TEMPLETON DEVELOPING MARKETS TRUST
THIS STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1996,
IS NOT A PROSPECTUS. IT SHOULD BE READ IN
CONJUNCTION WITH THE PROSPECTUS OF TEMPLETON DEVELOPING
MARKETS TRUST DATED MAY 1, 1996, AS AMENDED FROM TIME TO TIME,
WHICH MAY BE OBTAINED WITHOUT CHARGE UPON REQUEST TO
THE PRINCIPAL UNDERWRITER,
FRANKLIN TEMPLETON DISTRIBUTORS, INC.,
700 CENTRAL AVENUE, P.O. BOX 33030,
ST. PETERSBURG, FLORIDA 33733-8030
TOLL FREE TELEPHONE: 1-800/DIAL BEN
TABLE OF CONTENTS
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General Information and History......................1 -Legal Counsel..................................24
Investment Objective and Policies....................1 -Independent Accountants........................24
-Investment Policies................................1 -Reports to Shareholders........................24
-Repurchase Agreements..............................1 Brokerage Allocation.............................24
-Debt Securities....................................2 Purchase, Redemption and Pricing of Shares.......27
-Structured Investments.............................3 -Ownership and Authority Disputes...............27
-Futures Contracts...................................4 -Tax-Deferred Retirement Plans..................28
-Options on Securities or Indices...................4 -Letter of Intent...............................29
-Foreign Currency Hedging Transactions..............6 -Special Net Asset Value Purchases..............30
-Investment Restrictions............................7 -Redemptions in Kind.............................30
-Risk Factors......................................10 Tax Status.......................................31
-Trading Policies..................................13 -Distributions..................................33
-Personal Securities Transactions..................14 -Options and Hedging Transactions...............34
Management of the Fund..............................14 -Currency Fluctuations --
"Section 988" Gains or Losses............... 35
Trustee Compensation................................19
Principal Shareholders..............................20 -Sale of Shares.................................35
Investment Management and Other Services............20 -Foreign Taxes..................................36
-Investment Management Agreement...................20 -Backup Withholding.............................36
-Management Fees...................................22 -Foreign Shareholders...........................37
-Templeton Asset Management Ltd. ..................22 -Other Taxation.................................37
-Business Manager..................................22 Principal Underwriter............................37
-Custodian and Transfer Agent......................24 Description of Shares............................39
Performance Information..........................39
Financial Statements.............................42
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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 Asset
Management Ltd.-- Hong Kong Branch (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.
STRUCTURED INVESTMENTS. Included among the issuers of debt securities in
which the Fund may invest are entities organized and operated solely for the
purpose of restructuring the investment characteristics of various securities.
These entities are typically organized by investment banking firms which
receive fees in connection with establishing each entity and arranging for the
placement of its securities. This type of restructuring involves the deposit
with or purchase by an entity, such as a corporation or trust, of specified
instruments and the issuance by that entity of one or more classes of
securities ("Structured Investments") backed by, or representing interests in,
the underlying instruments. The cash flows on the underlying instruments may
be apportioned among the newly issued Structured Investments to create
securities with different investment characteristics such as varying
maturities, payment priorities or interest rate provisions; the extent of the
payments made with respect to Structured Investments is dependent on the
extent of the cash flows on the underlying instruments. Because Structured
Investments of the type in which the Fund anticipates investing typically
involve no credit enhancement, their credit risk will generally be equivalent
to that of the underlying instruments.
The Fund is permitted to invest in a class of Structured Investments that
is either subordinated or unsubordinated to the right of payment of another
class. Subordinated Structured Investments typically have higher yields and
present greater risks than unsubordinated Structured Investments. Although the
Fund's purchase of subordinated Structured Investments would have a similar
economic effect to that of borrowing against the underlying securities, the
purchase will not be deemed to be leveraged for purposes of the limitations
placed on the extent of the Fund's assets that may be used for borrowing
activities.
Certain issuers of Structured Investments may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, a Fund's investment in
these Structured Investments may be limited by the restrictions contained in
the 1940 Act. Structured Investments are typically sold in private placement
transactions, and there currently is no active trading market for Structured
Investments. To the extent such investments are illiquid, they will be subject
to the Fund's restrictions on investments in illiquid securities.
