration. Furthermore, although a Russian public
enterprise with more than 1,000 shareholders is required by law to contract out
the maintenance of its shareholder register to an independent entity that meets
certain criteria, in practice this regulation has not always been strictly
enforced. Because of this lack of independence, management of a company may be
able to exert considerable influence over who can purchase and sell the
company's shares by illegally instructing the registrar to refuse to record
transactions in the share register. This practice may prevent the Fund from
investing in the securities of certain Russian issuers deemed suitable by the
Investment Manager. Further, this also could cause a delay in the sale of
Russian 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, particularly when the Fund changes investments from
one country to another or when proceeds of the sale of Shares in U.S. dollars
are used for the purchase of securities in foreign countries. Also, some
countries may adopt policies which would prevent the Fund from transferring cash
out of the country or withhold portions of interest and dividends at the source.
There is the possibility of cessation of trading on national exchanges,
expropriation, nationalization or confiscatory taxation, withholding and other
foreign taxes on income or other amounts, foreign exchange controls (which may
include suspension of the ability to transfer currency from a given country),
default in foreign government securities, political 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 certain of these funds and clients may
contain many or some of the same securities. When certain funds or clients are
engaged simultaneously in the purchase or sale of the same security, the trades
may be aggregated for execution and then allocated in a manner designed to be
equitable to each party. The larger size of the transaction may affect the price
of the security and/or the quantity which may be bought or sold for each party.
If the transaction is large enough, brokerage commissions 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:
- 20 -
<TABLE>
<CAPTION>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
<S> <C>
HARRIS J. ASHTON Chairman of the Board, president and chief executive
Metro Center officer of General Host Corporation (nursery and craft
1 Station Place centers); and a director of RBC Holdings (U.S.A.) Inc.
Stamford, Connecticut (a bank holding company) and Bar-S Foods. Age 63.
Director
NICHOLAS F. BRADY* Chairman of Templeton Emerging Markets Investment Trust
The Bullitt House PLC; chairman of Templeton Latin America Investment
102 East Dover Street Trust PLC; chairman of Darby Overseas Investments, Ltd.
Easton, Maryland (an investment firm) (1994-present); director of the
Director Amerada Hess Corporation, Capital Cities/ABC, Inc.,
Christiana Companies, and the H.J. Heinz Company;
Secretary of the United States Department of the
Treasury (1988-January, 1993); and chairman of the
board of Dillon, Read & Co. Inc. (investment banking)
prior thereto. Age 66.
HARMON E. BURNS* Executive vice president, secretary, and director of
777 Mariners Island Blvd. Franklin Resources, Inc.; executive vice president and
San Mateo, California director of Franklin Templeton Distributors, Inc.;
Director and Vice President executive vice president of Franklin Advisers, Inc.;
and an officer and/or director, as the case may
be, of other subsidiaries of Franklin Resources, Inc.
and of 41 of the investment companies in the Franklin
Templeton Group. Age 51.
FRANK J. CROTHERS President and chief executive officer of Atlantic
P.O. Box N-3238 Equipment & Power Ltd.; vice chairman of Caribbean
Nassau, Bahamas Utilities Co., Ltd.; president of Provo Power
Director Corporation; and a director of various other business
and nonprofit organizations. Age 51.
</TABLE>
<TABLE>
<S> <C>
S. JOSEPH FORTUNATO Member of the law firm of Pitney, Hardin, Kipp & Szuch;
200 Campus Drive and a director of General Host Corporation. Age 63.
Florham Park, New Jersey
Director
JOHN Wm. GALBRAITH President of Galbraith Properties, Inc. (personal
360 Central Avenue investment company); director of Gulfwest Banks, Inc.
Suite 1300 (bank holding company) (1995-present) and Mercantile
St. Petersburg, Florida Bank (1991-present); vice chairman of Templeton,
Director Galbraith & Hansberger Ltd. (1986-1992); and chairman
of Templeton Funds Management, Inc. (1974-1991). Age 74.
