TEMPLETON DEVELOPING MARKETS TRUST
THIS STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1995,
AS SUPPLEMENTED JUNE 1, 1995,
IS NOT A PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION
WITH THE PROSPECTUS OF TEMPLETON DEVELOPING MARKETS TRUST
DATED MAY 1, 1995, WHICH MAY BE OBTAINED
WITHOUT CHARGE UPON REQUEST TO
THE PRINCIPAL UNDERWRITER,
FRANKLIN TEMPLETON DISTRIBUTORS, INC.,
700 CENTRAL AVENUE, P.O. BOX 33030,
ST. PETERSBURG, FLORIDA 33733-8030
TOLL FREE TELEPHONE: (800) 237-0738
TABLE OF CONTENTS
General Information and History
Investment Objective and Policies
-Investment Policies
-Repurchase Agreements
-Debt Securities
-Futures Contracts
-Options on Securities or Indices
-Foreign Currency Hedging Transactions
-Investment Restrictions
-Risk Factors
-Trading Policies
-Personal Securities Transactions
Management of the Fund
Trustee Compensation
Principal Shareholders
Investment Management and Other Services
-Investment Management Agreement
-Management Fees
-Templeton Investment Management (Hong Kong) Limited
-Business Manager
-Custodian and Transfer Agent
-Legal Counsel
-Independent Accountants
-Reports to Shareholders
Brokerage Allocation
Purchase, Redemption and Pricing of Shares
-Ownership and Authority Disputes
-Tax-Deferred Retirement Plans
-Letter of Intent
-Special Net Asset Value Purchases
Tax Status
-Distributions
-Options and Hedging Transactions
-Currency Fluctuations -- "Section 988" Gains or Losses
-Sale of Shares
-Foreign Taxes
-Backup Withholding
-Foreign Shareholders
-Other Taxation
Principal Underwriter
Description of Shares
Performance Information
Financial Statements
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 (Hong Kong) Limited (the "Investment
Manager") will monitor the value of such securities daily to
determine that the value equals or exceeds the repurchase price.
Repurchase agreements may involve risks in the event of default
or insolvency of the seller, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying
securities. The Fund will enter into repurchase agreements only
with parties who meet creditworthiness standards approved by the
Board of 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
from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and
liquidity of low rated debt securities, especially in a thinly
traded market. Analysis of the creditworthiness of issuers of
low rated debt securities may be more complex than for issuers of
higher rated securities, and the ability of the Fund to achieve
its investment objective may, to the extent of investment in low
rated debt securities, be more dependent upon such
creditworthiness analysis than would be the case if the Fund were
investing in higher rated securities.
Low rated debt securities may be more susceptible to real or
perceived adverse economic and competitive industry conditions
than investment grade securities. The prices of low rated debt
securities have been found to be less sensitive to interest rate
changes than higher rated investments, but more sensitive to
adverse economic downturns or individual corporate developments.
A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a decline in low rated
debt securities prices because the advent of a recession could
lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the
issuer of low rated debt securities defaults, the Fund may incur
additional expenses to seek recovery.
Recent legislation, which requires federally insured savings
and loan associations to divest their investments in low rated
debt securities, may have a material adverse effect on the Fund's
net asset value and investment practices.
Futures Contracts. The Fund may purchase and sell financial
futures contracts. Although some financial futures contracts
call for making or taking delivery of the underlying securities,
in most cases these obligations are closed out before the
settlement date. The closing of a contractual obligation is
accomplished by purchasing or selling an identical offsetting
futures contract. Other financial futures contracts by their
terms call for cash settlements.
The Fund may also buy and sell index futures contracts with
respect to any stock index traded on a recognized stock exchange
or board of trade. An index futures contract is a contract to
buy or sell units of an index at a specified future date at a
price agreed upon when the contract is made. The stock index
futures contract specifies that no delivery of the actual stocks
making up the index will take place. Instead, settlement in cash
must occur upon the termination of the contract, with the
settlement being the difference between the contract price and
the actual level of the stock index at the expiration of the
contract.