FUTURES CONTRACTS. The Fund may purchase and sell financial futures
contracts. Although some financial futures contracts call for making or taking
delivery of the underlying securities, in most cases these obligations are
closed out before the settlement date. The closing of a contractual obligation
is accomplished by purchasing or selling an identical offsetting futures
contract. Other financial futures contracts by their terms call for cash
settlements.
The Fund may also buy and sell index futures contracts with respect to
any stock index traded on a recognized stock exchange or board of trade. An
index futures contract is a contract to buy or sell units of an index at a
specified future date at a price agreed upon when the contract is made. The
stock index futures contract specifies that no delivery of the actual stocks
making up the index will take place. Instead, settlement in cash must occur
upon the termination of the contract, with the settlement being the difference
between the contract price and the actual level of the stock index at the
expiration of the contract.
At the time the Fund purchases a futures contract, an amount of cash,
U.S. Government securities, or other highly liquid debt securities equal to
the market value of the futures contract will be deposited in a segregated
account with the Fund's custodian. When writing a futures contract, the Fund
will maintain with its custodian liquid assets that, when added to the amounts
deposited with a futures commission merchant or broker as margin, are equal to
the market value of the instruments underlying the contract. Alternatively,
the Fund may "cover" its position by owning the instruments underlying the
contract (or, in the case of an index futures contract, a portfolio with a
volatility substantially similar to that of the index on which the futures
contract is based), or holding a call option permitting the Fund to purchase
the same futures contract at a price no higher than the price of the contract
written by the Fund (or at a higher price if the difference is maintained in
liquid assets with the Fund's custodian).
OPTIONS ON SECURITIES OR INDICES. The Fund may write covered call and put
options and purchase call and put options on securities or stock indices that
are traded on United States and foreign exchanges and in the over-the-counter
markets.
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./1/
2. Purchase or retain securities of any company in which Trustees
or officers of the Fund or of its Investment Manager,
individually own more than 1/2 of 1% of the securities of such
company or, in the aggregate, own more than 5% of the
securities of such company.
3. 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./2/
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.
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 securities involves a high degree of risk and
special considerations not typically associated with investing in the United
States securities markets, and should be considered highly speculative. Such
risks include: (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 issuers deemed suitable by the
Investment Manager. Further, this also could cause a delay in the sale of
Russian securities by the Fund if a potential purchaser is deemed unsuitable,
which may expose the Fund to potential loss on the investment.
The Fund endeavors to buy and sell foreign currencies on as favorable a
basis as practicable. Some price spread 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 certain of these funds and clients may
contain many or some of the same securities. When certain funds or clients are
engaged simultaneously in the purchase or sale of the same security, the trades
may be aggregated for execution and then allocated in a manner designed to be
equitable to each party. The larger size of the transaction may affect the price
of the security and/or the quantity which may be bought or sold for each party.
If the transaction is large enough, brokerage commissions may be negotiated
below those otherwise chargeable.
Sale or purchase of securities, without payment of brokerage
commissions, fees (except customary transfer fees) or other remuneration in
connection therewith, may be effected between any of these funds, or between
funds and private clients, under procedures adopted pursuant to Rule 17a-7 under
the 1940 Act.
PERSONAL SECURITIES TRANSACTIONS. Access persons of the Franklin
Templeton Group, as defined in SEC Rule 17(j) under the 1940 Act, who are
employees of Franklin Resources, Inc. or their subsidiaries, are permitted to
engage in personal securities transactions subject to the following general
restrictions and procedures: (1) The trade must receive advance clearance from a
Compliance Officer and must be completed within 24 hours after this clearance;
(2) Copies of all brokerage confirmations must be sent to the Compliance Officer
and within 10 days after the end of each calendar quarter, a report of all
securities transactions must be provided to the Compliance Officer; (3) In
addition to items (1) and (2), access persons involved in preparing and making
investment decisions must file annual reports of their securities holdings each
January and also inform the Compliance Officer (or other designated personnel)
if they own a security 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
- 19 -
<TABLE>
<CAPTION>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING THE PAST FIVE YEARS
<S> <C>
HARRIS J. ASHTON Chairman of the Board, President, and Chief Executive
Metro Center, 1 Station Place Officer of General Host Corporation (nursery and craft
Stamford, Connecticut centers); and a Director of RBC Holdings (U.S.A.) Inc. (a
Trustee bank holding company) and Bar-S Foods. Age 63.
