Registration No.33-42163
As filed with the Securities and Exchange Commission on December 31, 1996
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 7 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 9 X
(Check appropriate box or boxes)
TEMPLETON DEVELOPING MARKETS TRUST
(Exact Name of Registrant as Specified in Charter)
700 CENTRAL AVENUE, P.O. BOX 33030, ST. PETERSBURG, FLORIDA 33733-8030
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (813) 823-8712
Ellen F. Stoutamire
700 Central Avenue
P.O. Box 33030
ST. PETERSBURG, FLORIDA 33733-8030
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b) of Rule 485
X on JANUARY 1, 1997 pursuant to paragraph (b) of Rule 485
60 days after filing pursuant to paragraph (a)(1) of Rule 485
on pursuant to paragraph (a)(1) of Rule 485
75 days after filing pursuant to paragraph (a)(2) of Rule 485
on pursuant to paragraph (a)(2) of Rule 485
this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
- ---------------------------------------------------------------------------
The Registrant has registered an indefinite number of shares of beneficial
interest under the Securities Act of 1933 pursuant to Rule 24f-2 under the
Investment Company Act of 1940, and filed its Rule 24f-2 Notice for the fiscal
year ended December 31, 1995 on February 29, 1996.
PAGE
TEMPLETON DEVELOPING MARKETS TRUST
CROSS-REFERENCE SHEET
FORM N-1A
PART A
<TABLE>
<CAPTION>
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
<S> <C> <C>
1 Cover page Cover Page
2 Synopsis Expense Summary
3 Condensed Financial "Financial Highlights";
Information "How Does the Fund
Measure Performance?"
4 General Description "How Is the Trust Organized?";
of Registrant "How Does the Fund Invest Its Assets?";
"What Are the Fund's Potential Risks?"
5 Management of the Fund "Who Manages the Fund?"
5A Management's Discussion Contained in Registrant's Annual
of Fund Performance Report to Shareholders
6 Capital Stock and Other "How is the Fund Organized?"; "Services
Securities to Help You Manage Your Account"; "What
Distributions Might I Received From the Fund?";
"How Taxation Affects You and the
Fund?"
7 Purchase of Securities "How Do I Buy Shares?"; "May I Exchange
Being Offered Shares for Shares of Another Fund?";
"Transaction Procedures and Special
Requirements"; "Services to Help You Manage
Your Account"; "Who Manages the Fund?" "Useful
Terms and Definitions"
8 Redemption or Repurchase "May I Exchange Shares for Shares of Another
Fund?"; "How Do I Sell Shares?"; "Transaction
Procedures and Special Requirements"? "Services
to Help You Manage Your Account"
9 Pending Legal Procedures Not Applicable
</TABLE>
PAGE
TEMPLETON DEVELOPING MARKETS TRUST
CROSS-REFERENCE SHEET
FORM N-1A
PART B
<TABLE>
<CAPTION>
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
<S> <C> <C>
10 Cover Page Cover Page
11 Table of Contents Table of Contents
12 General Information and Not Applicable
History
13 Investment Objectives and "How Does the Fund Invest Its Assets?";
Policies "Investment Restrictions"; "What Are the
Fund's Potential Risks?"
14 Management of the "Officers and Trustees"; "Investment
Registrant Advisory and Other Services"
15 Control Persons and "Officers and Trustees"; "Investment
Principal Holders of Advisory and Other Services"; "Miscellaneous
Securities Information?"
16 Investment Advisory and "Investment Advisory and Other Services";
Other Services "The Fund's Underwriter"
17 Brokerage Allocation and "How Does the Fund Buy Securities
Other Practices For Its Portfolio?"
18 Capital Stock and Other "Miscellaneous Information"; "See Prospectus
Securities "How Is The Trust Organized?"
19 Purchase, Redemption and "How Do I Buy, Sell and Exchange Shares?";
Pricing of Securities "How Are Fund Shares Valued?";
Being Offered "Financial Statements"
20 Tax Status "Additional Information on Distributions
and Taxes"
21 Underwriters "The Fund's Underwriter"
22 Calculation of Performance "How Does the Fund Measure Performance?"
Data
23 Financial Statements Financial Statements
</TABLE>
PAGE
PART A
PROSPECTUS
PAGE
PROSPECTUS
& APPLICATION
LOGO
TEMPLETON
DEVELOPING MARKETS
TRUST
--------------------------------------------------
JANUARY 1, 1997
INVESTMENT STRATEGY
GLOBAL GROWTH
LOGO
- --------------------------------------------------------------------------------
This prospectus describes the Advisor Class shares of Templeton
Developing Markets Trust (the "Fund"). It contains information you should
know before investing in the Fund. Please keep it for future reference.
THE FUND SEEKS LONG-TERM CAPITAL APPRECIATION BY INVESTING IN SECURITIES
OF ISSUERS OF COUNTRIES HAVING DEVELOPING MARKETS. INVESTMENT IN SUCH
SECURITIES INVOLVES CERTAIN CONSIDERATIONS WHICH ARE NOT NORMALLY
INVOLVED IN INVESTMENT IN SECURITIES OF U.S. COMPANIES, AND AN
INVESTMENT IN THE FUND MAY BE CONSIDERED SPECULATIVE. THE FUND MAY
BORROW MONEY FOR INVESTMENT PURPOSES, WHICH MAY INVOLVE GREATER RISK AND
ADDITIONAL COSTS TO THE FUND. IN ADDITION, THE FUND MAY INVEST UP TO 10%
OF ITS ASSETS IN RESTRICTED SECURITIES, WHICH MAY INVOLVE GREATER RISK
AND INCREASED FUND EXPENSES. SEE "WHAT ARE THE FUND'S POTENTIAL RISKS?"
The Fund's SAI for the Advisor Class, dated January 1, 1997, as may be
amended from time to time, includes more information about the Fund's
procedures and policies. It has been filed with the SEC and is
incorporated by reference into this prospectus. For a free copy or a
larger print version of this prospectus, call 1-800/DIAL BEN or write
the Fund at the address shown.
Advisor Class shares are only available for purchase by certain persons,
including, among others, certain broker-dealers and qualified registered
investment advisors; participants in Franklin Templeton's 401(k) and
Franklin Templeton's Profit Sharing Plans; Franklin Templeton Fund
Allocator Series; and directors, trustees, officers and full time
employees (and their family members) of Franklin Templeton Group and the
Franklin Templeton Group of Funds. See "About Your Account."
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY OF THE U.S. GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
PAGE
TEMPLETON DEVELOPING
MARKETS TRUST
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This prospectus is not an offering of the securities herein
described in any state in which the offering is not authorized.
No sales representative, dealer, or other person is
authorized to give any information or make any representations
other than those contained in this prospectus. Further
information may be obtained from Distributors.