At the time the Fund purchases a futures contract, an amount
of cash, U.S. Government securities, or other highly liquid debt
securities equal to the market value of the futures contract will
be deposited in a segregated account with the Fund's custodian.
When writing a futures contract, the Fund will maintain with its
custodian liquid assets that, when added to the amounts deposited
with a futures commission merchant or broker as margin, are equal
to the market value of the instruments underlying the contract.
Alternatively, the Fund may "cover" its position by owning the
instruments underlying the contract (or, in the case of an index
futures contract, a portfolio with a volatility substantially
similar to that of the index on which the futures contract is
based), or holding a call option permitting the Fund to purchase
the same futures contract at a price no higher than the price of
the contract written by the Fund (or at a higher price if the
difference is maintained in liquid assets with the Fund's
custodian).
Options on Securities or Indices. The Fund may write
covered call and put options and purchase call and put options on
securities or stock indices that are traded on United States and
foreign exchanges and in the over-the-counter markets.*
_______________
* 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.
An option on a security is a contract that gives the
purchaser of the option, in return for the premium paid, the
right to buy a specified security (in the case of a call option)
or to sell a specified security (in the case of a put option)
from or to the writer of the option at a designated price during
the term of the option. An option on a securities index gives
the purchaser of the option, in return for the premium paid, the
right to receive from the seller cash equal to the difference
between the closing price of the index and the exercise price of
the option.
The Fund may write a call or put option only if the option
is "covered." A call option on a security written by the Fund is
"covered" if the Fund owns the underlying security covered by the
call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its
portfolio. A call option on a security is also "covered" if the
Fund holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call
held (1) is equal to or less than the exercise price of the call
written or (2) is greater than the exercise price of the call
written if the difference is maintained by the Fund in cash or
high grade U.S. Government securities in a segregated account
with its custodian. A put option on a security written by the
Fund is "covered" if the Fund maintains cash or fixed income
securities with a value equal to the exercise price in a
segregated account with its custodian, or else holds a put on the
same security and in the same principal amount as the put written
where the exercise price of the put held is equal to or greater
than the exercise price of the put written.
The Fund will cover call options on stock indices that it
writes by owning securities whose price changes, in the opinion
of the Investment Manager, are expected to be similar to those of
the index, or in such other manner as may be in accordance with
the rules of the exchange on which the option is traded and
applicable laws and regulations. Nevertheless, where the Fund
covers a call option on a stock index through ownership of
securities, such securities may not match the composition of the
index. In that event, the Fund will not be fully covered and
could be subject to risk of loss in the event of adverse changes
in the value of the index. The Fund will cover put options on
stock indices that it writes by segregating assets equal to the
option's exercise price, or in such other manner as may be in
accordance with the rules of the exchange on which the option is
traded and applicable laws and regulations.
The Fund will receive a premium from writing a put or call
option, which increases the Fund's gross income in the event the
option expires unexercised or is closed out at a profit. If the
value of a security or an index on which the Fund has written a
call option falls or remains the same, the Fund will realize a
profit in the form of the premium received (less transaction
costs) that could offset all or a portion of any decline in the
value of the portfolio securities being hedged. If the value of
the underlying security or index rises, however, the Fund will
realize a loss in its call option position, which will reduce the
benefit of any unrealized appreciation in the Fund's investments.
By writing a put option, the Fund assumes the risk of a decline
in the underlying security or index. To the extent that the
price changes of the portfolio securities being hedged correlate
with changes in the value of the underlying security or index,
writing covered put options on indices or securities will
increase the Fund's losses in the event of a market decline,
although such losses will be offset in part by the premium
received for writing the option.
The Fund may also purchase put options to hedge its
investments against a decline in value. By purchasing a put
option, the Fund will seek to offset a decline in the value of
the portfolio securities being hedged through appreciation of the
put option. If the value of the Fund's investments does not
decline as anticipated, or if the value of the option does not
increase, the Fund's loss will be limited to the premium paid for
the option plus related transaction costs. The success of this
strategy will depend, in part, on the correlation between the
changes in value of the underlying security or index and the
changes in value of the Fund's security holdings being hedged.