NICHOLAS F. BRADY* Chairman of Templeton Emerging Markets Investment Trust
The Bullitt House PLC, Templeton Latin America Investment Trust PLC and
102 East Dover Street Darby Overseas Investments, Ltd. (an investment firm)
Easton, Maryland (1994-present); Director of the Amerada Hess Corporation,
Trustee Capital Cities/ABC, Inc., Christiana Companies, and the
H.J. Heinz Company; Secretary of the United States
Department of the Treasury (1988-January 1993); and
chairman of the board of Dillon, Read & Co. Inc.
(investment banking) prior thereto.
Age 66.
FRANK J. CROTHERS President and Chief Executive Officer of Atlantic
P.O. Box N-3238 Equipment &
Nassau, Bahamas Power Ltd.; Vice Chairman of Caribbean Utilities Co.,
Trustee Ltd.; President of
Provo Power Corporation; and a
director of various
other businesses and
nonprofit organizations. Age 51.
S. JOSEPH FORTUNATO Member of the law firm of Pitney, Hardin, Kipp & Szuch;
200 Campus Drive and a director of General Host Corporation. Age 63.
Florham Park, New Jersey
Trustee
JOHN Wm. GALBRAITH President of Galbraith Properties, Inc. (personal
360 Central Avenue investment company); Director of Gulfwest Banks, Inc.
Suite 1300 (bank holding company) (1995-present) and Mercantile Bank
St. Petersburg, Florida (1991-present); Vice Chairman of Templeton, Galbraith &
Trustee Hansberger Ltd. (1986-1992); and Chairman of Templeton
Funds Management, Inc. (1974-1991). Age 74.
ANDREW H. HINES, JR. Consultant for the Triangle Consulting Group; Chairman of
150 2nd Avenue N. the Board and Chief Executive Officer of Florida Progress
St. Petersburg, Florida Corporation (1982-February, 1990) and director of various
Trustee of its subsidiaries;
Chairman and Director
of Precise Power
Corporation;
executive-in-residence
of Eckerd College
(1991-present); and a
Director of Checkers
Drive-In Restaurants,
Inc. Age 73.
</TABLE>
<TABLE>
<S> <C>
CHARLES B. JOHNSON* President, Chief Executive Officer, and Director of
777 Mariners Island Blvd. Franklin Resources, Inc.; Chairman of the Board and
San Mateo, California Director of Franklin Advisers, Inc. and Franklin Templeton
Trustee, Chairman of the Board Distributors, Inc.; General Host Corporation, and
and Vice President Templeton Global Investors, Inc.; and officer and
director, trustee or
managing general partner, as the case
may be, of most other
subsidiaries of Franklin and of 55 of
the investment companies in the
Franklin Templeton Group. Age 63.
CHARLES E. JOHNSON* Senior Vice President and Director of Franklin Resources,
777 Mariners Island Blvd. Inc.; Senior Vice President of Franklin Templeton
San Mateo, California Distributors, Inc.; President and Director of Templeton
Trustee and Vice President Worldwide, Inc. and Franklin Institutional Service
Corporation; Chairman of the Board of Templeton Investment
Counsel, Inc.; vice president and/or director, as the case
may be, for some of the subsidiaries of Franklin
Resources, Inc.; and an officer and/or director, as the
case may be, of 24 of the investment companies in the
Franklin Templeton Group. Age 39.
BETTY P. KRAHMER Director or trustee of various civic associations;
2201 Kentmere Parkway formerly, economic analyst, U.S. Government. Age 66.
Wilmington, Delaware
Trustee
GORDON S. MACKLIN Chairman of White River Corporation (information
8212 Burning Tree Road services); Director of Fund America Enterprises Holdings,
Bethesda, Maryland Inc., Lockheed Martin Corporation, MCI Communications
Trustee Corporation, Fusion
Systems Corporation,
Infovest Corporation,
and Medimmune, Inc.;
formerly, Chairman of
Hambrecht and Quist
Group; Director of H&Q
Healthcare Investors;
and President of the
National Association of
Securities Dealers,
Inc. Age 67.