----------------------------------------------------------
When reading this prospectus, you will see
certain terms beginning with capital letters.
This means the term is explained
in our glossary section.
PAGE
<TABLE>
<S> <C> <C>
TEMPLETON TABLE OF CONTENTS
DEVELOPING ABOUT THE FUND
MARKETS TRUST Expense Summary ...................... 2
- ----------------------- How Does the Fund Invest Its
January 1, 1997 Assets? .............................. 3
What Are the Fund's Potential
Risks? ............................... 9
Who Manages the
Fund? ............................... 13
How Does the Fund Measure
Performance? ........................ 15
How Is the Fund
Organized? .......................... 15
How Taxation Affects You and the
Fund ................................ 16
ABOUT YOUR ACCOUNT
How Do I Buy
Shares? ............................. 18
May I Exchange Shares for Shares of
Another Fund? ....................... 19
How Do I Sell
Shares? ............................. 21
What Distributions Might I Receive
From the Fund? ...................... 23
Transaction Procedures and Special
Requirements ........................ 24
Services to Help You Manage Your
700 Central Avenue Account ............................ 28
St. Petersburg, Florida GLOSSARY
33701 Useful Terms and
1-800/DIAL BEN Definitions ........................ 32
</TABLE>
PAGE
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Advisor Class shares of the Fund. Because the Advisor Class shares were not
offered to the public prior to January 1, 1997, the table is based on the
historical expenses of the Class I shares of the Fund for the fiscal year ended
December 31, 1995.* Your actual expenses may vary.
<TABLE>
<CAPTION>
ADVISOR
CLASS
<S> <C> <C> <C>
A. SHAREHOLDER TRANSACTION EXPENSES**
MAXIMUM SALES CHARGE IMPOSED ON PURCHASES NONE
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 1.25%
Rule 12b-1 Fees NONE
Other Expenses (audit, legal, business
management,
transfer agent and custodian) 0.50%
----------
Total Fund Operating Expenses 1.75%
----------
C. EXAMPLE
</TABLE>
Assume the annual return for the Advisor Class shares is 5% and its
operating expenses are as described above. For each $1,000 investment, you
would pay the following projected expenses if you sold your shares after the
number of years shown.
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
------------------------------------------------------
<S> <C> <C> <C>
$18 $55 $95 $206
</TABLE>
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The Fund pays its operating expenses. The effects of these expenses are
reflected in its Net Asset Value or dividends and are not directly charged
to your account.
*Unlike Advisor Class shares, the Class I shares of the Fund have a front-end
sales charge and Rule 12b-1 fees.
**If your transaction is processed through your Securities Dealer you may be
charged a fee by your Securities Dealer for this service.
- Templeton Developing Markets Trust
2
PAGE
HOW DOES THE FUND INVEST ITS ASSETS?
The Fund's Investment Objective
The Fund's investment objective is long-term capital appreciation, which it
seeks to achieve by investing primarily in equity securities of issuers in
countries having developing markets. The objective is a fundamental policy of
the Fund and may not be changed without shareholder approval. Of course, there
is no assurance that the Fund's objective will be achieved.
It is currently expected that under normal conditions at least 65% of the Fund's
total assets will be invested in developing market equity securities. The Fund
and TAML may, from time to time, use various methods of selecting securities for
the Fund's portfolio, and may also employ and rely on independent or affiliated
sources of information and ideas in connection with management of the Fund's
portfolio. TAML generally will provide three portfolio managers for the Fund,
and such portfolio management assignments may, from time to time, be changed or
improved.
The Fund considers countries having developing markets to be all countries that
are generally considered to be developing or emerging countries by the
International Bank for Reconstruction and Development (more commonly referred
to as the World Bank) or the International Finance Corporation, as well as
countries that are classified by the United Nations or otherwise regarded by
their authorities as developing. Currently, the countries not in this category
include Ireland, Spain, New Zealand, Australia, the United Kingdom, Italy, the
Netherlands, Belgium, Austria, France, Canada, Germany, Denmark, the U.S.,
Sweden, Finland, Norway, Japan, Iceland, Luxembourg and Switzerland. In
addition, as used in this prospectus, developing market equity securities means
(i) equity securities of companies the principal securities trading market for
which is a developing market country, as defined above, (ii) equity securities,
traded in any market, of companies that derive 50% or more of their total
revenue from either goods or services produced in developing market countries
or sales made in developing market countries or (iii) equity securities of
companies organized under the laws of, and with a principal office in, a
developing market country. "Equity securities," as used in this prospectus,
refers to common stock, preferred stock, warrants or rights to subscribe to or
purchase such securities and sponsored or unsponsored American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs"), and Global Depositary
Receipts ("GDRs") (collectively, "depositary receipts"). Determinations as to
eligibility will be made by TAML based on publicly available information and
inquiries made to the companies. (See "What Are the Fund's Potential Risks?"
for a discussion of the nature of information publicly available for non-U.S.
Templeton Developing Markets Trust -
3
PAGE
companies.) The Fund will at all times, except during defensive periods,
maintain investments in at least three countries having developing markets.
The Fund seeks to benefit from economic and other developments in developing
markets. The investment objective of the Fund reflects the belief that
investment opportunities may result from an evolving long-term international
trend favoring more market-oriented economies, a trend that may especially
benefit certain countries having developing markets. This trend may be
facilitated by local or international political, economic or financial
developments that could benefit the capital markets of such countries. Certain
such countries, which may be in the process of developing more market-oriented
economies, may experience relatively high rates of economic growth. Other
countries, although having relatively mature developing markets, may also be in
a position to benefit from local or international developments encouraging
greater market orientation and diminishing governmental intervention in
economic affairs.
For capital appreciation, the Fund may invest up to 35% of its total assets in
debt securities (defined as bonds, notes, debentures, commercial paper,
certificates of deposit, time deposits and bankers' acceptances and which may
include structured investments) which are rated at least C by Moody's or C by
S&P or unrated debt securities deemed to be of comparable quality by TAML. See
"What Are the Fund's Potential Risks?" As an operating policy, which may be
changed by the Board, the Fund will not invest more than 5% of its total assets
in debt securities rated lower than Baa by Moody's or BBB by S&P. Certain debt
securities can provide the potential for capital appreciation based on various
factors such as changes in interest rates, economic and market conditions,
improvement in an issuer's ability to repay principal and pay interest, and
ratings upgrades. Additionally, convertible bonds offer the potential for
capital appreciation through the conversion feature, which enables the holder
of the bond to benefit from increases in the market price of the securities
into which they are convertible.