The Fund may purchase call options on individual securities
to hedge against an increase in the price of securities that the
Fund anticipates purchasing in the future. Similarly, the Fund
may purchase call options on a securities index to attempt to
reduce the risk of missing a broad market advance, or an advance
in an industry or market segment, at a time when the Fund holds
uninvested cash or short-term debt securities awaiting
investment. When purchasing call options, the Fund will bear the
risk of losing all or a portion of the premium paid if the value
of the underlying security or index does not rise.
There can be no assurance that a liquid market will exist
when the Fund seeks to close out an option position. Trading
could be interrupted, for example, because of supply and demand
imbalances arising from a lack of either buyers or sellers, or
the options exchange could suspend trading after the price has
risen or fallen more than the maximum specified by the exchange.
Although the Fund may be able to offset to some extent any
adverse effects of being unable to liquidate an option position,
the Fund may experience losses in some cases as a result of such
inability.
Foreign Currency Hedging Transactions. In order to hedge
against foreign currency exchange rate risks, the Fund may enter
into forward foreign currency exchange contracts and foreign
currency futures contracts, as well as purchase put or call
options on foreign currencies, as described below. The Fund may
also conduct its foreign currency exchange transactions on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market.
The Fund may enter into forward foreign currency exchange
contracts ("forward contracts") to attempt to minimize the risk
to the Fund from adverse changes in the relationship between the
U.S. dollar and foreign currencies. A forward contract is an
obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and
privately traded by currency traders and their customers. The
Fund may enter into a forward contract, for example, when it
enters into a contract for the purchase or sale of a security
denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security. In addition, for example, when the
Fund believes that a foreign currency may suffer 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.
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.**
_______________
** 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.
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.***
_______________
*** 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.
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.
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.****
_______________
**** 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.
Whenever any investment policy or investment restriction
states a maximum percentage of the Fund's assets which may be
invested in any security or other property, it is intended that
such maximum percentage limitation be determined immediately
after and as a result of the Fund's acquisition of such security
or property. Assets are calculated as described in the
Prospectus under the heading "How to Buy Shares of the Fund." If
the Fund receives from an issuer of securities held by the Fund
subscription rights to purchase securities of that issuer, and if
the Fund exercises such subscription rights at a time when the
Fund's portfolio holdings of securities of that issuer would
otherwise exceed the limits set forth in investment restrictions
3 or 9 above, it will not constitute a violation if, prior to
receipt of securities upon exercise of such rights, and after
announcement of such rights, the Fund has sold at least as many
securities of the same class and value as it would receive on
exercise of such rights. 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
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
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
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
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.
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 these funds and clients may contain many or some of
the same securities. When any two or more of these funds or
clients are engaged simultaneously in the purchase or sale of the
same security, the transactions will be placed for execution in a
manner designed to be equitable to each party. The larger size
of the transaction may affect the price of the security and/or
the quantity which may be bought or sold for each party. If the
transaction is large enough, brokerage commissions 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
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 Chairman of the Board, president,
Metro Center, 1 Station Place and chief executive officer of
Stamford, Connecticut General Host Corporation (nursery
Trustee and craft centers); and a
director of RBC Holdings (U.S.A.)
Inc. (a bank holding company) and
Bar-S Foods.
NICHOLAS F. BRADY* Chairman of Templeton Emerging
The Bullitt House Markets Investment Trust PLC;
102 East Dover Street chairman of Templeton Latin
Easton, Maryland America Investment Trust PLC;
Trustee 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.
FRANK J. CROTHERS President and chief executive
P.O. Box N-3238 officer of Atlantic Equipment &
Nassau, Bahamas Power Ltd.; vice chairman of
Trustee Caribbean Utilities Co., Ltd.;
president of Provo Power
Corporation; and a director of
various other businesses and
nonprofit organizations.
S. JOSEPH FORTUNATO Member of the law firm of Pitney,
200 Campus Drive Hardin, Kipp & Szuch; and a
Florham Park, New Jersey director of General Host
Trustee Corporation.