</TABLE>
<TABLE>
<S> <C>
FRED R. MILLSAPS Manager of personal investments (1978-present); Chairman
665 N.E. 37th Drive and Chief Executive Officer of Landmark Banking
Fort Lauderdale, Florida Corporation (1969-1978); Financial Vice President of
Trustee Florida Power and Light
(1965-1969); Vice President of The
Federal Reserve Bank of
Atlanta (1958-1965);
and a director of
various other business
and nonprofit organizations. Age 67.
CONSTANTINE DEAN TSERETOPOULOS Physician, Lyford Cay Hospital (July
Lyford Cay Hospital 1987-present); cardiology fellow, University of Maryland
P.O. Box N-7776 (July 1985-July 1987); internal medicine intern, Greater
Nassau, Bahamas Baltimore Medical Center (July 1982-July 1985). Age 42.
Trustee
J. MARK MOBIUS Managing director of Templeton Asset Management Ltd.;
Two Exchange Square portfolio manager for various Templeton advisory
Hong Kong affiliates; President of International Investment Trust
President Company Limited (investment manager of Taiwan R.O.C. Fund)
(1986-1987); and Director of Vickers da Costa, Hong Kong
(1983-1986). Age 49.
RUPERT H. JOHNSON, JR. Executive Vice President and Director of Franklin
777 Mariners Island Blvd. Resources, Inc.; President and Director of Franklin
San Mateo, California Advisers, Inc.; Executive Vice President and Director of
Vice President Franklin
Templeton Distributors,
Inc.; and officer
and/or director,
trustee or managing
general partner, as the
case may be, of most
other subsidiaries of
Franklin Resources,
Inc., and of 61 of the
investment companies in
the Franklin Templeton
Group. Age 55.
HARMON E. BURNS Executive Vice President, Secretary and Director of
777 Mariners Island Blvd. Franklin Resources, Inc.; Executive Vice President and
San Mateo, California Director of Franklin Templeton Distributors, Inc.;
Vice President Executive Vice President of Franklin Advisers, Inc.;
Director of Franklin Templeton Investor Services, Inc.;
officers and/or director, as the case may be of other
subsidiaries of Franklin Resources, Inc.; and officer
and/or director of 61 of the investment companies in the
Franklin Templeton Group of Funds. Age 51.
DEBORAH R. GATZEK Senior Vice President and General Counsel of Franklin
777 Mariners Island Blvd. Resources, Inc.; Senior Vice President of Franklin
San Mateo, California Templeton Distributors, Inc., and Franklin Advisers, Inc.
Vice President and officer of 61 of the investment
companies in the Franklin Templeton
Group of Funds. Age 47.
MARK G. HOLOWESKO President and Director of Templeton Global Advisors
Lyford Cay Limited; Chief Investment Officer of global equity
Nassau, Bahamas research for Templeton Worldwide, Inc.; president or vice
Vice President president of
other Templeton Funds;
formerly, investment
administrator with Roy
West Trust Corporation
(Bahamas) Limited
(1984-1985). Age 36.
MARTIN L. FLANAGAN Senior vice president, Treasurer and Chief Financial
777 Mariners Island Blvd. Officer of Franklin Resources, Inc.; Director and
San Mateo, California Executive Vice President of Templeton Investment Counsel,
Vice President Inc.; Director, Chief Executive Officer, and President of
Templeton Global Investors, Inc.; director or trustee and
president or vice president of various Templeton Funds;
accountant with Arthur Andersen & Company (1982-1983); and
a member of the International Society of Financial
Analysts and the American Institute of Certified public
Accountants. Age 35.
JOHN R. KAY Vice President of the Templeton Funds; Vice President and
500 East Broward Blvd. Treasurer of Templeton Global Investors, Inc. and
Fort Lauderdale, Florida Templeton Worldwide, Inc.; Assistant Vice President of
Vice President Franklin Templeton Distributors, Inc.; formerly, Vice
President and Controller of the Keystone Group, Inc. Age
55.