The Fund may also lend its portfolio securities and borrow money for investment
purposes (i.e., "leverage" its portfolio). In addition, the Fund may enter into
transactions in options on securities, securities indices and foreign
currencies, forward foreign currency exchange contracts, and futures contracts
and related options. When deemed appropriate by TAML, the Fund may invest cash
balances in repurchase agreements and other money market investments to
maintain liquidity in an amount to meet expenses or for day-to-day operating
purposes. These investment techniques are described below and under the heading
"How Does the Fund Invest Its Assets?" in the SAI.
- Templeton Developing Markets Trust
4
PAGE
When TAML believes that market conditions warrant, the Fund may adopt a
temporary defensive position and may invest without limit in money market
securities denominated in U.S. dollars or in the currency of any foreign
country. See "Types of Securities in which the Fund May Invest - Temporary
Investments."
The Fund does not emphasize short-term trading profits and usually expects to
have an annual portfolio turnover rate not exceeding 50%.
Types of Securities in which the Fund May Invest
The Fund is authorized to use the various securities and investment techniques
described below. Although these strategies are regularly used by some investment
companies and other institutional investors in various markets, some of these
strategies cannot at the present time be used to a significant extent by the
Fund in some of the markets in which the Fund will invest and may not be
available for extensive use in the future.
Temporary Investments. For temporary defensive purposes, the Fund may invest up
to 100% of its total assets in the following money market securities,
denominated in U.S. dollars or in the currency of any foreign country, issued by
entities organized in the U.S. or any foreign country: short-term (less than
twelve months to maturity) and medium-term (not greater than five years to
maturity) obligations issued or guaranteed by the U.S. government or the
governments of foreign countries, their agencies or instrumentalities; finance
company and corporate commercial paper, and other short-term corporate
obligations, in each case rated Prime-1 by Moody's or A or better by S&P or, if
unrated, of comparable quality as determined by TAML; obligations (including
certificates of deposit, time deposits and bankers' acceptances) of banks; and
repurchase agreements with banks and broker-dealers with respect to such
securities.
Borrowing. The Fund may borrow up to one-third of the value of its total assets
from banks to increase its holdings of portfolio securities. Under the 1940 Act,
the Fund is required to maintain continuous asset coverage of 300% with respect
to such borrowings and to sell (within three days) sufficient portfolio holdings
to restore such coverage if it should decline to less than 300% due to market
fluctuations or otherwise, even if such liquidations of the Fund's holdings may
be disadvantageous from an investment standpoint. Leveraging by means of
borrowing may exaggerate the effect of any increase or decrease in the value of
portfolio securities on the Fund's Net Asset Value, and money borrowed will be
subject to interest and other costs (which may include commitment fees and/or
the cost of maintaining minimum average balances), which may or may not
Templeton Developing Markets Trust -
5
PAGE
exceed the income or gains received from the securities purchased with borrowed
funds.
Loans of Portfolio Securities. The Fund may lend to broker-dealers portfolio
securities with an aggregate market value of up to one-third of its total
assets to generate income. Such loans must be secured by collateral (consisting
of any combination of cash, U.S. government securities or irrevocable letters
of credit) in an amount at least equal (on a daily marked-to-market basis) to
the current market value of the securities loaned. The Fund may terminate the
loans at any time and obtain the return of the securities loaned within five
business days. The Fund will continue to receive any interest or dividends paid
on the loaned securities and will continue to retain any voting rights with
respect to the securities. In the event that the borrower defaults on its
obligation to return borrowed securities, because of insolvency or otherwise,
the Fund could experience delays and costs in gaining access to the collateral
and could suffer a loss to the extent that the value of the collateral falls
below the market value of the borrowed securities.
Options on Securities or Indices. The Fund may write (i.e., sell) covered put
and call options and purchase put and call options on securities or securities
indices that are traded on U.S. and foreign exchanges or in the over-the-counter
markets. An option on a security is a contract that permits 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 permits 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 to
generate income, and will do so only if the option is "covered." This means
that so long as the Fund is obligated as the writer of a call option, it will
own the underlying securities subject to the call, or hold a call at the same
or lower exercise price, for the same exercise period, and on the same
securities as the written call. A put is covered if the Fund maintains liquid
assets with a value at least equal to the exercise price in a segregated
account, or holds a put on the same underlying securities at an equal or
greater exercise price. The value of the underlying securities on which options
may be written at any one time will not exceed 15% of the total assets of the
Fund. The Fund will not purchase put or call options if the aggregate premium
paid for such options would exceed 5% of its total assets at the time of
purchase.
- Templeton Developing Markets Trust
6
PAGE
Forward Foreign Currency Exchange Contracts and Options on Foreign Currencies.
The Fund will normally conduct its foreign currency exchange transactions either
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into forward contracts to purchase or sell
foreign currencies. The Fund will generally not enter into a forward contract
with a term of greater than one year. 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 will generally enter into forward contracts only under two
circumstances. First, when the Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security in relation to another currency by
entering into a forward contract to buy the amount of foreign currency needed
to settle the transaction. Second, when TAML believes that the currency of a
particular foreign country may suffer or enjoy a substantial movement against
another currency, it may enter into a forward contract to sell or buy the
former foreign currency (or another currency which acts as a proxy for that
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." The Fund will not enter
into forward contracts if, as a result, the Fund will have more than 20% of its
total assets committed to the consummation of such contracts. Although forward
contracts will be used primarily to protect the Fund from adverse currency
movements, they also involve the risk that anticipated currency movements will
not be accurately predicted.
The Fund may purchase put and call options and write covered put and call
options on foreign currencies for the purpose of protecting against declines in
the U.S. dollar value of foreign currency-denominated portfolio securities and
against increases in the U.S. dollar cost of such securities to be acquired. As
in the case of other kinds of options, however, the writing of an option on a
foreign currency constitutes 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 a foreign currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate movements
adverse to the Fund's position, it may forfeit the entire amount of the premium
plus related transaction costs. Options on foreign currencies to be written or
Templeton Developing Markets Trust -
7
PAGE
purchased by the Fund are traded on U.S. and foreign exchanges or over-the-
counter.
Closed-End Investment Companies. Some countries, such as South Korea, Chile and
India, have authorized the formation of closed-end investment companies to
facilitate indirect foreign investment in their capital markets. In accordance
with the 1940 Act, the Fund may invest up to 10% of its total assets in
securities of closed-end investment companies. This restriction on investments
in securities of closed-end investment companies may limit opportunities for
the Fund to invest indirectly in certain developing markets. Shares of certain
closed-end investment companies may at times be acquired only at market prices
representing premiums to their Net Asset Values. If the Fund acquires shares of
closed-end investment companies, shareholders would bear both their
proportionate share of expenses of the Fund (including management and advisory
fees) and, indirectly, the expenses of such closed-end investment companies.
