TEMPLETON DEVELOPING MARKETS TRUST
THIS STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1995,
AS AMENDED SEPTEMBER 29, 1995 IS NOT A PROSPECTUS. IT SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS OF TEMPLETON DEVELOPING
MARKETS TRUST DATED MAY 1, 1995, AS AMENDED FROM TIME TO TIME,
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
General Information and History.............................1
Investment Objective and Policies...........................1
-Investment Policies.......................................1
-Repurchase Agreements.....................................1
-Debt Securities...........................................2
-Futures Contracts.........................................3
-Options on Securities or Indices..........................4
-Foreign Currency Hedging Transactions.....................6
-Investment Restrictions...................................8
-Risk Factors.............................................11
-Trading Policies.........................................16
-Personal Securities Transactions.........................16
Management of the Fund.....................................17
Trustee Compensation.......................................23
Principal Shareholders.....................................24
Investment Management and Other Services...................24
-Investment Management Agreement..........................24
-Management Fees..........................................26
-Templeton Investment Management (Singapore) Pte Ltd......26
-Business Manager.........................................27
-Custodian and Transfer Agent.............................28
-Legal Counsel29
-Independent Accountants29
-Reports to Shareholders29
Brokerage Allocation29
Purchase, Redemption and Pricing of Shares32
-Ownership and Authority Disputes33
-Tax-Deferred Retirement Plans33
-Letter of Intent35
-Special Net Asset Value Purchases36
Tax Status37
-Distributions40
-Options and Hedging Transactions41
-Currency Fluctuations -- "Section 988" Gains or Losses42 -Sale of Shares42
-Foreign Taxes43 -Backup Withholding44 -Foreign Shareholders44 -Other
Taxation44
Principal Underwriter45
Description of Shares47
Performance Information48
Financial Statements51
GENERAL INFORMATION AND HISTORY
Templeton Developing Markets Trust (the "Fund") was organized as a
Massachusetts business trust on August 9, 1991, 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."
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 Management (Singapore) Pte Ltd. (the "Investment
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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 Trustees, 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 Investors Service, Inc. ("Moody's") or C by Standard &
Poor's Corporation ("S&P") or unrated debt securities 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. 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.
Bonds which are rated C by Moody's are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Bonds rated C by S&P are obligations on
which no interest is being paid.
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
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from a limited number of dealers and may not necessarily represent firm bids of
such dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated debt securities may be more complex
than for issuers of higher rated securities, and the ability of the Fund to
achieve its investment objective may, to the extent of investment in low rated
debt securities, be more dependent upon such creditworthi-ness analysis than
would be the case if the Fund were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low rated debt securities have been found to be less
sensitive to interest rate changes than higher rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in low rated debt securities prices because the
advent of a recession could lessen the ability of a highly leveraged company to
make principal and interest payments on its debt securities. If the issuer of
low rated debt securities defaults, the Fund may incur additional expenses to
seek recovery.
Recent legislation, which requires federally insured savings and loan
associations to divest their investments in low rated debt securities, may have
a material adverse effect on the Fund's net asset value and investment
practices.
FUTURES CONTRACTS. The Fund may purchase and sell financial futures
contracts. Although some financial futures contracts call for making or taking
delivery of the underlying securities, in most cases these obligations are
closed out before the settlement date. The closing of a contractual obligation
is accomplished by purchasing or selling an identical offsetting futures
contract. Other financial futures contracts by their terms call for cash
settlements.
The Fund may also buy and sell index futures contracts with respect to
any stock index traded on a recognized stock exchange or board of trade. An
index futures contract is a contract to buy or sell units of an index at a
specified future date at a price agreed upon when the contract is made. The
stock index futures contract specifies that no delivery of the actual stocks
making up the index will take place. Instead, settlement in cash must occur upon
the termination of the contract, with the
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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.1
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
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1 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.
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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.
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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
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
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Fund may enter into a forward contract, for example, when it enters into a
contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. dollar price of the security. In
addition, for example, when the Fund believes that a foreign currency may suffer
or enjoy a substantial movement against another currency, it may enter into a
forward contract to sell an amount of the former foreign currency approximating
the value of some or all of the Fund's portfolio securities denominated in such
foreign currency. This second investment practice is generally referred to as
"cross-hedging." Because in connection with the Fund's forward 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. In addition, when the Fund sells a forward contract, it will
cover its obligation under the contract by segregating cash, cash equivalents or
high quality debt securities, or by owning securities denominated in the
corresponding currency and with a market value equal to or greater than the
Fund's obligation. Assets used as cover for forward contracts 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.
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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
approval of the Fund's Shareholders. For this purpose, the provisions in the
1940 Act require the affirmative vote of the lesser of either (a) 67% or more of
the Shares present at a Shareholders' meeting at which more than 50% of the
outstanding Shares are present or represented by proxy or (b) more than 50% of
the outstanding Shares of the Fund.
In accordance with these restrictions, the Fund will not:
1. Invest in real estate or mortgages on real estate
(although the Fund may invest in marketable securities
secured by real estate or interests therein or issued
by companies or investment trusts which invest in real
estate or interests therein); invest in interests
(other than debentures or equity stock interests) in
oil, gas or other mineral exploration or development
programs; purchase or sell commodity contracts (except
futures contracts as described in the Fund's
Prospectus); or invest in other open-end investment
companies except as permitted by the 1940 Act.2
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2 As a non-fundamental policy, the Fund will not invest
more than 10% of its assets in real estate investment
trusts. In addition, the Fund has undertaken with a
state securities commission that (1) the Fund will
invest in other open-end investment companies only (a)
for short term investment of cash balances in money
market funds, or (b) for investment in securities in
the portfolios of such other open-end investment
companies, direct investment in which is unavailable to
the Fund; and (2) the Fund will not pay an investment
management fee with respect to any portion of its
portfolio comprising shares of other open-end
investment companies.
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2. Purchase or retain securities of any company in which Trustees
or officers of the Fund or of its Investment Manager,
individually owning more than 1/2 of 1% of the securities of
such company, in the aggregate own more than 5% of the
securities of such company.