ANDREW H. HINES, JR. Consultant for the Triangle Consulting Group; chairman
150 2nd Avenue N. of the board and chief executive officer of Florida
St. Petersburg, Florida Progress Corporation (1982-February, 1990) and director
Director of various of its subsidiaries; chairman and director of
Precise Power Corporation; executive-in-residence
of Eckerd College (1991-present); and a director of
Checkers Drive-In Restaurants, Inc. Age 73.
CHARLES B. JOHNSON* President, chief executive officer, and director of
777 Mariners Island Blvd. Franklin Resources, Inc.; chairman of the board and
San Mateo, California director of Franklin Advisers, Inc. and Franklin
Director, Chairman of the Board Templeton Distributors, Inc.; director of Franklin
and Vice President Administrative Services, Inc., General Host
Corporation, and Templeton Global Investors, Inc.;
and officer and director, trustee or managing
general partner, as the case may be, of most other
subsidiaries of Franklin and of 55 of the investment
companies in the Franklin Templeton Group. Age 63.
BETTY P. KRAHMER Director or trustee of various civic associations;
2201 Kentmere Parkway formerly, economic analyst, U.S. Government. Age 66.
Wilmington, Delaware
Director
</TABLE>
<TABLE>
<S> <C>
GORDON S. MACKLIN Chairman of White River Corporation (information
8212 Burning Tree Road services); director of Fund America Enterprises
Bethesda, Maryland Holdings, Inc., Lockheed Martin Corporation, MCI
Director Communications Corporation,Fusion Systems Corporation,
Infovest Corporation, and Medimmune, Inc.; and formerly held
the following positions: chairman of Hambrecht and
Quist Group; director of H&Q Healthcare Investors; and
president of the National Association of Securities
Dealers, Inc. Age 67.
FRED R. MILLSAPS Manager of personal investments (1978-present);
2665 N.E. 37th Drive chairman and chief executive officer of Landmark
Fort Lauderdale, Florida Banking Corporation (1969-1978); financial vice
Director president of Florida Power and Light (1965-1969); vice
president of The Federal Reserve Bank of Atlanta
(1958-1965); and a director of various other
business and nonprofit organizations. Age 67.
CONSTANTINE DEAN TSERETOPOULOS Physician, Lyford Cay Hospital (1987-present);
Lyford Cay Hospital cardiology fellow, University of Maryland (1985-1987);
P.O. Box N-7776 internal medicine intern, Greater Baltimore Medical
Nassau, Bahamas Center (July 1982-July 1985). Age 42.
Director
GARY P. MOTYL Executive vice president and director of Templeton
500 East Broward Blvd. Investment Counsel, Inc.; director of Templeton Global
Fort Lauderdale, Florida Investors, Inc.; and president or vice president of
President other Templeton Funds. Age 43.
</TABLE>
<TABLE>
<S> <C>
RUPERT H. JOHNSON, JR. Executive Vice President and director of Franklin
777 Mariners Island Blvd. Resources, Inc.; executive vice president of Franklin
San Mateo, California Templeton Distributors, Inc.; executive vice president
Vice President of Franklin Advisers, Inc.; director of Franklin
Templeton Investor Services, Inc.; officer and/or
director, as the case may be, of other subsidiaries of
Franklin Resources, Inc.; and officer and/or director
or trustee of 61 of the investment companies in the
Franklin Templeton Group of Funds. Age 55.
CHARLES E. JOHNSON Senior Vice President and director of Franklin
777 Mariners Island Blvd. Resources, Inc.; senior vice president of Franklin
San Mateo, California Templeton Distributors, Inc.; president and chief
Vice President executive officer of Templeton Worldwide, Inc.;
president and director of Franklin Institutional
Services Corporation; chairman of the board of
Templeton Investment Counsel, Inc.; vice president
and/or director, as the case may be, for some of the
subsidiaries of Franklin Resources, Inc.; and an
officer and/or director, as the case may be, of 24 of
the investment companies in the Franklin Templeton
Group. Age 39.
</TABLE>
<TABLE>
<S> <C>
DEBORAH R. GATZEK Senior vice president and general counsel of Franklin
777 Mariners Island Blvd. Resources, Inc.; senior vice president of Franklin
San Mateo, California Templeton Distributors, Inc.; vice president of
Vice President Franklin Advisers, Inc. and officer of 61 of the
investment companies in the Franklin Templeton Group of
Funds. Age 47.