Futures Contracts. For hedging purposes only, the Fund may buy and sell
financial futures contracts, stock index futures contracts, foreign currency
futures contracts and options on any of the foregoing. A financial futures
contract is an agreement between two parties to buy or sell a specified debt
security at a set price on a future date. An index futures contract is an
agreement to take or make delivery of an amount of cash based on the difference
between the value of the index at the beginning and at the end of the contract
period. A futures contract on a foreign currency is an agreement to buy or sell
a specified amount of a currency for a set price on a future date.
When the Fund enters into a futures contract, it must make an initial deposit,
known as "initial margin," as a partial guarantee of its performance under the
contract. As the value of the security, index or currency fluctuates, either
party to the contract is required to make additional margin payments, known as
"variation margin," to cover any additional obligation it may have under the
contract. In addition, when the Fund enters into a futures contract, it will
segregate assets or "cover" its position in accordance with the 1940 Act. See
"How Does the Fund Invest Its Assets? - Futures Contracts" in the SAI. The Fund
may not commit more than 5% of its total assets to initial margin deposits on
futures contracts and related options. The value of the underlying securities
on which futures contracts will be written at any one time will not exceed 25%
of the total assets of the Fund.
Repurchase Agreements. For temporary defensive purposes and for cash management
purposes, the Fund may enter into repurchase agreements with U.S. banks and
broker-dealers. Under a repurchase agreement the Fund acquires a security from
a U.S. bank or a registered broker-dealer who simultaneously agrees to
- Templeton Developing Markets Trust
8
PAGE
repurchase the security at a specified time and price. The repurchase price is
in excess of the purchase price by an amount which reflects an agreed-upon rate
of return, which is not tied to the coupon rate on the underlying security.
Under the 1940 Act, repurchase agreements are considered to be loans
collateralized by the underlying security and therefore will be fully
collateralized. However, if the seller should default on its obligation to
repurchase the underlying security, the Fund may experience delay or difficulty
in exercising its rights to realize upon the security and might incur a loss if
the value of the security declines, as well as incur disposition costs in
liquidating the security.
Depositary Receipts. ADRs are depositary receipts typically issued by a U.S.
bank or trust company which evidence ownership of underlying securities issued
by a foreign corporation. EDRs and GDRs are typically issued by foreign banks or
trust companies, although they also may be issued by U.S. banks or trust
companies, and evidence ownership of underlying securities issued by either a
foreign or a U.S. corporation. Generally, depositary receipts in registered form
are designed for use in the U.S. securities market and depositary receipts in
bearer form are designed for use in securities markets outside the U.S.
Depositary receipts may not necessarily be denominated in the same currency as
the underlying securities into which they may be converted. Depositary receipts
may be issued pursuant to sponsored or unsponsored programs. In sponsored
programs, an issuer has made arrangements to have its securities traded in the
form of depositary receipts. In unsponsored programs, the issuer may not be
directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs and there may not be a correlation
between such information and the market value of the depositary receipts.
Depositary receipts also involve the risks of other investments in foreign
securities, as discussed below. For purposes of the Fund's investment policies,
the Fund's investments in depositary receipts will be deemed to be investments
in the underlying securities.
WHAT ARE THE FUND'S POTENTIAL RISKS?
You should understand that all investments involve risk and there can be no
guarantee against loss resulting from an investment in the Fund, nor can there
be any assurance that the Fund's investment objective will be attained. As with
any investment in securities, the value of, and income from, an investment in
the Fund can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the Fund's portfolio
Templeton Developing Markets Trust -
9
PAGE
securities, including general economic conditions and market factors. In
addition to the factors which affect the value of individual securities, you
may anticipate that the value of the shares of the Fund will fluctuate with
movements in the broader equity and bond markets. A decline in the stock market
of any country in which the Fund is invested may also be reflected in declines
in the price of the shares of the Fund. Changes in currency valuations will
also affect the price of the shares of the Fund. History reflects both
decreases and increases in stock markets and currency valuations, and these may
occur unpredictably in the future. The value of debt securities held by the
Fund generally will vary inversely with changes in prevailing interest rates.
Additionally, investment decisions made by TAML will not always be profitable
or prove to have been correct. The Fund is not intended as a complete
investment program.
The Fund has the right to purchase securities in any foreign country, developed
or developing. You should consider carefully the substantial risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments. These
risks are often heightened for investments in developing markets, including
certain Eastern European countries. See "What Are the Fund's Potential Risks?"
in the SAI. There is the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations, foreign exchange controls (which
may include suspension of the ability to transfer currency from a given
country), foreign investment controls on daily stock market movements, default
in foreign government securities, political or social instability, or
diplomatic developments which could affect investment in securities of issuers
in foreign nations. In addition, in many countries there is less publicly
available information about issuers than is available in reports about
companies in the U.S. 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 U.S. companies.
The Fund may encounter difficulties or be unable to vote proxies, exercise
shareholder rights, pursue legal remedies, and obtain judgments in foreign
courts. Also, some countries may withhold portions of income and dividends at
the source. These considerations generally are more of a concern in developing
countries, where the possibility of political instability (including
revolution) and dependence on foreign economic assistance may be greater than
in developed countries. Investments in companies domiciled in developing
countries therefore may be subject to potentially higher risks than investments
in developed countries.
- Templeton Developing Markets Trust
10
PAGE
Brokerage commissions, custodial services, and other costs relating to
investment in developing markets are generally more expensive than in the U.S.
Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is
earned thereon. The inability of the Fund to make intended security purchases
due to settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Fund due to subsequent declines
in value of the portfolio security or, if the Fund has entered into a contract
to sell the security, could result in possible liability to the purchaser.
Prior governmental approval of non-domestic investments may be required under
certain circumstances in some developing countries, and the extent of foreign
investment in domestic companies may be subject to limitation in other
developing countries. Foreign ownership limitations also may be imposed by the
charters of individual companies in developing countries to prevent, among
other concerns, violation of foreign investment limitations. Repatriation of
investment income, capital and proceeds of sales by foreign investors may
require governmental registration and/or approval in some developing countries.
The Fund could be adversely affected by delays in or a refusal to grant any
required governmental registration or approval for such repatriation.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
In many developing markets, there is less government supervision and regulation
of business and industry practices, stock exchanges, brokers and listed
companies than in the U.S. There is an increased risk, therefore, of uninsured
loss due to lost, stolen, or counterfeit stock certificates. In addition, the
foreign securities markets of many of the countries in which the Fund may
invest may also be smaller, less liquid, and subject to greater price
volatility than those in the U.S. The Fund may invest in Eastern European
countries, which involves special risks that are described under "What Are the
Fund's Potential Risks?" in the SAI.