3. Purchase any security (other than obligations of the U.S.
Government, its agencies and instrumentalities) if, as a result,
as to 75% of the Fund's total assets (i) more than 5% of the
Fund's total assets would be invested in securities of any
single issuer, or (ii) the Fund would then own more than 10% of
the voting securities of any single issuer.3
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,
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 enter into
repurchase agreements and lend 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 the Fund's total assets (including the amount
borrowed), or pledge, mortgage or hypothecate its
assets for any purpose, except to secure borrowings and
then only to an extent not greater than 15% of the
Fund's total assets. Arrangements with respect to
margin for futures contracts, forward contracts and
related options are not deemed to be a pledge of
assets.
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3 The Fund has undertaken with a state securities
commission that, with respect to 100% of its assets,
the Fund will not purchase more than 10% of a company's
outstanding voting securities. As a non-fundamental
policy, the Fund will not invest in any company for the
purpose of exercising control or management.
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7. Invest more than 5% of the value of the Fund's total assets in
securities of issuers, including their predecessors, which have
been in continuous operation less than three years.
8. Invest more than 5% of the Fund's total assets in warrants,
whether or not listed on the New York or American Stock
Exchange, including no more than 2% of its total assets which
may be invested in warrants that are not listed on those
exchanges. Warrants acquired by the Fund in units or attached to
securities are not included in this restriction.
9. Invest more than 25% of the Fund's 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 other Templeton Funds and clients.)
11. Invest more than 15% of the Fund's total assets in
securities of foreign issuers that are not listed on a
recognized United States or foreign securities
exchange, including no more than 10% of its total
assets in restricted securities, securities that are
not readily marketable, repurchase agreements having
more than seven days to maturity, and over-the-counter
options purchased by the Fund. Assets used as cover
for over-the-counter options written by the Fund are
considered not readily marketable.4
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
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4 As a non-fundamental policy, the Fund will not invest
more than 10% of its total assets in restricted
securities, securities that are not readily marketable,
securities of issuers, including their predecessors,
that have been in continuous operation less than three
years, repurchase agreements having more than seven
days to maturity, and over-the-counter options
purchased by the Fund. Assets used as cover for
over-the-counter options written by the Fund are
considered not readily marketable. Under the 1940 Act,
the Fund may invest up to 15% of its total assets in
illiquid securities.
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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. The Fund may borrow up to 5% of the value of its total assets to
meet redemptions and for other temporary purposes.
RISK FACTORS. 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. 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 (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the absence,
until recently in certain
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Eastern European countries, of a capital market structure or market-oriented
economy; and (vii) the possibility that recent favorable economic developments
in Eastern Europe may be slowed or reversed by unanticipated political or social
events in such countries.
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 European countries may involve risks of
nationalization, expropriation and confiscatory taxation. The communist
governments of a number of Eastern European countries expropriated large amounts
of private property in the past, in many cases without adequate compensation,
and there can be no assurance that such expropriation will not occur in the
future. In the event of such expropriation, the Fund could lose a substantial
portion of any investments it has made in the affected countries. Further, no
accounting standards exist in Eastern European countries. Finally, even though
certain Eastern European currencies may be convertible into U.S. dollars, the
conversion rates may be artificial to the actual market values and may be
adverse to Fund Shareholders.
Certain Eastern European countries, which do not have market economies,
are characterized by an absence of developed legal structures governing private
and foreign investments and private property. Certain countries require
governmental approval prior to investments by foreign persons, or limit the
amount of investment by foreign persons in a particular company, or limit the
investment of foreign persons to only a specific class of securities of a
company that may have less advantageous terms than securities of the company
available for purchase by nationals.
Authoritarian governments in certain Eastern European countries may
require that a governmental or quasi-governmental authority act as custodian of
the Fund's assets invested in such country. To the extent such governmental or
quasi-governmental authorities do not satisfy the requirements of the 1940 Act
to act as foreign custodians of the Fund's cash and securities, the Fund's
investment in such countries may be limited or may be
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required to be effected through intermediaries. The risk of loss
through governmental confiscation may be increased in such
countries.
Investing in Russian companies involves a high degree of risk and special
considerations not typically associated with investing in the United States
securities markets, and should be considered highly speculative. Such risks
include: (a) delays in settling portfolio transactions and risk of loss arising
out of Russia's system of share registration and custody; (b) the risk that it
may be impossible or more difficult than in other countries to obtain and/or
enforce a judgment; (c) pervasiveness of corruption and crime in the Russian
economic system; (d) currency exchange rate volatility and the lack of available
currency hedging instruments; (e) higher rates of inflation (including the risk
of social unrest associated with periods of hyper-inflation); (f) controls on
foreign investment and local practices disfavoring foreign investors and
limitations on repatriation of invested capital, profits and dividends, and on
the Fund's ability to exchange local currencies for U.S. dollars; (g) the risk
that the government of Russia or other executive or legislative bodies may
decide not to continue to support the economic reform programs implemented since
the dissolution of the Soviet Union and could follow radically different
political and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, or a return to the centrally planned
economy that existed prior to the dissolution of the Soviet Union; (h) the
financial condition of Russian companies, including large amounts of
inter-company debt which may create a payments crisis on a national scale; (i)
dependency on exports and the corresponding importance of international trade;
(j) the risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation; and (k) possible
difficulty in identifying a purchaser of securities held by the Fund due to the
underdeveloped nature of the securities markets.
There is little historical data on Russian securities markets because
they are relatively new and a substantial proportion of securities transactions
in Russia are privately negotiated outside of stock exchanges. Because of the
recent formation of the securities markets as well as the underdeveloped state
of the banking and telecommunications systems, settlement, clearing and
registration of securities transactions are subject to significant risks.
Ownership of shares (except where shares are held through depositories that meet
the requirements of the 1940 Act) is defined according to entries in the
company's share register and normally evidenced by extracts from the register or
by formal share certificates. However, there is no central
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registration system for shareholders and these services are carried out by the
companies themselves or by registrars located throughout Russia. These
registrars are not necessarily subject to effective state supervision and it is
possible for the Fund to lose its registration through fraud, negligence or even
mere oversight. While the Fund will endeavor to ensure that its interest
continues to be appropriately recorded either itself or through a custodian or
other agent inspecting the share register and by obtaining extracts of share
registers through regular confirmations, these extracts have no legal
enforceability and it is possible that subsequent illegal amendment or other
fraudulent act may deprive the Fund of its ownership rights or improperly dilute
its interests. In addition, while applicable Russian regulations impose
liability on registrars for losses resulting from their errors, it may be
difficult for the Fund to enforce any rights it may have against the registrar
or issuer of the securities in the event of loss of share registration.