</TABLE>
<TABLE>
<S> <C>
THOMAS M. MISTELE Senior Vice President of Templeton Global Investors, Inc.;
700 Central Avenue Vice President of Franklin Templeton Distributors, Inc.;
St. Petersburg, Florida Secretary of the Templeton Funds; formerly, attorney,
Secretary Dechert Price & Rhoads
(1985-1988) and
Freehill, Hollingdale &
Page (1988); and
judicial clerk, U.S.
District Court (Eastern
District of Virginia)
(1984-1985). Age 42.
JAMES R. BAIO Certified Public Accountant; Treasurer of the Templeton
500 East Broward Blvd. Funds; Senior Vice President of Templeton Worldwide, Inc.,
Fort Lauderdale, Florida Templeton Global Investors, Inc., and Templeton Funds
Treasurer Trust Company;
formerly, senior tax
manager with Ernst &
Young (certified public
accountants)
(1977-1989). Age 41.
</TABLE>
- 20 -
- ---------------------
* 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 Global Advisors
Limited. are limited partners of Darby Emerging Markets Fund, L.P.
There are no family relationships between any of the Trustees, 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:
<TABLE>
<CAPTION>
Number of Total Compensation
Aggregate Franklin Templeton from All Funds in
Compensation Fund Boards on which Franklin Templeton
NAME OF TRUSTEE FROM THE FUND* TRUSTEE SERVES GROUP*
- --------------- -------------- ------------------ ------------------
<S> <C> <C> <C>
Harris J. Ashton $ 8,000 56 $327,925
Nicholas F. Brady 8,000 24 98,225
Frank J. Crothers 8,863 4 22,975
S. Joseph Fortunato 8,000 58 344,745
John Wm. Galbraith 6,000 23 70,100
Andrew H. Hines, Jr. 8,000 24 106,325
Betty P. Krahmer 6,000 24 93,475
Gordon S. Macklin 8,000 53 321,525
Fred R. Millsaps 8,711 24 104,325
Constantine Dean 8,863 4 22,975
Tseretopoulos
</TABLE>
- ---------------
* For the fiscal year ended December 31, 1995
PRINCIPAL SHAREHOLDERS
As of March 29, 1996, there were 191,077,127 Fund Shares outstanding,
of which 47,601 Shares (0.025%)were owned beneficially by the Trustees and
Officers of the Fund as a group. As of March 29, 1996, to the knowledge of
management, no person owned beneficially or of record 5% or more of the Fund's
outstanding Class I Shares, except that Merrill Lynch, Pierce, Fenner & Smith
Inc., P.O. Box 45286, Jacksonville, Florida 32232-5286, owned 14,785,202 Shares
(8% of the outstanding shares) and no person owned beneficially or of record 5%
or more of the Fund's outstanding Class II Shares, except that Merrill Lynch,
Pierce, Fenner & Smith Inc., Mutual Funds Operations, 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, owned 1,167,908 Shares (15% of the outstanding
shares).
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGEMENT AGREEMENT. The Investment Manager of the Fund is
Templeton Asset Management Ltd. -- Hong Kong Branch, a Singapore corporation
with offices at Two Exchange Square, Suite 908, Hong Kong. The Investment
Management Agreement, dated October 30, 1992, as amended and restated November
23, 1995 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 23, 1996, and will continue through April 30, 1997. The
Investment Management Agreement will continue from year to year thereafter,
subject to approval annually by the Board of Trustees or by vote of the holders
of a majority of the outstanding shares of the Fund (as defined in the 1940 Act)
and also, in either event, with the approval of a majority of those Trustees who
are not parties to the Investment Management Agreement or interested persons of
any such party in person at a meeting called for the purpose of voting on such
approval.
The Agreement requires the Investment Manager to manage the investment
and reinvestment of the Fund's assets. The Investment Manager is not required to
furnish any personnel, overhead items or facilities for the Fund, including
daily pricing or trading desk facilities, although such expenses are paid by
investment advisers of some other investment companies.
The Agreement provides that the Investment Manager will select brokers
and dealers for execution of the Fund's portfolio transactions consistent with
the Fund's brokerage policies (see "Brokerage Allocation"). Although the
services provided by broker-dealers in accordance with the brokerage policies
incidentally may help reduce the expenses of or otherwise benefit the Investment
Manager and other investment advisory clients of the Investment Manager and of
its affiliates, as well as the Fund, the value of such services is
indeterminable and the Investment Manager's fee is not reduced by any offset
arrangement by reason thereof.