Templeton Developing Markets Trust -
11
PAGE
As a non-fundamental policy, the Fund will limit its investments in Russian
securities to 5% of its total assets. Russian securities involve additional
significant risks, including political and social uncertainty (for example,
regional conflicts and risk of war), currency exchange rate volatility,
pervasiveness of corruption and crime in the Russian economic system, delays in
settling portfolio transactions and risk of loss arising out of Russia's system
of share registration and custody. For more information on these risks and
other risks associated with Russian securities, please see "What Are the Fund's
Potential Risks?" in the SAI.
The Fund usually effects currency exchange transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign exchange market. However, some
price spread on currency exchange transactions (to cover service charges) will
be incurred when the Fund converts assets from one currency to another.
The Fund is authorized to invest in medium quality or high-risk, lower quality
debt securities that are rated between BBB and as low as C by S&P, and between
Baa and as low as C by Moody's or, if unrated, are of equivalent investment
quality as determined by TAML. As an operating policy, which may be changed by
the Board without shareholder approval, the Fund will not invest more than 5%
of its total assets in debt securities rated lower than BBB by S&P or Baa by
Moody's. The Board may consider a change in this operating policy if, in its
judgment, economic conditions change such that a higher level of investment in
high-risk, lower quality debt securities would be consistent with the interests
of the Fund and its shareholders. See "How Does the Fund Invest Its
Assets? - Debt Securities" in the SAI for descriptions of debt securities rated
BBB by S&P and Baa by Moody's. High-risk, lower quality debt securities,
commonly known as junk bonds, are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and may be in default.
Unrated debt securities are not necessarily of lower quality than rated
securities but they may not be attractive to as many buyers. Regardless of
rating levels, all debt securities considered for purchase (whether rated or
unrated) will be carefully analyzed by TAML to insure, to the extent possible,
that the planned investment is sound. The Fund may, from time to time, purchase
defaulted debt securities if, in the opinion of TAML, the issuer may resume
interest payments in the near future. As a fundamental policy, the Fund will
not invest more than 10% of its total assets (at the time of purchase) in
defaulted debt securities, which may be illiquid.
Leveraging by means of borrowing may exaggerate the effect of any increase or
decrease in the value of portfolio securities on the Fund's Net Asset Value, and
money borrowed will be subject to interest and other costs (which may include
- Templeton Developing Markets Trust
12
PAGE
commitment fees and/or the cost of maintaining minimum average balances) which
may or may not exceed the income or gains received from the securities
purchased with borrowed funds.
Successful use of futures contracts and related options is subject to special
risk considerations. A liquid secondary market for any futures or options
contract may not be available when a futures or options position is sought to
be closed. In addition, there may be an imperfect correlation between movements
in the securities or foreign currency on which the futures or options contract
is based and movements in the securities or currency in the Fund's portfolio.
Successful use of futures or options contracts is further dependent on TAML's
ability to correctly predict movements in the securities or foreign currency
markets and no assurance can be given that its judgment will be correct.
Successful use of options on securities or securities indices is subject to
similar risk considerations. In addition, by writing covered call options, the
Fund gives up the opportunity, while the option is in effect, to profit from
any price increase in the underlying security above the option exercise price.
There are further risk factors, including possible losses through the holding of
securities in domestic and foreign custodian banks and depositories, described
elsewhere in the prospectus and in the SAI.
WHO MANAGES THE FUND?
The Board. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure that no material conflicts exist among
the classes of shares. While none is expected, the Board will act appropriately
to resolve any material conflict that may arise.
Investment Manager. TAML manages the Fund's assets and makes the Fund's
investment decisions. TAML also performs similar services for other funds. It is
wholly owned by Resources, a publicly owned company engaged in the financial
services industry through its subsidiaries. Charles B. Johnson and Rupert H.
Johnson, Jr. are the principal shareholders of Resources. Together, TAML and its
affiliates manage over $172 billion in assets. The Templeton organization has
been investing globally since 1940. TAML and its affiliates have offices in
Argentina, Australia, Bahamas, Canada, France, Germany, Hong Kong, India,
Italy, Luxembourg, Poland, Russia, Scotland, Singapore, South Africa, U.S., and
Vietnam. Please see "Investment Management and Other Services" and
"Miscellaneous Information" in the SAI for information on securities
transactions and a summary of the Fund's Code of Ethics.
Templeton Developing Markets Trust -
13
PAGE
Portfolio Management. The lead portfolio manager for the Fund since its
inception is Dr. J. Mark Mobius. Dr. Mobius is managing director of TAML. He
holds a BA in fine arts from Boston University, an MA in mass communications
from Boston University, and a PhD in economics from the Massachusetts Institute
of Technology. Prior to joining the Templeton organization in 1987, Dr. Mobius
was president of the International Investment Trust Company Limited (investment
manager of Taiwan, R.O.C. Fund) (1986-1987) and a director of Vickers da Costa,
Hong Kong (an international securities firm) (1983-1986). Dr. Mobius began
working in Vickers da Costa's Hong Kong office in 1980 and moved to Taiwan in
1983 to open the firm's office there and to direct operations in India,
Indonesia, Thailand, the Philippines, and Korea. Before joining Vickers da
Costa, Dr. Mobius operated his own consulting firm in Hong Kong from 1970 until
1980.
Allan Lam and Tom Wu exercise secondary portfolio management responsibilities
for the Fund. Mr. Lam holds a BA in accounting from Rutgers University. Prior
to joining the Templeton organization in 1987, he worked as an auditor with two
international accounting firms in Hong Kong: Deloitte Haskins & Sells CPA and
KPMG Peat Marwick CPA. Mr. Wu is a director of TAML. He holds a BS in economics
from the University of Hong Kong and an MBA in finance from the University of
Oregon. Prior to joining the Templeton organization in 1987, Mr. Wu worked as
an investment analyst, specializing in Hong Kong companies, with Vickers da
Costa. Further information concerning TAML is included under the heading
"Investment Management and Other Services" in the SAI.
Management Fees. For the fiscal year ended December 31, 1995, the Fund paid
1.25% of its average daily net assets in management fees.
Portfolio Transactions. TAML tries to obtain the best execution on all
transactions. If TAML believes more than one broker or dealer can provide the
best execution, consistent with internal policies it may consider research and
related services and the sale of Fund shares, as well as shares of other funds
in the Franklin Templeton Group of Funds, when selecting a broker or dealer.
Please see "How Does the Fund Buy Securities for Its Portfolio?" in the SAI for
more information.
Administrative Services. FT Services (and, prior to October 1, 1996, Templeton
Global Investors, Inc.) provides certain administrative services and facilities
for the Fund. For the fiscal year ended December 31, 1995, administrative fees
were 0.15% of the Fund's average daily net assets. Please see "Investment
Management and Other Services" in the SAI for more information.