Furthermore, although a Russian public enterprise with more than 1,000
shareholders is required by law to contract out the maintenance of its
shareholder register to an independent entity that meets certain criteria, in
practice this regulation has not always been strictly enforced. Because of this
lack of independence, management of a company may be able to exert considerable
influence over who can purchase and sell the company's shares by illegally
instructing the registrar to refuse to record transactions in the share
register. This practice may prevent the Fund from investing in the securities of
certain Russian companies deemed suitable by the Investment Manager. Further,
this also could cause a delay in the sale of Russian company securities by the
Fund if a potential purchaser is deemed unsuitable, which may expose the Fund to
potential loss on the investment.
The Fund endeavors to buy and sell foreign currencies on as favorable a
basis as practicable. Some price spread on currency exchange (to cover service
charges) may be incurred, particularly when the Fund changes investments from
one country to another or when proceeds of the sale of Shares in U.S. dollars
are used for the purchase of securities in foreign countries. Also, some
countries may adopt policies which would prevent the Fund from transferring cash
out of the country, withhold portions of interest and dividends at the source,
or impose other taxes, with respect to the Fund's investments in securities of
issuers of that country. Although the management places the Fund's investments
only in foreign nations which it considers as having relatively stable and
friendly governments, there is the possibility of cessation of trading on
national exchanges, expropriation, nationalization, confiscatory or other
taxation, foreign exchange controls (which may include suspension of the ability
to transfer currency from a given country), default in
- 14 -
<PAGE>
foreign government securities, political or social instability, or diplomatic
developments that could affect investments in securities of issuers in those
nations.
The Fund may be affected either unfavorably or favorably by fluctuations
in the relative rates of exchange between the currencies of different nations,
by exchange control regulations and by indigenous economic and political
developments. Some countries in which the Fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Further,
certain currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which the Fund's portfolio
securities are denominated may have a detrimental impact on the Fund. Through
the Fund's flexible policy, management endeavors to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where from time to time it places the Fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove profitable
and others may not. No assurance can be given that profits, if any, will exceed
losses.
The Trustees 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 Trustees 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 Trustees'
appraisal of the risks will always be correct or that such exchange control
restrictions or political acts of foreign governments might not occur.
- 15 -
<PAGE>
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 correctly movements in the direction
of the market, as to which no assurance can be given.
TRADING POLICIES. The Investment Manager and its affiliated companies
serve as investment manager 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 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 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
- 16 -
<PAGE>
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 Trustees and Principal Executive
Officers of the Fund are as follows:
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING THE PAST FIVE YEARS
HARRIS J. ASHTON
Metro Center, 1 Station Place
Stamford, Connecticut
Trustee
Chairman of the Board, president,
and chief executive officer of
General Host Corporation (nursery
and craft centers); and a
director of RBC Holdings (U.S.A.)
Inc. (a bank holding company) and
Bar-S Foods. Age 63.
NICHOLAS F. BRADY*
The Bullitt House
102 East Dover Street
Easton, Maryland
Trustee
Chairman of Templeton Emerging Markets Investment Trust PLC; chairman of
Templeton Latin America Investment Trust PLC; chairman of Darby Overseas
Investments, Ltd. (an investment firm) (1994-present); director of the Amerada
Hess Corporation, Capital Cities/ABC, Inc., Christiana Companies, and the H.J.
Heinz Company; Secretary of the United States Department of the Treasury
(1988-January 1993); and chairman of the board of Dillion, Read & Co. Inc.
(investment banking) prior thereto. Age 65.
FRANK J. CROTHERS
P.O. Box N-3238
Nassau, Bahamas
Trustee
President and chief executive officer of Atlantic Equipment & Power Ltd.; vice
chairman of Caribbean Utilities Co., Ltd.; president of Provo Power Corporation;
and a director of various other businesses and nonprofit organizations. Age 51.
- 17 -
<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING THE PAST FIVE YEARS
S. JOSEPH FORTUNATO
12 Brannick Drive
Madison, New Jersey
Trustee
Member of the law firm of Pitney,
Hardin, Kipp & Szuch; and a
director of General Host
Corporation. Age 63.
JOHN Wm. GALBRAITH
360 Central Avenue
Suite 1300
St. Petersburg, Florida
Trustee
President of Galbraith
Properties, Inc. (personal
investment company); director of
Gulfwest Banks, Inc. (bank
holding company) (1995-present)
and Mercantile Bank (1991-
present); vice chairman of
Templeton, Galbraith & Hansberger
Ltd. (1986-1992); and chairman of
Templeton Funds Management, Inc.
(1974-1991). Age 74.
ANDREW H. HINES, JR.
150 2nd Avenue N.
St. Petersburg, Florida
Trustee Consultant for the Triangle Consulting Group; chairman of the board
and chief executive officer of Florida Progress Corporation (1982-February,
1990) and director of various of its subsidiaries; chairman and director of
Precise Power Corporation; executive-in-residence of Eckerd College
(1991-present); and a director of Checkers Drive-In Restaurants, Inc. Age 72.
- 18 -
<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING THE PAST FIVE YEARS
CHARLES B. JOHNSON*
777 Mariners Island Blvd.
San Mateo, California
Chairman of the Board
and Vice President
President, chief executive officer, and director of Franklin Resources, Inc.;
chairman of the board and director of Franklin Advisers, Inc. and Franklin
Templeton Distributors, Inc.; director of Franklin Administrative Services,
Inc., General Host Corporation, and Templeton Global Investors, Inc.; and
officer and director, trustee or managing general partner, as the case may be,
of most other subsidiaries of Franklin and of 55 of the investment companies in
the Franklin Templeton Group. Age 62.
CHARLES E. JOHNSON*
777 Mariners Island Blvd.
San Mateo, California
Trustee Senior vice president and director of Franklin Resources, Inc.; senior
vice president of Franklin Templeton Distributors, Inc.; president and director
of Templeton Worldwide, Inc. and Franklin Institutional Service 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.
BETTY P. KRAHMER
2201 Kentmere Parkway
Wilmington, Delaware
Trustee
Director or trustee of various civic associations; formerly, economic analyst,
U.S.