The Investment Manager renders its services to the Fund from outside
the United States. When the Investment Manager determines to buy or sell the
same security for the Fund that the Investment Manager or certain of its
affiliates have selected for one or more of the Investment Manager's other
clients or for clients of its affiliates, the orders for all such securities
trades may be placed for execution by methods determined by the Investment
Manager, with approval by the Board of Trustees, to be impartial and fair, in
order to seek good results for all parties. See "Investment Objective and
Policies -- Trading Policies." Records of securities transactions of persons who
know when orders are placed by the Fund are available for inspection at least
four times annually by the compliance officer of the Fund so that the
non-interested Trustees (as defined in the 1940 Act) can be satisfied that the
procedures are generally fair and equitable to all parties.
The Investment Manager also provides management services to numerous
other investment companies or funds and accounts pursuant to management
agreements with each fund or account. The Investment Manager may give advice and
take action with respect to any of the other funds and accounts it manages, or
for its own account, which may differ from action taken by the Manager on behalf
of the Fund. Similarly, with respect to the Fund, the Investment Manager is not
obligated to recommend, purchase or sell, or to refrain from recommending,
purchasing or selling, any security that the Investment Manager and access
persons, as defined by the 1940 Act, may purchase or sell for its or their own
account or for the accounts of any other fund or account. Furthermore, the
Investment Manager is not obligated to refrain from investing in securities held
by the Fund or other funds or accounts which it manages or administers. Any
transactions for the accounts of the Investment Manager and other access persons
will be made in compliance with the Fund's Code of Ethics as described in the
section "Investment Objective and Policies -- Personal Securities Transactions."
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, 1995, 1994, and 1993, the Investment Manager received fees
from the Fund of $26,314,151, $23,325,167, and $6,765,008, 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 ASSET MANAGEMENT LTD.--HONG KONG BRANCH. 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) and Rupert H. Johnson,
Jr. (an officer of the Fund) are principal shareholders of Franklin and own,
respectively, approximately 20%, and 16% of its outstanding shares. Messrs.
Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
BUSINESS MANAGER. Templeton Global Investors, Inc. performs certain
administrative functions as Business Manager for the Fund, including:
o providing office space, telephone, office equipment and
supplies for the Fund;
o paying compensation of the Fund's officers for services
rendered as such;
o authorizing expenditures and approving bills for payment on
behalf of the Fund;
o supervising preparation of annual and semi-annual reports to
Shareholders, notices of dividends, capital gains
distributions and tax credits, and attending to correspondence
and other special communications with individual Shareholders;
o daily pricing of the Fund's investment portfolio and
supervising publication of daily quotations of the bid and
asked prices of the Fund's Shares, earnings reports and other
financial data;
o providing trading desk facilities for the Fund;
o monitoring relationships with organizations serving the
Fund, including custodians, transfer agents and printers;
o supervising compliance by the Fund with recordkeeping
requirements under the 1940 Act and regulations thereunder and
with state regulatory requirements, maintaining books and
records for the Fund (other than those maintained by the
Custodian and Transfer Agent), and preparing and filing tax
reports other than the Fund's income tax returns;
o monitoring the qualifications of tax-deferred retirement
plans providing for investment in Shares of the Fund; and
o providing executive, clerical and secretarial help needed to
carry out these responsibilities.
For its services, the Business Manager receives a monthly fee equal on
an annual basis to 0.15% of the first $200,000,000 of the Fund's average daily
net assets, reduced to 0.135% annually of the Fund's net assets in excess of
$200,000,000, further reduced to 0.1% annually of such net assets in excess of
$700,000,000, and further reduced to 0.075% annually of such net assets in
excess of $1,200,000,000. Each class of Shares pays a portion of the fee,
determined by the proportion of the Fund that it represents. During the fiscal
years ended December 31, 1995, 1994, and 1993, the Business Manager (and, prior
to April 1, 1993, Templeton Funds Management, Inc., the previous business
manager) received business management fees of $2,153,848, $1,974,513, and
$760,331, 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 $14.08
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 the Fund Information Department at
1-800/DIAL BEN.