- Templeton Developing Markets Trust
14
PAGE
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, each class of the Fund advertises its performance. The more
commonly used measures of performance are total return, current yield and
current distribution rate. Performance figures are usually calculated using the
maximum sales charge, if applicable. Certain performance figures may not
include any sales charge or 12b-1 fees.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How Does the Fund Measure Performance?" in the SAI.
HOW IS THE FUND ORGANIZED?
The Fund is a diversified, open-end management investment company, commonly
called a mutual fund. It was organized as a Massachusetts business trust on
August 9, 1991, and is registered with the SEC under the 1940 Act.
The Fund offers three classes of shares: Templeton Developing Markets Trust -
Class I, Templeton Developing Markets Trust - Class II and Templeton Developing
Markets Trust - Advisor Class. The Fund began offering Advisor Class shares on
January 1, 1997. Class I, Class II and Advisor Class shares differ as to sales
charges, expenses and services. Different fees and expenses will affect
performance. In the future, additional classes of shares may be offered. A
further description of Class I and Class II is set forth below.
Each class will vote separately on matters (1) affecting only that class, (2)
expressly required to be voted on separately by state law, or (3) required to
be voted on separately by the 1940 Act. Shares of each class represent
proportionate interests in the assets of the Fund and have the same voting and
other rights and preferences as the other classes of the Fund for matters that
affect the Fund as a whole.
Templeton Developing Markets Trust -
15
PAGE
Class I and Class II. Class I and Class II shares of the Fund are described in a
separate prospectus relating only to those classes. You may buy Class I and
Class II shares through your investment representative or directly by contacting
the Fund. If you would like a prospectus relating to the Fund's Class I and
Class II shares, contact your investment representative or Distributors.
Class I and Class II shares of the Fund have sales charges and Rule 12b-1
charges that may affect performance. Class I shares have a front-end sales
charge of 5.75% (6.10% of the net amount invested) which is reduced on certain
transactions of $50,000 or more. Class I shares are subject to Rule 12b-1
expenses up to a maximum of 0.35% per year of Class I's average daily net
assets. Class II shares have a front-end sales charge of 1.00% (1.01% of the net
amount invested), and are subject to Rule 12b-1 expenses up to a maximum of
1.00% per year of Class II's average daily net assets. Shares of Class I may be
subject to, and shares of Class II are generally subject to, a Contingent
Deferred Sales Charge upon redemption.
The Fund has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Fund does not intend to hold annual shareholder meetings. It may hold a
special meeting, however, for matters requiring shareholder approval under the
1940 Act. The Fund will call a special meeting of shareholders for the purpose
of considering the removal of a Board member if requested in writing to do so
by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection
with removing members of the Board.
HOW TAXATION AFFECTS YOU AND THE FUND
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund intends to elect to be treated and to qualify each year as a regulated
investment company under Subchapter M of the Code. A regulated investment
company generally is not subject to Federal income tax on income and gains
distributed in a timely manner to its shareholders. The Fund intends to
distribute to shareholders substantially all of its net investment income and
net realized capital gains, which generally will be taxable income or capital
gains in
- Templeton Developing Markets Trust
16
PAGE
their hands. Distributions declared in October, November or December to
shareholders of record on a date in such month and paid during the following
January will be treated as having been received by shareholders on December 31
in the year such distributions were declared. The Fund will inform shareholders
each year of the amount and nature of such income or gains. Sales or other
dispositions of Fund shares generally will give rise to taxable gain or loss.
Templeton Developing Markets Trust -
17
PAGE
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
Opening Your Account
Advisor Class shares are offered only to investors satisfying one of the
following criteria:
(a) Broker-dealers, qualified registered investment advisors or certified
financial planners, who have entered into a supplemental agreement with
Distributors for clients participating in comprehensive fee programs;
(b) Qualified registered investment advisors or registered certified financial
planners who have clients invested in Mutual Series on October 31, 1996;
(c) Qualified registered investment advisors or registered certified financial
planners who did not have clients invested in Mutual Series on October 31,
1996 may buy through a broker-dealer or service agent who has entered into
an agreement with Distributors;
(d) Effective on or about February 1, 1997, participants in Franklin Templeton's
401(k) and Franklin Templeton's Profit Sharing Plans;
(e) Directors, trustees, officers and full-time employees (and members of their
immediate family) of Franklin Templeton Group and Franklin Templeton Group
of Funds who invest $100 or more;
(f) Accounts managed by the Franklin Templeton Group; and
(g) Class I shareholders of the Fund who qualify under one of the above
categories, may have their existing Class I shares invested into the Fund's
Advisor Class by sending written instructions indicating that they wish to
do so, by June 30, 1997. Instructions should be addressed to Investor
Services. Generally, for federal income tax purposes, there will be no
recognition of gain or loss associated with such a transaction. You may
wish to consult with your tax advisor to determine whether there are any
state income tax consequences to such a transaction.
(h) Each series of Franklin Templeton Fund Allocator Series that invests $1,000
or more.
The minimum for subsequent investments in Advisor Class shares is $25 for most
purchases of Advisor Class shares of the Fund and for purchases by directors,
trustees, officers and full-time employees (and members of their
- Templeton Developing Markets Trust
18
PAGE
immediate family) of Franklin Templeton Group and Franklin Templeton Funds; and
$1,000 for each series of Franklin Templeton Fund Allocator Series.
Purchase Price of Fund Shares
Advisor Class shares are purchased at Net Asset Value without a sales charge.
Securities Dealers may receive compensation up to 0.25% of the amount invested
from Distributors or an affiliated company.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction for taxable investors.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums. Some
Franklin Templeton Funds do not offer Advisor Class shares.
<TABLE>
<CAPTION>
METHOD STEPS TO FOLLOW
- -----------------------------------------------------------------------
<S> <C>
BY MAIL 1. Send us written instructions signed by all
account owners
2. Include any outstanding share certificates
for the shares you're exchanging
- -----------------------------------------------------------------------
BY PHONE Call Shareholder Services
(If you do not want the ability to exchange by
phone to apply to your account, please let us
know.)
- -----------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- -----------------------------------------------------------------------
</TABLE>
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
How We Process Your Exchange
If you are exchanging your Advisor Class shares of the Fund you may:
- - exchange into any of our money funds except Franklin Templeton Money Fund II.
Templeton Developing Markets Trust -
19
PAGE
- - exchange into the other Advisor Class shares of the Franklin Templeton Funds
(excluding Templeton Foreign Fund and Templeton Growth Fund, Inc., except as
described below), Class Z of Mutual Series and Templeton Institutional Funds,
Inc., if you meet the investment requirements of the fund to be acquired.