MARTIN L. FLANAGAN Senior vice president, treasurer and chief financial
777 Mariners Island Blvd. officer of Franklin Resources, Inc.; director and
San Mateo, California executive vice president of Templeton Investment
Vice President Counsel, Inc.; director, president and chief executive
officer of Templeton Global Investors, Inc.; director
or trustee and president or vice president of various
Templeton Funds; accountant with Arthur Andersen &
Company (1982-1983); and a member of the International
Society of Financial Analysts and the American
Institute of Certified Public Accountants. Age 35.
MARK G. HOLOWESKO President and director of Templeton Global Advisors
Lyford Cay Limited; Chief Investment Officer of global equity
Nassau, Bahamas research for Templeton, Worldwide, Inc.; president or
Vice President vice president of the Templeton Funds; formerly,
investment administrator with Roy West Trust Corporation
(Bahamas) Limited (1984-1985). Age 36.
JOHN R. KAY Vice president of the Templeton Funds; vice president
500 East Broward Blvd. and treasurer of Templeton Global Investors, Inc. and
Fort Lauderdale, Florida Templeton Worldwide, Inc.; assistant vice president of
Vice President Franklin Templeton Distributors, Inc.; formerly,
vice president and controller of the Keystone
Group, Inc. Age 55.
</TABLE>
<TABLE>
<S> <C>
THOMAS M. MISTELE Senior vice president of Templeton Global Investors,
700 Central Avenue Inc.; vice president of Franklin Templeton
St. Petersburg, Florida Distributors, Inc.; secretary of the Templeton Funds;
Secretary formerly, attorney, Dechert Price & Rhoads
(1985-1988) and Freehill, Hollingdale & Page (1988);
and judicial clerk, U.S. District Court (Eastern
District of Virginia)(1984-1985). Age 42.
JAMES R. BAIO Certified public accountant; treasurer of the Templeton
500 East Broward Blvd. Funds; senior vice president of Templeton Worldwide,
Fort Lauderdale, Florida Inc., Templeton Global Investors, Inc., and Templeton
Treasurer Funds Trust Company; formerly, senior tax manager with
Ernst & Young (certified public accountants) (1977-1989).
Age 41.
</TABLE>
- --------------------
- 22 -
* These are Directors who are "interested persons" of the Fund as that
term is defined in the 1940 Act. Mr. Brady and Franklin Resources, Inc.
are limited partners of Darby Overseas Partners, L.P. ("Darby
Overseas"). Mr. Brady established Darby Overseas in February, 1994,
and is Chairman and a shareholder of the corporate general partner of
Darby Overseas. In addition, Darby Overseas and Templeton Global
Advisors Limited are limited partners of Darby Emerging Markets Fund,
L.P.
There are no family relationships between any of the Directors.
DIRECTOR COMPENSATION
All of the Fund's Officers and Directors also hold positions with other
investment companies in the Franklin Templeton Group. No compensation is paid by
the Fund to any officer or Director who is an officer, trustee or employee of
the Investment Manager or its affiliates. Each Templeton Fund pays its
independent directors and trustees and Mr. Brady an annual retainer and/or fees
for attendance at Board and Committee meetings, the amount of which is based on
the level of assets in each fund. Accordingly, the Fund currently pays the
independent Directors and Mr. Brady an annual retainer of $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:
<TABLE>
<CAPTION>
NUMBER OF TOTAL COMPENSATION
NAME AGGREGATE FRANKLIN TEMPLETON FROM ALL FUNDS IN
OF COMPENSATION FUND BOARDS ON WHICH FRANKLIN TEMPLETON
DIRECTOR FROM THE FUND* DIRECTOR SERVES GROUP*
- ------
<S> <C> <C> <C>
Harris J. Ashton $100 56 $327,925
Nicholas F. Brady 100 24 98,225
Frank J. Crothers 118 4 22,975
S. Joseph Fortunato 100 58 344,745
John Wm. Galbraith 75 23 70,100
Andrew H. Hines, Jr. 100 24 106,325
Betty P. Krahmer 75 24 93,475
Gordon S. Macklin 100 53 321,525
Fred R. Millsaps 115 24 104,325
Constantine Dean Tseretopoulos 118 4 22,975
</TABLE>
- -------------------
* For the fiscal year ended December 31, 1995.