JOHN Wm. GALBRAITH President of Galbraith
360 Central Avenue Properties, Inc. (personal
Suite 1300 investment company); director of
St. Petersburg, Florida Gulfwest Banks, Inc. (bank
Trustee 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).
ANDREW H. HINES, JR. Consultant for the Triangle
150 2nd Avenue N. Consulting Group; chairman of the
St. Petersburg, Florida board and chief executive officer
Trustee 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.
CHARLES B. JOHNSON* President, chief executive
777 Mariners Island Blvd. officer, and director of Franklin
San Mateo, California Resources, Inc.; chairman of the
Chairman of the Board board and director of Franklin
and Vice President 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.
CHARLES E. JOHNSON* Senior vice president and
777 Mariners Island Blvd. director of Franklin Resources,
San Mateo, California Inc.; senior vice president of
Trustee 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.
BETTY P. KRAHMER Director or trustee of various
2201 Kentmere Parkway civic associations; formerly,
Wilmington, Delaware economic analyst, U.S.
Trustee Government.
GORDON S. MACKLIN Chairman of White River
8212 Burning Tree Road Corporation (information
Bethesda, Maryland services); director of Fund
Trustee 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.
FRED R. MILLSAPS Manager of personal investments
2665 N.E. 37th Drive (1978-present); chairman and
Fort Lauderdale, Florida chief executive officer of
Trustee 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.
CONSTANTINE DEAN TSERETOPOULOS Physician, Lyford Cay Hospital
Lyford Cay Hospital (July 1987-present); cardiology
P.O. Box N-7776 fellow, University of Maryland
Nassau, Bahamas (July 1985-July 1987); internal
Trustee medicine intern, Greater
Baltimore Medical Center (July
1982-July 1985).
J. MARK MOBIUS Managing director of Templeton
Two Exchange Square Investment Management (Hong Kong)
Hong Kong Limited; portfolio manager for
President 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).
MARK G. HOLOWESKO President and director of
Lyford Cay Templeton, Galbraith & Hansberger
Nassau, Bahamas Ltd.; director of global equity
Vice President 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).
MARTIN L. FLANAGAN Senior vice president, treasurer
777 Mariners Island Blvd. and chief financial officer of
San Mateo, California Franklin Resources, Inc.;
Vice President 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.
JOHN R. KAY Vice president of the Templeton
500 East Broward Blvd. Funds; vice president and
Fort Lauderdale, Florida treasurer of Templeton Global
Vice President Investors, Inc. and Templeton
Worldwide, Inc.; assistant vice
president of Franklin Templeton
Distributors, Inc.; formerly,
vice president and controller of
the Keystone Group, Inc.
THOMAS M. MISTELE Senior vice president of
700 Central Avenue Templeton Global Investors, Inc.;
St. Petersburg, Florida vice president of Franklin
Secretary 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).
JAMES R. BAIO Certified public accountant;
500 East Broward Blvd. treasurer of the Templeton Funds;
Fort Lauderdale, Florida senior vice president of
Treasurer Templeton Worldwide, Inc.,
Templeton Global Investors, Inc.,
and Templeton Funds Trust
Company; formerly, senior tax
manager with Ernst & Young
(certified public accountants)
(1977-1989).
JACK L. COLLINS Assistant treasurer of the
700 Central Avenue Templeton Funds; assistant vice
St. Petersburg, Florida president of Franklin Templeton
Assistant Treasurer Investor Services, Inc.;
formerly, partner with Grant
Thornton, independent public
accountants.
JEFFREY L. STEELE Partner, Dechert Price & Rhoads.
1500 K Street, N.W.
Washington, D.C.
Assistant Secretary
______________________
* 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:
Number of
Franklin Total
Aggregate Templeton Fund Compensation
Compensation Boards on from All Funds
from the Which Director in Franklin
Name of Director Fund* Serves Templeton Group*
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 4,000 4 12,850
Tseretopoulos
_______________
* 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 Templeton Investment Management (Hong Kong) Limited,
a Hong Kong company with offices at Two Exchange Square, Hong
Kong. 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 one or more of its affiliates has selected
for one or more of its other clients or for clients of its
affiliates, the orders for all such securities transactions are
placed for execution by methods determined by the Investment
Manager, with approval by the Board of 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.