Government. Age 66.
- 19 -
<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING THE PAST FIVE YEARS
GORDON S. MACKLIN
8212 Burning Tree Road
Bethesda, Maryland
Trustee
Chairman of White River
Corporation (information
services); director of Fund
America Enterprises Holdings,
Inc., Lockheed Martin
Corporation, MCI Communications Corporation, Fusion Systems Corporation,
Infovest Corporation, and Medimmune, Inc.; formerly, chairman of Hambrecht and
Quist Group; director of H&Q Healthcare Investors; and president of the National
Association of Securities Dealers, Inc. Age 67.
FRED R. MILLSAPS
2665 N.E. 37th Drive
Fort Lauderdale, Florida
Trustee
Manager of personal investments (1978-present); chairman and chief executive
officer of Landmark Banking Corporation (1969-1978); financial vice 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 66.
CONSTANTINE DEAN TSERETOPOULOS
Lyford Cay Hospital
P.O. Box N-7776
Nassau, Bahamas
Trustee
Physician, Lyford Cay Hospital (July 1987-present); cardiology fellow,
University of Maryland (July 1985-July 1987); internal medicine intern, Greater
Baltimore Medical Center (July 1982-July 1985). Age 41.
- 20 -
<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING THE PAST FIVE YEARS
J. MARK MOBIUS
Two Exchange Square
Hong Kong
President Managing director of Templeton Investment Management (Hong Kong)
Limited; portfolio manager for various Templeton advisory affiliates; president
of International Investment Trust Company Limited (investment manager of Taiwan
R.O.C. Fund) (1986-1987); and director of Vickers da Costa, Hong Kong
(1983-1986). Age 49
MARK G. HOLOWESKO
Lyford Cay
Nassau, Bahamas
Vice President
President and director of
Templeton, Galbraith & Hansberger Ltd.; director of global equity research for
Templeton Worldwide, Inc.; president or vice president of other Templeton Funds;
formerly, investment administrator with Roy West Trust Corporation (Bahamas)
Limited (1984-1985). Age 35.
MARTIN L. FLANAGAN
777 Mariners Island Blvd.
San Mateo, California
Vice President Senior vice president, treasurer and chief financial officer of
Franklin Resources, Inc.; director and executive vice president of Templeton
Investment Counsel, Inc.; director, chief executive officer, and president 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.
- 21 -
<PAGE>
JOHN R. KAY
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President Vice president of the Templeton Funds; vice president and
treasurer of Templeton Global Investors, Inc. and Templeton Worldwide, Inc.;
assistant vice president of Franklin Templeton Distributors, Inc.; formerly,
vice president and controller of the Keystone Group, Inc. Age 55.
THOMAS M. MISTELE
700 Central Avenue
St. Petersburg, Florida
Secretary
Senior vice president of
Templeton Global Investors, Inc.; vice president of Franklin Templeton
Distributors, Inc.; secretary of the Templeton Funds; 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
500 East Broward Blvd.
Fort Lauderdale, Florida
Treasurer Certified public accountant; treasurer of the Templeton Funds;
senior vice president of Templeton Worldwide, Inc., Templeton Global Investors,
Inc., and Templeton Funds Trust Company; formerly, senior tax manager with Ernst
& Young (certified public accountants) (1977-1989). Age 41.
JACK L. COLLINS
700 Central Avenue
St. Petersburg, Florida
Assistant Treasurer Assistant treasurer of the Templeton Funds; assistant
vice president of Franklin Templeton Investor Services, Inc.; formerly, partner
with Grant Thornton, independent public accountants. Age 66.
JEFFREY L. STEELE
1500 K Street, N.W.
Washington, D.C.
Assistant Secretary
Partner, Dechert Price & Rhoads.
Age 50.
- 22 -
<PAGE>
- ----------------------
* These Trustees 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,
Galbraith & Hansberger, Ltd. are limited partners of Darby
Emerging Markets Fund, L.P.
There are no family relationships between any of the
Directors, except that Mr. Charles B. Johnson is the father of
Mr. Charles E. Johnson.
TRUSTEE COMPENSATION
All of the Fund's Officers and Trustees also hold positions with other
investment companies in the Franklin Templeton Group. No compensation is paid by
the Fund to any officer or Trustee 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 will pay the independent
Trustees and Mr. Brady an annual retainer of $6,000 and a fee of $500 per
meeting attended of the Board and its Committees. The independent Trustees 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 Trustees by
the Fund and by all investment,companies in the Franklin Templeton Group:
- 23 -
<PAGE>
<TABLE>
<CAPTION>
NAME OF DIRECTOR
Aggregate
Compensation106,125
FROM THE FUND*
Number of
Franklin Templeton
Fund Boards on which
DIRECTOR SERVES
Total Compensation
from All Funds in
Franklin Templeton
GROUP*
<S> <C> <C> <C>
Harris J. Ashton $3,500 54 $319,925
Nicholas F. Brady 3,500 23 86,125
Frank J. Crothers 4,000 4 12,850
S. Joseph Fortunato 3,500 56 336,065
John Wm. Galbraith 0 22 0
Andrew H. Hines, Jr. 3,500 23 106,125
Betty P. Krahmer 0 23 75,275
Gordon S. Macklin 3,500 51 303,685
Fred R. Millsaps 3,500 23 106,125
Constantine Dean
Tseretopoulos 4,000 4 12,850
</TABLE>
- ---------------
* For the fiscal year ended December 31, 1994.
PRINCIPAL SHAREHOLDERS
As of March 31, 1995, there were 152,129,832 Fund Shares outstanding. As
of that date, 22,708 Shares, representing less than 1%, were owned beneficially
by the Trustees and officers of the Fund. As of that date, to the knowledge of
management, no person owned beneficially 5% or more of the Fund's outstanding
Shares, except that Merrill Lynch, Pierce, Fenner & Smith Inc., P.O. Box 45286,
Jacksonville, Florida 32232-5286, owned 12,706,778 Shares (8%).