BROKERAGE ALLOCATION
The Investment Management Agreement provides that the Investment
Manager is responsible for selecting members of securities exchanges, brokers
and dealers (such members, brokers and dealers being hereinafter referred to as
"brokers") for the execution of the Fund's portfolio transactions and, when
applicable, the negotiation of commissions in connection therewith. All
decisions and placements are made in accordance with the following principles:
1. Purchase and sale orders are usually placed with brokers who
are selected by the Investment Manager as able to achieve
"best execution" of such orders. "Best execution" means
prompt and reliable execution at the most favorable
securities price, taking into account the other provisions
hereinafter set forth. The determination of what may
constitute best execution and price in the execution of a
securities transaction by a broker involves a number of
considerations, including, without limitation, the overall
direct net economic result to the Fund (involving both price
paid or received and any commissions and other costs paid),
the efficiency with which the transaction is effected, the
ability to effect the transaction at all where a large block
is involved, availability of the broker to stand ready to
execute possibly difficult transactions in the future, and
the financial strength and stability of the broker. Such
considerations are judgmental and are weighed by the
Investment Manager in determining the overall reasonableness
of brokerage commissions.
2. In selecting brokers for portfolio transactions, the
Investment Manager takes into account its past experience as
to brokers qualified to achieve "best execution," including
brokers who specialize in any foreign securities held by the
Fund.
3. The Investment Manager is authorized to allocate brokerage
business to brokers who have provided brokerage and research
services, as such services are defined in Section 28(e) of the
Securities Exchange Act of 1934 (the "1934 Act"), for the
Fund and/or other accounts, if any, for which the Investment
Manager exercises investment discretion (as defined in Section
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, 1995, 1994, and 1993 amounted to $4,305,521,
$4,035,106, and $3,109,324, 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:
o For individuals whether or not covered by other qualified
plans;
o For simplified employee pensions;
o For employees of tax-exempt organizations; and
o For corporations, self-employed individuals and partnerships.
Capital gains and income received by the foregoing plans generally are
exempt from taxation until distribution from the plans. Investors considering
participation in any such plan should review specific tax laws relating thereto
and should consult their attorneys or tax advisers with respect to the
establishment and maintenance of any such plan. Additional information,
including the fees and charges with respect to all of these plans, is available
upon request to the Principal Underwriter. No distribution under a retirement
plan will be made until Franklin Templeton Trust Company ("FTTC") receives the
participant's election on IRS Form W-4P (available on request from FTTC) and
such other documentation as it deems necessary as to whether or not U.S.
income tax is to be withheld from such distribution.
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% on sales of $1 million but less than $2 million, plus 0.80% on
sales of $2 million but less than $3 million, plus 0.50% on sales of $3 million
but less than $50 million, plus 0.25% on sales of $50 million but less than $100
million, plus 0.15% on sales of $100 million or more; and (ii) purchases of most
fixed-income Franklin Templeton Funds made at net asset value by non-designated
retirement plans: 0.75% on sales of $1 million but less than $2 million, plus
0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales of $3
million but less than $50 million, plus 0.25% on sales of $50 million but less
than $100 million, plus 0.15% on sales of $100 million or more. These payment
breakpoints are reset every 12 months for purchases of additional purchases.
With respect to purchases made at net asset value by certain trust companies and
trust departments of banks and certain retirement plans of organizations with
collective retirement plan assets of $1 million or more, FTD, or one of its
affiliates, out of its own resources, may pay up to 1% of the amount invested.
Under agreements with certain banks in Taiwan, Republic of China, the
Fund's Shares are avaialbe to such banks' discretionary trut 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, inlcuding expenses related to local
literature fulfillment and communication facilities.
REDEMPTIONS IN KIND. Redemption proceeds are normally paid in cash;
however, the Fund may pay the redemption price in whole or in part by a
distribution in kind of securities from the portfolio of the Fund, in lieu of
cash, in conformity with applicable rules of the SEC. In such circumstances, the
securities distributed would be valued at the price used to compute the Fund's
net asset value. If Shares are redeemed in kind, the redeeming Shareholder might
incur brokerage costs inconverting the assets into cash. The Fund is obligated
to redeem Shares solely in cash up to the lesser of $250,000 or 1% of its net
assets during any 90-day period for any one Shareholder.