PRINCIPAL SHAREHOLDERS
As of March 29, 1996, there were 3,069,013 Shares of the Fund
outstanding, of which 3,195 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 Class I Shares, except that Kurt Eckerle, Morningside
Avenue, RR 1 Box 158, Palisades, New York 10964-9801, owned 8,166 Shares (9% of
the outstanding shares); Hugh G. Robinson, Jr., 9825 Gaillard Road, Fort
Bellvoir, Virginia 22060-1930, owned 7,331 Shares (8% of the outstanding
shares); and Larry H. Hutton, 391 Montclair Drive #228, Big Bear City,
California 92314, owned 6,640 Shares (7% of the outstanding shares); and no
person owned beneficially or of record 5% or more of the fund's outstanding
Class II shares, except that Merrill Lynch, Pierce, Fenner & Smith Inc., P.O.
Box 45286, Jacksonville, Florida 32232-5286 owned of record 265,968 Shares
(representing 8% 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 23, 1996, and will continue through April 30, 1997. 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, although such
expenses are paid by investment advisers of some other investment companies.
The Investment Management Agreement provides that the Investment
Manager will select brokers and dealers for execution of the Fund's portfolio
transactions consistent with the Fund's brokerage policy (see "Brokerage
Allocation"). Although the services provided by broker-dealers in accordance
with the brokerage policy incidentally may help reduce the expenses of or
otherwise benefit the Investment Manager and other investment advisory clients
of the Investment Manager and of its affiliates, as well as the Fund, the value
of such services is indeterminable, and the Investment Manager's fee is not
reduced by any offset arrangement by reason thereof.
When the Investment Manager determines to buy or sell the same
securities for the Fund that the Investment Manager or certain of its affiliates
have selected for one or more of the Investment Manager's other clients or for
clients of its affiliates, the orders for all such securities trades may be
placed for execution by methods determined by the Investment Manager, with
approval by the Board of Directors, to be impartial and fair, in order to seek
good results for all parties (see 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, 1995, 1994, and 1993, the Investment Manager received from the Fund
fees of $304,286, $255,905, and $223,035, 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 NYSE. Charles B. Johnson (a Director
and officer of the Fund) and Rupert H. Johnson, Jr. are principal shareholders
of Franklin and own, respectively, approximately 20% and 16% of its outstanding
shares. Messrs. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
BUSINESS MANAGER. Templeton Global Investors, Inc. performs certain
administrative functions for the Fund including:
o providing office space, telephone, office equipment and
supplies for the Fund;
o paying 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, 1995, 1994, and 1993, the Fund paid business management fees
of $65,203, $54,836, and $47,794, 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 $14.08
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 ("SEC") 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. Shareholders who would
like to receive an interim quarterly report may phone the Fund Information
Department at 1-800/DIAL BEN.
BROKERAGE ALLOCATION
The Investment Management Agreement provides that the Investment
Manager is responsible for selecting members of securities exchanges, brokers
and dealers (such members, brokers and dealers being hereinafter referred to as
"brokers") for the execution of the Fund's portfolio transactions and, when
applicable, the negotiation of commissions in connection therewith. It is not
the duty of the Investment Manager, nor does it have any obligation, to provide
a trading desk for the Fund's portfolio transactions. All decisions and
placements are made in accordance with the following principles:
1. Purchase and sale orders will usually be placed with brokers
who are selected by the Investment Manager as able to achieve
"best execution" of such orders. "Best execution" means
prompt and reliable execution at the most favorable
securities price, taking into account the other provisions
hereinafter set forth. The determination of what may
constitute best execution and price in the execution of a
securities transaction by a broker involves a number of
considerations, including without limitation, the overall
direct net economic result to the Fund (involving both
price paid or received and any commissions and other costs
paid), the efficiency with which the transaction is
effected, the ability to effect the transaction at all
where a large block is involved, availability of the broker
to stand ready to execute possibly difficult transactions
in the future, and the financial strength and stability of
the broker. Such considerations are judgmental and are
weighed by the Investment Manager 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 commi-
ssion; 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 trans-
actions (including agency transactions, principal trans-
actions, 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, 1995, 1994,
and 1993, the Fund paid brokerage commissions of $ 10,454 , $34,622, and
$20,620, 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 NYSE (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 NYSE is
closed, which currently are: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Trading in securities on European and Far Eastern securities exchanges
and over-the-counter markets is normally completed well before the close of
business in New York on each day on which the NYSE is open. Trading of European
or Far Eastern securities generally, or in a particular country or countries,
may not take place on every New York business day. Furthermore, trading takes
place in various foreign markets on days which are not business days in New York
and on which the Fund's net asset value is not calculated. The Fund calculates
net asset value per Share, and therefore effects sales, redemptions and
repurchases of its Shares, as of the close of the NYSE once on each day on which
that Exchange is open. Such calculation does not take place contemporaneously
with the determination of the prices of many of the portfolio securities used in
such calculation, and if events occur which materially affect the value of those
foreign securities, they will be valued at fair market value as determined by
the management and approved in good faith by the Board of Directors.