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGEMENT AGREEMENT. The Investment Manager of
the Fund is the Hong Kong office of Templeton Investment
Management (Singapore) Pte Ltd., a Singapore corporation at 20
Raffles Place, Ocean Towers, Singapore. On September 29, 1995,
the Investment Manager assumed the investment management duties
of Templeton Investment Management (Hong Kong) Limited, a Hong
- 24 -
<PAGE>
Kong company, with respect to the Fund under the Investment Management
Agreement. The Investment Management Agreement, dated October 30, 1992, was
approved by Shareholders of the Fund on October 30, 1992, and was last approved
by the Board of Trustees, including a majority of the Trustees who were not
parties to the Agreement or interested persons of any such party, at a meeting
on February 24, 1995, and will continue through April 30, 1996. The Investment
Management Agreement will continue from year to year thereafter, subject to
approval annually by the Board of Trustees 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 Trustees 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 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 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 policies (see "Brokerage Allocation"). Although the
services provided by broker-dealers in accordance with the brokerage policies
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.
The Investment Manager renders its services to the Fund from outside the
United States. When the Investment Manager determines to buy or sell the same
security 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 Trustees, to be impartial and fair, in order to seek
good results for all parties. See "Investment Objective and Policies -- Trading
Policies." Records of securities transactions of persons who know when orders
are placed by the Fund are available for inspection at least four times annually
by the compliance officer of the Fund so that the non-interested Trustees (as
defined in the 1940 Act) can be satisfied that the procedures are generally fair
and equitable to all parties.
- 25 -
<PAGE>
The Agreement 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
Agreement, except liability resulting from willful misfeasance, bad faith or
gross negligence on the Investment Manager's part or reckless disregard of its
duties under the Agreement. The 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 Trustees in office at the time or by vote of a majority of the
outstanding voting securities of the Fund (as defined in the 1940 Act.)
MANAGEMENT FEES. For its services, the Fund pays the Investment Manager a
monthly fee equal on an annual basis to 1.25% 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. This fee is higher than advisory
fees paid by most other U.S. investment companies, primarily because investing
in equity securities of companies with smaller capital markets, many of which
are not widely followed by professional analysts, requires the Investment
Manager to invest additional time and incur added expense in developing
specialized resources, including research facilities. During the fiscal years
ended December 31, 1994, 1993 and 1992, Templeton Investment Management (Hong
Kong ) Limited the Fund's previous investment manager (and, prior to October 30,
1992, Templeton, Galbraith & Hansberger Ltd., the Fund's previous investment
manager) received fees from the Fund of $23,325,167, $6,765,008, and $1,615,491,
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 advisory
fee, but generally excluding distribution expenses, 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, 2.0% of the next $70,000,000 of net assets and
1.5% of the remainder.
TEMPLETON INVESTMENT MANAGEMENT (SINGAPORE) PTE LTD. 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
Trustee and officer of the Fund), Rupert H. Johnson, Jr., and R.
Martin Wiskemann are principal shareholders of Franklin and own,
respectively, approximately 20%, 16% and 9.2% of its outstanding
- 26 -
<PAGE>
shares. Messrs. Charles B. Johnson and Rupert H. Johnson, Jr.
are brothers.
BUSINESS MANAGER. Templeton Global Investors, Inc. performs
certain administrative functions as Business Manager for the
Fund, including:
o providing office space, telephone, office equipment and
supplies for the Fund;
o paying compensation of the Fund's officers for services
rendered as such;
o authorizing expenditures and approving bills for
payment on behalf of the Fund;
- 27 -
<PAGE>
o supervising preparation of annual and semi-annual reports to
Shareholders, notices of dividends, capital gains distributions
and tax credits, and attending to correspondence and other
special communications with individual Shareholders;
o daily pricing of the Fund's investment portfolio 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 custodians, transfer agents 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 tax-deferred
retirement plans providing for investment in Shares of
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. During the fiscal
years ended December 31, 1994, 1993 and 1992, the Business Manager (and, prior
to April 1, 1993, Templeton Funds Management, Inc., the previous business
manager) received business management fees of $1,974,513, $760,331, and
$193,944, 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, gross negligence or
reckless disregard of
- 28 -
<PAGE>
its duties and obligations under the Agreement. The 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 Trustees of the Fund in office at the time or by vote of a
majority of the outstanding voting securities of the Fund, and shall terminate
automatically and immediately in the event of its assignment.
Templeton Global Investors, Inc. is a 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 Trustees pursuant to
Rule 17f-5 under the 1940 Act. The Custodian, its branches and sub-custodians
generally domestically, and frequently abroad, do not actually 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 and
redemption orders; making dividend payments, capital gain distributions and
reinvestments; and handling routine communications with Shareholders. The
Transfer Agent receives from the Fund an annual fee of $13.74 per Shareholder
account plus out-of-pocket expenses. These fees are 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. McGladrey & Pullen, LLP, 555 Fifth Avenue, New
York, New York 10017, serve as independent accountants for the Fund. Their audit
services comprise examination of the Fund's financial statements and review of
the Fund's filings with the Securities and Exchange Commission ("SEC") and the
Internal Revenue Service ("IRS").
REPORTS TO SHAREHOLDERS. The Fund's fiscal year ends on
December 31. Shareholders are provided at least semi-annually
with reports showing the Fund's portfolio and other information,
- 29 -
<PAGE>
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. All
decisions and placements are made in accordance with the following principles:
1. Purchase and sale orders are usually 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
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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 in making
the selection in question 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 the research services 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 (i) obtaining a low commission is
deemed secondary to obtaining a favorable securities price,
since it is recognized that usually it is more beneficial to the
Fund to obtain a favorable price than to pay the lowest
commission; and (ii) the quality, comprehensiveness and
frequency of research studies which are provided for the
Investment Manager are useful to the Investment Manager in
performing its advisory services under its 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 Agreement with the Fund. 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
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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 are 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 companies registered under
the 1940 Act which have either the same investment
manager or an investment manager affiliated with the
Investment Manager) made by a broker are one factor,
among others, to be taken into account in deciding to
allocate portfolio transactions (including agency
transactions, principal transactions, purchases in
underwritings or tenders in response to tender offers)
for the account of the Fund to that broker; provided
that the broker shall furnish "best execution," as
defined in paragraph 1 above, and that such allocation
shall be within the scope of the Fund's other 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 Trustee or officer of the Fund has any
material direct or indirect interest in any broker employed by or on behalf of
the Fund. Franklin Templeton Distributors, Inc., the Fund's Principal
Underwriter, is a registered broker-dealer, but has never executed any purchase
or sale transactions for the Fund's portfolio or participated in any commissions
on any such transactions, and has no intention of doing so in the future. The
total brokerage commissions on the portfolio transactions for the Fund during
the fiscal years ended December 31, 1994, 1993 and 1992 amounted to $4,035,106,
$3,109,324, and $983,000, respectively. All portfolio transactions are allocated
to broker-dealers only when their prices and execution, in the good faith
judgment of the Investment Manager, are equal or superior to the best available
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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 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 Trustees.