TAX STATUS
The Fund intends 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%
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. 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, 1995, FTD incurred, in
connection with the distribution of Shares, costs and expenses of $6,651,862 for
Class I Shares of the Fund and $372,513 for Class II Shares of the Fund. During
the same period, the Fund made reimbursements pursuant to the Class I Plan in
the amount of $7,316,486 and pursuant to the Class II Plan in the amount of
$125,940. In the event that the Plan is terminated, the Fund will not be liable
to FTD for any unreimbursed expenses that had been carried forward from previous
months or years. During the fiscal year ended December 31, 1995, FTD spent,
pursuant to the Plan, with respect to Class I Shares of the Fund, the following
amounts on: compensation to dealers, $4,843,345; sales promotion, $208,133;
printing, $291,320; advertising, $1,058,308; and wholesaler costs and expenses,
$250,756; with respect to Class II Shares of the Fund, the following amounts on:
compensation to dealers, $34,668; sales promotion, $322; printing, $1,308;
advertising, $4,342; wholesaler costs and expenses, $331,873.
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, 1995, 1994, and 1993 FTD
(and, prior to June 1, 1993, Templeton Funds Distributor, Inc.) retained of such
discount $2,087,056, $6,592,272, and $414,599, or approximately 13.3%, 16.1%,
and 15%, 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. With respect to the Class I Shares, the Fund's average annual total
return for the one-year period ended December 31, 1995 and for the period from
October 16, 1991 (commencement of operations) to December 31, 1995 was -5.42%
and 7.70%, respectively. With respect to the Class II Shares, the Fund's annual
total return for the period May 1, 1995 (commencement of sales) through December
31, 1995 was -2.27%.
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 and industry distribution of the Fund's
portfolio and the Fund's top ten holdings.
(5) The gross national product and populations, including age
characteristics, literacy rates, foreign investment
improvements due to a liberalization of securities laws and a
reduction of foreign exchange controls, and improving
communication technology, of various countries as published by
various statistical organizations.
(6) To assist investors in understanding the different returns and
risk characteristics of various investments, the Fund may show
historical returns of various investments and published
indices (E.G., Ibbotson Associates, Inc. Charts and Morgan
Stanley EAFE - Index).
(7) The major industries located in various jurisdictions as
published by the Morgan Stanley Index.
(8) Rankings by DALBAR Surveys, Inc. with respect to mutual fund
shareholder services.
(9) Allegorical stories illustrating the importance of persistent
long-term investing.
(10) The Fund's portfolio turnover rate and its ranking relative to
industry standards as published by Lipper Analytical
Services, Inc. or Morningstar, Inc.
(11) A description of the Templeton organization's investment
management philosophy and approach, including its worldwide
search for undervalued or "bargain" securities and its
diversification by industry, nation and type of stocks or
other securities.
(12) The number of Shareholders in the Fund or the aggregate number
of shareholders in the Franklin Templeton Group of Funds or
the dollar amount of fund and private account assets under
management.
(13) Comparison of the characteristics of various emerging
markets, including population, financial and economic
conditions.
(14) Quotations from the Templeton organization's founder, Sir John
Templeton,/*/ advocating the virtues of diversification and
long-term investing, including the following:
o "Never follow the crowd. Superior performance is
possible only if you invest differently from the
crowd."
o "Diversify by company, by industry and by country."
o "Always maintain a long-term perspective."
o "Invest for maximum total real return."
o "Invest - don't trade or speculate."
o "Remain flexible and open-minded about types of
investment."
o "Buy low."
o "When buying stocks, search for bargains among
quality stocks."
o "Buy value, not market trends or the economic
outlook."
o "Diversify, in stocks and bonds, as in much else,
there is safety in numbers."
o "Do your homework or hire wise experts to help you."
o "Aggressively monitor your investments."
o "Don't panic."
o "Learn from your mistakes."
o "Outperforming the market is a difficult task."
o "An investor who has all the answers doesn't even
understand all the questions."
o "There's no free lunch."
o "And now the last principle: Do not be fearful or
negative too often."
FINANCIAL STATEMENTS
The financial statements contained in the Fund's Annual Report to
Shareholders dated December 31, 1995 are incorporated herein by reference.
TL711 STMT 05/96
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/1/ 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/ 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.
/*/ 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.