The Board of Directors may establish procedures under which the Fund
may suspend the determination of net asset value for the whole or any part of
any period during which (1) the NYSE is closed other than for customary weekend
and holiday closings, (2) trading on the NYSE is restricted, (3) an emergency
exists as a result of which disposal of securities owned by the Fund is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or (4) for such other period as the
SEC may by order permit for the protection of the holders of the Fund's Shares.
OWNERSHIP AND AUTHORITY DISPUTES. In the event of disputes involving
multiple claims of ownership or authority to control a Shareholder's account,
the Fund has the right (but has no obligation) to: (1) freeze the account and
require the written agreement of all persons deemed by the Fund to have a
potential property interest in the account, prior to executing instructions
regarding the account; or (2) interplead disputed funds or accounts with a court
of competent jurisdiction. Moreover, the Fund may surrender ownership of all or
a portion of an account to the Internal Revenue Service ("IRS") 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 ("FTTC"), the custodian
of the retirement plans, receives the participant's election on IRS Form W-4P
(available on request from FTTC) 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 IRA. 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 IRAs
are available through FTTC. Disclosure statements summarizing certain aspects of
IRAs 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 FTTC.
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 IRS. A "Section 401(k) Plan" is also available.
FTTC 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 Group of Funds and
the Templeton Family of Funds, except Templeton Capital Accumulator Fund, Inc.,
Templeton Variable Annuity Fund, Templeton Variable Products Series Fund,
Franklin Valuemark Funds and Franklin Government Securities Trust (the "Franklin
Templeton Funds"), 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 unless the investor is a qualifying
employee benefit plan (the "Benefit Plan"), 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 unless the investor is a Benefit Plan. Except
for purchases of Shares by a Benefit PLAN, 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 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 $1 million or more, FTD, or one of its
affiliates, out of its own resources, may pay up to 1% of the amount invested.
Under agreements with certain banks in Taiwan, Republic of China, the
Fund's Shares are available to such banks' discretionary trust funds at net
asset value. The banks may charge service fees to their customers who
participate in the discretionary trusts. Pursuant to agreements, a portion of
such service fees may be paid to FTD, or an affiliate of FTD, to help defray
expenses of maintaining a service office in Taiwan, including expenses related
to local literature fulfillment and communication facilities.
REDEMPTIONS IN KIND. Redemption proceeds are normally paid in cash;
however, the Fund may pay the redemption price in whole or in part by a
distribution in kind of securities from the portfolio of the Fund, in lieu of
cash, in conformity with applicable rules of the SEC. In such circumstances, the
securities distributed would be valued at the price used to compute the Fund's
net assets value. If Shares are redeemed in kind, the redeeming Shareholder
might incur brokerage costs in converting the assets into cash. The Fund is
obligated to redeem Shares solely in cash up to the lesser of $250,000 or 1% of
its net assets during any 90-day period for any one Shareholder.