The Board of Trustees 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.
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The Fund will not effect redemptions of its Shares in assets other than
cash, except in accordance with applicable provisions of the 1940 Act.
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 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; and
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") 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
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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 IRS 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.
Custodial 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
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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 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
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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 purchases of additional purchases.
With respect to purchases made at net asset value by certain trust companies and
trust departments of banks and certain retirement plans of organizations with
collective retirement plan assets of $10 million or more, FTD, or one of its
affiliates, out of its own resources, may pay up to 1% of the amount invested.
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.
TAX STATUS
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The Fund intends to qualify annually and to elect to be treated as a
regulated investment company under the Code.
To qualify as a regulated investment company, the Fund generally must,
among other things, (a) derive in each taxable year at least 90% of its gross
income from dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including gains from options, futures contracts and
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies; (b) derive less than 30% of its gross income
from the sale or other disposition of certain assets (namely, (i) stock or
securities, (ii) options, futures, and forward contracts (other than those on
foreign currencies), and (iii) foreign currencies (including options, futures,
and forward contracts on such currencies) not directly related to the Fund's
principal business of investing in stocks or securities (or options and futures
with respect to stocks and securities)) held less than three months (the "30%
Limitation"); (c) diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other securities
of any one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Fund's total assets and not greater than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities or the securities of other regulated
investment companies) or of any two or more issuers that the Fund controls and
that are determined to be engaged in the same business or some similar or
related business; and (d) distribute at least 90% of its investment company
taxable income (which includes, among other items, dividends, interest and net
short-term capital gains in excess of net long-term capital losses, but does not
include net long-term capital gains in excess of net short-term capital losses)
each taxable year.
As a regulated investment company, the Fund generally will not be subject
to U.S. Federal income tax on its investment company taxable income and net
capital gains (net long-term capital gains in excess of net short-term capital
losses), if any, that it distributes to Shareholders. The Fund intends to
distribute to its Shareholders, at least annually, substantially all of its
investment company taxable income and net capital gains. Amounts not distributed
on a timely basis in accordance with a calendar year distribution requirement
are subject to a nondeductible 4% excise tax. To prevent imposition of the tax,
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the Fund must distribute during each calendar year an amount equal to the sum of
(1) at least 98% of its ordinary income (not taking into account any capital
gains or losses) for the calendar year, (2) at least 98% of its capital gains in
excess of its capital losses (adjusted for certain ordinary losses) for the
twelve-month period ending on October 31 of the calendar year, and (3) any
ordinary income and capital gains for previous years that was not distributed
during those years. A distribution will be treated as having been received on
December 31 of the current calendar year if it is declared by the Fund in
October, November or December with a record date in such a month and paid by the
Fund during January of the following calendar year. Such distributions will be
taxable to Shareholders in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
To prevent application of the excise tax, the Fund intends to make its
distributions in accordance with the calendar year distribution requirement.
Some of the debt securities that may be acquired by a Fund may be treated
as debt securities that are originally issued at a discount. Original issue
discount can generally be defined as the difference between the price at which a
security was issued and its stated redemption price at maturity. Although no
cash income is actually received by the Fund in a given year, original issue
discount on a taxable debt security earned in that given year generally is
treated for Federal income tax purposes as interest and, therefore, such income
would be subject to the distribution requirements of the Code. 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.
Some of the debt securities may be purchased by the Fund at a discount
which exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for Federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount will be treated as ordinary income to the extent it does not exceed the
accrued market discount on such debt security. Generally, market discount
accrues on a daily basis for each day the debt security is held by the Fund at a
constant rate over the time remaining to the debt security's maturity or, at the
election of the Fund, at a constant yield to maturity which takes into account
the semiannual compounding of interest.
Exchange control regulations that may restrict repatriation of investment
income, capital, or the proceeds of securities sales by foreign investors may
limit the Fund's ability to make sufficient distributions to satisfy the 90% and
calendar year
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distribution requirements. See "Risk Factors" section of the
SAI.
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 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
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income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC shares.
DISTRIBUTIONS. Dividends paid out of the Fund's investment company
taxable income will be taxable to a Shareholder as ordinary income. Because a
portion of the Fund's income may consist of dividends paid by U.S. corporations,
a portion of the dividends paid by the Fund may be eligible for the corporate
dividends-received deduction. However, the alternative minimum tax applicable to
corporations may reduce the benefit of the dividends received deduction.
Distributions of net capital gains, if any, designated by the Fund as capital
gain dividends, are taxable as long-term capital gains, regardless of how long
the Shareholder has held the Fund's Shares, and are not eligible for the
dividends-received deduction. Generally, dividends and distributions are taxable
to Shareholders, whether received in cash or reinvested in Shares of the Fund.
Any distributions that are not from the Fund's investment company taxable income
or net capital gain may be characterized as a return of capital to Shareholders
or, in some cases, capital gain. Shareholders receiving distributions in the
form of newly issued Shares generally will have a cost basis in each Share
received equal to the net asset value of a Share of the Fund on the distribution
date. Shareholders will be notified annually as to the U.S. Federal tax status
of distributions, and Shareholders receiving distributions in the form of
newly-issued Shares will receive a report as to the net asset value of the
Shares received.
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.
If the Fund retains net capital gains for reinvestment, the Fund may
elect to treat such amounts as having been distributed to Shareholders. As a
result, the Shareholders would be subject to tax on undistributed net capital
gains, would be able to claim their proportionate share of the Federal income
taxes paid by the Fund on such gains as a credit against their own Federal
income tax liabilities, and would be entitled to an increase in their basis in
their Fund Shares.
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OPTIONS AND HEDGING TRANSACTIONS. Certain options, futures contracts and
forward contracts in which the Fund may invest are "section 1256 contracts."