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,
the 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 (Hong Kong) Limited. 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
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:
- providing office space, telephone, office equipment and
supplies for the Fund;
- paying compensation of the Fund's officers for services
rendered as such;
- authorizing expenditures and approving bills for
payment on behalf of the Fund;
- 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;
- 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;
- providing trading desk facilities for the Fund;
- monitoring relationships with organizations serving the
Fund, including custodians, transfer agents and
printers;
- 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;
- monitoring the qualifications of tax-deferred
retirement plans providing for investment in Shares of
the Fund; and
- 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
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,
including an annual report with financial statements audited by
independent accountants. Shareholders who would like to receive
an interim quarterly report may phone Fund Information at 1-800-
292-9293.
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
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
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
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.
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:
- For individuals whether or not covered by other
qualified plans;
- For simplified employee pensions;
- For employees of tax-exempt organizations; and
- 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
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
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
investors may purchase Class I Shares of the Fund at net asset
value (without a front-end or contingent deferred sales charge).
Franklin Templeton Distributors, Inc. ("FTD") or one of its
affiliates may make payments, out of its own resources, to
securities dealers who initiate and are responsible for such
purchases, as indicated below. FTD may make these payments in
the form of contingent advance payments, which may require
reimbursement from the securities dealers with respect to certain
redemptions made within 12 months of the calendar month following
purchase, as well as other conditions, all of which may be
imposed by an agreement between FTD, or its affiliates, and the
securities dealer.
The following amounts will be paid by FTD or one of its
affiliates, out of its own resources, to securities dealers who
initiate and are responsible for (i) purchases of most equity and
fixed-income Franklin Templeton Funds made at net asset value by
certain designated retirement plans (excluding IRA and IRA
rollovers): 1.00% on sales of $1 million but less than $2
millon, plus 0.80% on sales of $2 million but less than $3
million, plus 0.50% on sales of $3 million but less than $50
million, plus 0.25% on sales of $50 million but less than $100
million, plus 0.15% on sales of $100 million or more; and (ii)
purchases of most fixed-income Franklin Templeton Funds made at
net asset value by non-designated retirement plans: 0.75% on
sales of $1 million but less than $2 million, plus 0.60% on sales
of $2 million but less than $3 million, plus 0.50% on sales of $3
million but less than $50 million, plus 0.25% on sales of $50
million but less than $100 million, plus 0.15% on sales of $100
million or more. These payment breakpoints are reset every 12
months for purposes of additional purchases. With respect to
purchases made at net asset value by certain trust companies and
trust departments of banks and certain retirement plans of
organizations with collective retirement plan assets of $10
million or more, FTD, or one of its affiliates, out of its own
resources, may pay up to 1% of the amount invested.
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
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,
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
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
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.
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.
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
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
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
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
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.
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).
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
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.
- "Never follow the crowd. Superior performance is
possible only if you invest differently from the
crowd."
- "Diversify by company, by industry and by
country."
- "Always maintain a long-term perspective."
- "Invest for maximum total real return."
- "Invest - don't trade or speculate."
- "Remain flexible and open-minded about types of
investment."
- "Buy low."
- "When buying stocks, search for bargains among
quality stocks."
- "Buy value, not market trends or the economic
outlook."
- "Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
- "Do your homework or hire wise experts to help
you."
- "Aggressively monitor your investments."
- "Don't panic."
- "Learn from your mistakes."
- "Outperforming the market is a difficult task."
- "An investor who has all the answers doesn't even
understand all the questions."
- "There's no free lunch."
- "And now the last principle: Do not be fearful or
negative too often."
In addition, the Fund and the Investment Manager may also
refer to the number of Shareholders in the Fund or the aggregate
number of shareholders of the Franklin Templeton Funds or the
dollar amount of fund and private account assets under management
in advertising materials.
FINANCIAL STATEMENTS
The financial statements contained in the Fund's
December 31, 1994 Annual Report to Shareholders are incorporated
herein by reference.