TAX STATUS
The Fund intends normally to pay a dividend at least once annually
representing substantially all of its net investment income (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 financial 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
distribution. 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 a 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 IRS notifies the Shareholder or the Fund that the Shareholder
has failed to report properly certain interest and dividend income to the IRS
and to respond to notices to that effect, or (3) when required to do so, the
Shareholder fails to certify that he is not subject to backup withholding.
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 may reimburse 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. Under the Plans, the
costs and expenses not reimbursed in any one given quarter (including costs and
expenses not reimbursed because they exceed the applicable limit) may be
reimbursed in subsequent quarters or years.
During the fiscal year ended December 31, 1995, FTD incurred
distribution costs and expenses (including advanced commissions) of $1,250 for
Class I Shares of the Fund and $ 752,822 for Class II Shares of the Fund. During
the same period, the Fund made payments of $1,602 under the Plan applicable to
Class I Shares and $429,294 under the Plan applicable to Class II Shares. During
the fiscal year ended December 31, 1995, FTD spent, pursuant to the Plan, with
respect to Class I Shares of the Fund, the following amounts on: compensation to
dealers, $917; wholesale costs and expenses, $206; advanced commissions, $ 0;
printing, $115; sales promotion, $3; and advertising, $9; with respect to Class
II Shares of the Fund, the following amounts on: compensation to dealers,
$116,673; wholesale costs and expenses, $1,736; advanced commissions, $614,582;
printing, $19,177; sales promotion, $172; and advertising, $482.
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.
During the fiscal years ended December 31, 1995, 1994, and 1993, FTD
received $48,847, $59,594, and $60,701, 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 one, five or ten 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, 1995 and for the period from February 27, 1991 (commencement of operations)
to December 31, 1995 for Class II Shares was 15.25% and 11.28%, respectively.
For Class I Shares, the average annual total return for the period from
inception (May 1, 1995) through December 31, 1995 was 3.62%.
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 and industry distribution of the Fund's
portfolio and the Fund's top ten holdings.
(5) The gross national product and populations, including age
characteristics, literacy rates, foreign investment
improvements due to a liberalization of securities laws
and a reduction of foreign exchange controls, and
improving communication technology, of various countries
as published by various statistical organizations.
(6) To assist investors in understanding the different
returns and risk characteristics of various investments,
the Fund may show historical returns of various
investments and published indices (e.g., Ibbotson
Associates, Inc. Charts and Morgan Stanley EAFE -
Index).
(7) The major industries located in various jurisdictions
as published by the Morgan Stanley Index.
(8) Rankings by DALBAR Surveys, Inc. with respect to mutual
fund shareholder services.
(9) Allegorical stories illustrating the importance of
persistent long-term investing.
(10) The Fund's portfolio turnover rate and its ranking
relative to industry standards as published by Lipper
Analytical Services, Inc. or Morningstar, Inc.
(11) A description of the Templeton organization's investment
management philosophy and approach, including its
worldwide search for undervalued or "bargain" securities
and its diversification by industry, nation and type of
stocks or other securities.
(12) The number of Shareholders in the Fund or the aggregate
number of shareholders in the Franklin Templeton Group
of Funds or the dollar amount of fund and private
account assets under management.
(13) Comparison of the characteristics of various emerging
markets, including population, financial and economic
conditions.
(14) Quotations from the Templeton organization's founder,
Sir John Templeton,/*/ advocating the virtues of
diversification and long-term investing, including the
following:
o "Never follow the crowd. Superior performance is
possible only if you invest
differently from the crowd."
o "Diversify by company, by industry and by country."
o "Always maintain a long-term perspective."
o "Invest for maximum total real return."
o "Invest - don't trade or speculate."
o "Remain flexible and open-minded about types of
investment."
o "Buy low."
o "When buying stocks, search for bargains among
quality stocks."
o "Buy value, not market trends or the economic
outlook."
o "Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
o "Do your homework or hire wise experts to help you."
o "Aggressively monitor your investments."
o "Don't panic."
o "Learn from your mistakes."
o "Outperforming the market is a difficult task.'
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."
FINANCIAL STATEMENTS
The financial statements contained in the Fund's Annual Report to
Shareholders dated December 31, 1995 are incorporated herein by reference.
TL100 STMT 05/96
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/1/ 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.
/2/ 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.
/3/ 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.
/*/ 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.