Gains or losses on section 1256 contracts generally are considered 60% long-term
and 40% short-term capital gains or losses ("60/40"); however, foreign currency
gains or losses (as discussed below) arising from certain section 1256 contracts
may be treated as ordinary income or loss. Also, section 1256 contracts held by
the Fund at the end of each taxable year (and, in some cases, for purposes of
the 4% excise tax, on October 31 of each year) are "marked-to-market" with the
result that unrealized gains or losses are treated as though they were realized.
Generally, the hedging transactions undertaken by the Fund may result in
"straddles" for 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 the losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to the Fund of hedging transactions are not
entirely clear. The hedging transactions may increase the amount of short-term
capital gain realized by 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 election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to Shareholders and which will be taxed to Shareholders as ordinary
income or long-term capital gain may be increased or decreased as compared to a
fund that did not engage in such hedging transactions.
Requirements relating to the Fund's tax status as a regulated investment
company may limit the extent to which the Fund will be able to engage in
transactions in options, futures contracts and forward contracts.
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CURRENCY FLUCTUATIONS -- "SECTION 988" GAINS OR LOSSES. Under the Code,
gains or losses attributable to fluctuations in exchange rates which occur
between the time the Fund accrues income or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities generally are
treated as ordinary income or ordinary loss. Similarly, on disposition of debt
securities denominated in a foreign currency and on disposition of certain
financial contracts, forward contracts and options, gains or losses attributable
to fluctuations in the value of foreign currency between the date of acquisition
of the security or contract and the date of disposition also are treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"section 988" gains or loses, may increase, decrease or eliminate the amount of
the Fund's investment company taxable income to be distributed to its
Shareholders as ordinary income. 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.
SALE OF SHARES. Upon the sale, exchange or other taxable disposition of
Shares of the Fund, a Shareholder may realize a capital gain or loss which will
be long-term or short-term, generally depending upon the Shareholder's holding
period for the Shares. Any loss realized on a sale or exchange will be
disallowed to the extent the shares disposed of are replaced (including
replacement through the reinvestment of dividends and capital gain distributions
in the Fund) within a period of 61 days beginning 30 days before and ending 30
days after 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 a disposition of Fund Shares held by the Shareholder for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of capital gain dividends received by the Shareholder with respect
to such Shares.
Under certain circumstances, the sales charge incurred in acquiring
Shares of the Fund may not be taken into account in determining the gain or loss
on the disposition of those Shares. For example, this rule applies if (1) the
Shareholder incurs a sales charge in acquiring stock of a regulated investment
company, (2) Shares of the Fund are exchanged for Shares of another Templeton or
Franklin Fund within 90 days after the date they were purchased, and (3) the new
Shares are acquired without
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a sales charge or at a reduced sales charge under a "reinvestment right"
received upon the initial purchase of Shares of stock. In that case, the gain or
loss recognized on the exchange will be determined by excluding from the tax
basis of the sales charge incurred in acquiring such Shares exchanged all or a
portion of the amount of sales charge incurred in acquiring the 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
the sales charge initially. Instead, the portion of the sales charge affected by
this rule will be treated as an amount paid for the new Shares.
FOREIGN TAXES. Income received by the Fund from sources within foreign
countries may be subject to withholding and other income or similar taxes
imposed by such countries. If more than 50% of the value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible and intends to elect to "pass-through"
to the Fund's Shareholders the amount of foreign taxes paid by the Fund.
Pursuant to this election, a Shareholder will be required to include in gross
income (in addition to taxable dividends actually received) his pro rata share
of the foreign taxes paid by the Fund, and will be entitled either to deduct (as
an itemized deduction) his pro rata share of foreign taxes in computing his
taxable income or to use it as a foreign tax credit against his U.S. Federal
income tax liability, subject to limitations. No deduction for foreign taxes may
be claimed by a Shareholder who does not itemize deductions, but such a
Shareholder may be eligible to claim the foreign tax credit (see below). Each
Shareholder will be notified within 60 days after the close of the Fund's
taxable year whether the foreign taxes paid by the Fund will "pass-through" for
that year.
Generally, a credit for foreign taxes is subject to the limitation that
it may not exceed the Shareholder's U.S. tax attributable to his or her foreign
source taxable income. For this purpose, if the pass-through election is made,
the source of the Fund's income flows through to its Shareholders. With respect
to the Fund, gains from the sale of securities will be treated as derived from
U.S. sources and certain currency fluctuation gains, including fluctuation gains
from foreign currency denominated debt securities, receivables and payables,
will be treated as ordinary income derived from U.S. sources. The limitation on
the foreign tax credit is applied separately to foreign source passive income
(as defined for purposes of the foreign tax credit), including the foreign
source passive income passed through by the Fund. Because of changes made by the
Tax Reform Act of 1986, Shareholders may be unable to claim a credit for the
full amount of their proportionate share of the foreign taxes paid by the Fund.
Foreign taxes may not be deducted in
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computing alternative minimum taxable income and the foreign tax credit can be
used to offset only 90% of the alternative minimum tax (as computed under the
Code for purposes of this limitation) imposed on corporations and individuals.
If the Fund is not eligible to make the election to "pass through" to its
Shareholders its foreign taxes, the foreign taxes it pays will reduce investment
company taxable income and the distributions by the Fund will be treated as
United States source income.
BACKUP WITHHOLDING. The Fund may be required to withhold U.S. Federal
income tax at the rate of 31% ("backup withholding") of all taxable
distributions and gross redemption proceeds payable to Shareholders who fail to
provide the Fund with their correct taxpayer identification number or to make
required certifications, where the Fund or Shareholder has been notified by the
IRS that they are subject to backup withholding. Corporate Shareholders and
certain other Shareholders specified in the Code generally are exempt from such
backup withholding, or when required to do so, the Shareholder fails to certify
that he is not subject to backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against the Shareholder's
U.S. Federal income tax liability.
FOREIGN SHAREHOLDERS. The tax consequences to a foreign Shareholder of an
investment in the Fund may differ from those described herein. Foreign
Shareholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Fund.
OTHER TAXATION. The foregoing discussion relates only to
U.S. Federal income tax law as applicable to U.S. persons (I.E.,
U.S. citizens and residents and U.S. domestic corporations,
partnerships, trusts and estates). Distributions by the Fund
also may be subject to state, local and foreign taxes, and their
treatment under state and local income tax laws may differ from
U.S. Federal income tax treatment. Shareholders should consult
their tax advisers with respect to particular questions of U.S.
Federal, state and local taxation. Shareholders who are not U.S.
persons should consult their tax advisers regarding U.S. and
foreign tax consequences of ownership of Shares of the Fund,
including the likelihood that distributions to them would be
subject to withholding of U.S. Federal income tax at a rate of
30% (or at a lower rate under a tax treaty).
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
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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 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 which is primarily intended to
result in the sale of Fund Shares. Under the Plans adopted with respect to Class
II Shares, the Fund will pay FTD or others quarterly (subject to a limit of
1.00% per annum of the Fund's average daily assets attributable to Class II
Shares of which up to 0.25% of such net assets may be paid to dealers for
personal service and/or 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 the Fund's Shares. The Plans are
reimbursement type plans which do not provide for the payment of interest or
carrying charges as distribution expenses. 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"); (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; (7) dealer
commissions and wholesaler compensation in connection with sales of Fund Shares;
and (8) such other similar services as the Fund's Board of Trustees determines
to be reasonably calculated to result in the sale of Shares. Under the Plan
adopted with respect to Class I Shares, the costs and expenses not reimbursed in
any one given quarter (including costs and expenses not reimbursed because they
exceed 0.35% of the Fund's average daily net assets attributable to Class I
Shares) may be reimbursed in subsequent quarters or years.
During the fiscal year ended December 31, 1994, FTD incurred costs and
expenses of $6,874,543 in connection with distribution of the Fund's Shares.
During the same period, the Fund made reimbursements pursuant to the Plan in the
amount of $6,531,047. As indicated above, unreimbursed expenses, which amounted
to $788,625 as of December 31, 1994, may be reimbursed by the Fund during the
fiscal year ending December 31, 1995 or in subsequent years. In the event that
the Plan is terminated, the Fund will not be liable to the Principal Underwriter
for any unreimbursed expenses that had been carried forward from previous months
or
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<PAGE>
years. During the fiscal year ended December 31, 1994, FTD spent, pursuant to
the Plan, the following amounts on: compensation to dealers, $4,296,129; sales
promotion, $137,319; printing, $670,147; advertising, $1,616,263; and wholesaler
costs and expenses, $154,686.
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 agreements with
responsible dealers, as well as sell to individual investors. The Shares are
sold only at the Offering Price in effect at the time of sale, and the Fund
receives not less than the full net asset value of the Shares sold. The discount
between the Offering Price and the net asset value may be retained by the
Principal Underwriter or it may reallow all or any part of such discount to
dealers. During the fiscal years ended December 31, 1994, 1993 and 1992 FTD
(and, prior to June 1, 1993, Templeton Funds Distributor, Inc.) retained of such
discount $6,592,272, $414,599, and $1,300,220 or approximately 16.1%, 15%, and
20.0%, respectively, of the gross sales commissions.
The Distribution Agreement provides that the Fund shall pay the costs and
expenses incident to registering and qualifying its 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,
although the Principal Underwriter may recoup these costs from payments it
receives under the Distribution Plan. (The Fund pays costs of preparation,
set-up and initial supply of its prospectus for existing Shareholders.)
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 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 Trustees 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
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.
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<PAGE>
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 Trustees at a meeting at
which 50% of the outstanding Shares are present can elect all the Trustees and,
in such event, the holders of the remaining shares voting for the election of
Trustees will not be able to elect any person or persons to the Board of
Trustees.
The Declaration of Trust provides that the holders of not less than
two-thirds of the outstanding Shares of the Fund may remove a person serving as
Trustee either by declaration in writing or at a meeting called for such
purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee 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
Trustee.
Under Massachusetts law, Shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Declaration of Trust disclaims liability of the Shareholders, Trustees or
officers of the Fund for acts or obligations of the Fund, which are binding only
on the assets and property of the Fund. The Declaration of Trust provides for
indemnification out of Fund property for all loss and expense of any Shareholder
held personally liable for the obligations of the Fund. The risk of a
Shareholder incurring financial loss on account of Shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations and, thus, should be considered remote.
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 a period of one year (or, if less, 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).
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<PAGE>
All total return figures reflect the 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 annualized total return for the
one-year period ended December 31, 1994 and for the period from October 16, 1991
(commencement of operations) to December 31, 1994 were (13.83)% and 10.10%,
respectively.
Performance information for the Fund may be compared, in reports and
promotional literature, to: (i) 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; (ii) 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 (iii) the Consumer Price Index (measure of 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 deduction 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
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<PAGE>
Corporation, Morgan Stanley Capital International or a similar
financial organization.
(4) The geographic distribution of the Fund's portfolio.
(5) The gross national product and populations, including age
characteristics, literacy rates, foreign investment improvements
due to a liberalization of securities laws and a reduction of
foreign exchange controls, and improving communication
technology, of various countries as published by various
statistical organizations.
(6) To assist investors in understanding the different
returns and risk characteristics of various
investments, the Fund may show historical returns of
various investments and published indices (E.G.,
Ibbotson Associates, Inc. Charts and Morgan Stanley
EAFE - Index).
(7) The major industries located in various jurisdictions
as published by the Morgan Stanley Index.
(8) Rankings by DALBAR Surveys, Inc. with respect to mutual
fund shareholder services.
(9) Allegorical stories illustrating the importance of
persistent long-term investing.
(10) The Fund's portfolio turnover rate and its ranking
relative to industry standards as published by Lipper
Analytical Services, Inc. or Morningstar, Inc.
(11) A description of the Templeton organization's investment
management philosophy and approach, including its worldwide
search for undervalued or "bargain" securities and its
diversification by industry, nation and type of stocks or other
securities.
(12) Quotations from the Templeton organization's founder,
Sir John Templeton,* advocating the virtues of
diversification and long-term investing, including the
following:
- --------
* 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.
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<PAGE>
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."
In addition, the Fund and the Investment Manager may also refer to the
number of Shareholders in the Fund or the aggregate number of shareholders of
the Franklin Templeton Funds or the
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dollar amount of fund and private account assets under management in advertising
materials.
FINANCIAL STATEMENTS
The financial statements contained in the Fund's Annual Report to
Shareholders dated December 31, 1994 are incorporated herein by reference.
<PAGE>
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