- - exchange into the Advisor Class shares of Templeton Foreign Fund and
Templeton Growth Fund, Inc. only if you fall into one of the following
categories: (i) you are a broker-dealer or a qualified registered investment
advisor who has entered into a special agreement with Distributors for your
clients who are participating in comprehensive fee programs; (ii) you are a
qualified registered investment advisor or registered certified financial
planner who has clients invested in Mutual Series on October 31, 1996; (iii)
you are a qualified registered investment advisor or registered certified
financial planner who did not have clients invested in Mutual Series on
October 31, 1996 and are buying through a broker-dealer or service agent who
has entered into an agreement with Distributors; (iv) you are a director,
trustee, officer or full-time employee (or a family member) of the Franklin
Templeton Group or the Franklin Templeton Funds; (v) you are a participant in
Franklin Templeton's 401(k) Plan or Franklin Templeton's Profit Sharing Plan;
(vi) the exchanging shareholder is an account managed by the Franklin
Templeton Group; or (vii) the exchanging shareholder is a series of the
Franklin Templeton Fund Allocator Series.
- - if the fund you are exchanging into does not offer Advisor Class shares, you
may exchange into the Class I shares of the fund at Net Asset Value.
Please be aware that the following restrictions may apply to exchanges:
- - The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically registered
money fund account requiring only one signature for all transactions. Please
notify us in writing if you do not want this option to be available on your
account(s). Additional procedures may apply. Please see "Transaction
Procedures and Special Requirements."
- - Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
- - The fund you are exchanging into must be eligible for sale in your state.
- Templeton Developing Markets Trust
20
PAGE
- - We may modify or discontinue our exchange policy upon 60 days' written notice.
- - Your exchange may be restricted or refused if you: (i) request an exchange out
of the Fund within two weeks of an earlier exchange request, (ii) exchange
shares out of the Fund more than twice in a calendar quarter, or (iii)
exchange shares equal to at least $5 million, or more than 1/4 of 1% of the
Fund's net assets. Shares under common ownership or control are combined for
these limits. If you exchange shares as described in this paragraph, you will
be considered a Market Timer. Each exchange by a Market Timer, if accepted,
will be charged $5.00. Some of our funds do not allow investments by Market
Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
<TABLE>
<CAPTION>
METHOD STEPS TO FOLLOW
- ----------------------------------------------------------------------
<S> <C>
BY MAIL 1. Send us written instructions signed by all
account owners
2. Include any outstanding share certificates
for the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts
may need to send additional documents.
Accounts under court jurisdiction may have
additional requirements.
- ----------------------------------------------------------------------
</TABLE>
Templeton Developing Markets Trust -
21
PAGE
<TABLE>
<CAPTION>
METHOD STEPS TO FOLLOW
- ----------------------------------------------------------------------
<S> <C>
BY PHONE Call Shareholder Services
(Only available if you have completed and sent to us the telephone
redemption agreement included with this prospectus)
Telephone requests will be accepted:
- If the request is $50,000 or less.
Institutional accounts may exceed $50,000 by
completing a separate agreement. Call
Institutional Services to receive a copy.
- If there are no share certificates issued
for the shares you want to sell or you have
already returned them to the Fund.
- Unless you are selling shares in a Trust
Company retirement plan account.
- Unless the address on your account was
changed by phone within the last 30 days.
Currently, the telephone redemption privilege
applies only to accounts that have
specifically requested the privilege and
submitted a completed telephone redemption
agreement. Beginning on or about May 1, 1997,
you will automatically be able to redeem shares
by telephone without completing a telephone
redemption agreement. Please notify us if you
do not want this option to be available on
your account. If you later decide you would
like this option, send us written instructions
signed by all account owners.
- ----------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ----------------------------------------------------------------------
</TABLE>
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
- Templeton Developing Markets Trust
22
PAGE
Trust Company Retirement Plan Accounts
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
Dividends and capital gains are calculated and distributed the same way for each
class of the Fund. The amount of any income dividends per share will differ,
however, generally due to the difference in the applicable Rule 12b-1 fees of
any class. Advisor Class shares are not subject to Rule 12b-1 fees.
The Fund intends to pay a dividend at least annually representing substantially
all of its net investment income and any net realized capital gains.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution.
Distribution Options
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy additional shares of the same
class of the Fund by reinvesting capital gain distributions, dividend
distributions, or both. This is a convenient way to accumulate additional
shares and maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy Advisor Class shares or Class I shares of another Franklin
Templeton Fund. Many shareholders find this a convenient way to diversify their
investments.
3. Receive distributions in cash - You may receive capital gains distributions,
dividend distributions, or both in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE THE SHAREHOLDER APPLICATION
INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT REPRESENTATIVE WHICH
Templeton Developing Markets Trust -
23
PAGE
OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL AUTOMATICALLY
REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE ADVISOR CLASS SHARES OF
THE FUND. For Trust Company retirement plans, special forms are required to
receive distributions in cash. You may change your distribution option at any
time by notifying us by mail or phone. Please allow at least seven days prior to
the record date for us to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
How and When Shares are Priced
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the scheduled close of the NYSE, generally 4:00
p.m. Eastern time. You can find the prior day's closing Net Asset Value and
Offering Price of the Fund in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.
The Price We Use When You Buy or Sell Shares
You buy shares of the Advisor Class at the Net Asset Value per share. We
calculate it to two decimal places using standard rounding criteria. You also
sell shares at Net Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest
between the time we receive the order from your dealer and the time we receive
any required documents.
Proper Form
An order to buy shares is in proper form when we receive your signed
shareholder application and check. Written requests to sell or exchange shares
are in proper form when we receive written instructions signed by all registered
owners, with a signature guarantee if necessary. We must also receive any
outstanding share certificates for those shares.
- Templeton Developing Markets Trust
24
PAGE
Written Instructions
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
- - Your name,
- - The Fund's name,
- - A description of the request,
- - For exchanges, the name of the fund you're exchanging into,
- - Your account number,
- - The dollar amount or number of shares, and
- - A telephone number where we may reach you during the day, or in the evening
if preferred.
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. YOU SHOULD
VERIFY THAT THE INSTITUTION IS AN ELIGIBLE GUARANTOR PRIOR TO SIGNING. A
NOTARIZED SIGNATURE IS NOT SUFFICIENT.
Share Certificates
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate
is lost,
Templeton Developing Markets Trust -
25
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stolen or destroyed, you may have to pay an insurance premium of up to 2% of
the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
Telephone Transactions
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We will also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
Trust Company Retirement Plan Accounts. You may not sell shares or change
distribution options on Trust Company retirement plans by phone.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
Account Registrations and Required Documents
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
Joint Ownership. If you open an account with two or more owners, we register
the account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or
more owners, all owners must sign instructions to process transactions and
changes to the account. Even if the law in your state says otherwise, you will
not
- Templeton Developing Markets Trust
26
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be able to change owners on the account unless all owners agree in writing. If
you would like another person or owner to sign for you, please send us a
current power of attorney.
Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Trusts. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
Required Documents. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
<TABLE>
<CAPTION>
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- -----------------------------------------------------------------------
<S> <C>
CORPORATION Corporate Resolution
- -----------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners,
2. A certification for a partnership agreement
- -----------------------------------------------------------------------
TRUST 1. The pages from the trust document that
identify the trustees, or
2. A certification for trust
- -----------------------------------------------------------------------
</TABLE>
Street or Nominee Accounts. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both
dealers must have an agreement with Distributors or we will not process the
transfer. Contact your Securities Dealer to initiate the transfer. We will
process the transfer after we receive authorization in proper form from your
delivering Securities Dealer. Accounts may be transferred electronically
through the NSCC. For accounts registered in street or nominee name, we may
take instructions directly from the Securities Dealer or your nominee.
Electronic Instructions. If there is a Securities Dealer or other
representative of record on your account, we are authorized to use and execute
electronic instructions received directly from your dealer or representative
without further inquiry. Electronic instructions may be processed through the
services of the NSCC, which currently include the NSCC's "Networking,"
"Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's PCTrades
II(TM) System.
Templeton Developing Markets Trust -
27
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Tax Identification Number
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is $50 or less, except for investors
under categories (d), (f) and (h) under "Opening Your Account." We will only do
this if the value of your account falls below this minimum because you
voluntarily sold your shares and your account has been inactive (except for the
reinvestment of distributions) for at least six months. Before we close your
account, we will notify you and give you 30 days to increase the value of your
account to the required minimum amount of at least $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the account application included with this
prospectus or contact your investment representative. The market value of the
Fund's shares may fluctuate and a systematic investment plan such as this will
not assure a profit or protect against a loss. You may discontinue the program
at any time by notifying Investor Services by mail or phone.
- Templeton Developing Markets Trust
28
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Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum
payment amount for each withdrawal must be at least $50. For retirement plans
subject to mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. You will generally receive your payment by the
end of the month in which a payment is scheduled. When you sell your shares
under a systematic withdrawal plan, it is a taxable transaction.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us in
writing at least seven business days before the end of the month preceding a
scheduled payment. Please see "How Do I Buy, Sell and Exchange Shares? -
Systematic Withdrawal Plan" in the SAI for more information.
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
- - Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
- - Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
Brokers and Dealers and Plan Administrators
You may buy and sell Fund shares through registered broker-dealers. The Fund
does not impose a sales or service charge but your broker-dealer may charge you
a transaction fee. Transaction fees and services may vary among broker-dealers,
and your broker-dealer may impose higher initial or subsequent investment
Templeton Developing Markets Trust -
29
PAGE
requirements than those established by the Fund. Services provided by broker-
dealers may include allowing you to establish a margin account and borrow on
the value of the Fund's shares in that account. If your broker-dealer receives
your order before pricing on a given day, the broker-dealer is required to
forward the order to the Fund before pricing closes on that day. A broker-
dealer's failure to timely forward an order may give rise to a claim by the
investor against the broker.
Third party plan administrators of tax-qualified retirement plans and other
entities may provide sub-transfer agent services to the Fund. In such cases, the
Fund may pay the third party an annual sub-transfer agency fee that is not
greater than the Fund otherwise would have paid for such services.
Institutional Accounts
Institutional investors will likely be required to complete an institutional
account application. There may be additional methods of opening accounts and
purchasing, redeeming or exchanging shares of the Fund available for
institutional accounts. To obtain an institutional application or additional
information regarding institutional accounts, contact Franklin Templeton
Institutional Services at 1-800/321-8563 Monday through Friday, from 9:00 a.m.
to 5:00 p.m. Eastern time.
Availability of These Services
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
What If I Have Questions About My Account?
If you have any questions about your account, you may write to Investor
Services, P.O. Box 33030, St. Petersburg, FL 33733-8030. The Fund and
- Templeton Developing Markets Trust
30
PAGE
Distributors are also located at this address. You may also contact us by phone
at one of the numbers listed below.
<TABLE>
<CAPTION>
HOURS OF OPERATION (EASTERN
TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- ------------------------------------------------------------------------
<S> <C> <C>
Shareholder Services 1-800/632-2301 8:30 a.m. to 8:00 p.m.
Dealer Services 1-800/524-4040 8:30 a.m. to 8:00 p.m.
Fund Information 1-800/DIAL BEN 8:30 a.m. to 11:00 p.m.
(1-800/342-5236) 9:30 a.m. to 5:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 8:30 a.m. to 8:00 p.m.
Institutional Services 1-800/321-8563 9:00 a.m. to 8:00 p.m.
TDD (hearing impaired) 1-800/851-0637 8:30 a.m. to 8:00 p.m.
</TABLE>
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
Templeton Developing Markets Trust -
31
PAGE
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1940 Act - Investment Company Act of 1940, as amended.
AMEX - American Stock Exchange, Inc.
Board - The Board of Trustees of the Fund.
CD - Certificate of deposit.
Class I, Class II and Advisor Class - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. Class I and Class II differ,
however, primarily in their sales charge structures and Rule 12b-1 plans.
Advisor Class shares are purchased without a sales charge and do not have a
Rule 12b-1 plan.
Code - Internal Revenue Code of 1986, as amended.
Contingency Period - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the
contingency period is 18 months. Regardless of when during the month you
purchased shares, they will age one month on the last day of that month and
each following month.
Contingent Deferred Sales Charge (CDSC) - A sales charge of 1% that may apply
if you sell your shares within the Contingency Period.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
Franklin Funds - The mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust.
Franklin Templeton Funds - The Franklin Funds and the Templeton Funds.
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries.
Franklin Templeton Group of Funds - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds.
FT Services - Franklin Templeton Services, Inc., the Fund's administrator.
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing agent and transfer agent.
IRS - Internal Revenue Service.
- Templeton Developing Markets Trust
32
PAGE
Market Timer(s) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
Moody's - Moody's Investors Service, Inc.
Mutual Series - Franklin Mutual Series Fund Inc., a member of the Franklin
Group of Funds, formerly the Mutual Series Fund Inc. Each series of Mutual
Series began offering three classes of shares on November 1, 1996, Class I,
Class II and Class Z. All shares sold before that time are designated Class Z
shares.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NSCC - National Securities Clearing Corporation.
NYSE - New York Stock Exchange, Inc.
Offering Price - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge, if applicable. The
maximum front-end sales charge is 5.75% for Class I and 1% for Class II. The
Advisor Class has no front-end sales charge.
Qualified Retirement Plan(s) - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information.
S&P - Standard & Poor's Corporation.
SEC - U.S. Securities and Exchange Commission.
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TAML - Templeton Asset Management Ltd. - Hong Kong Branch, the Fund's
investment manager, is located at Two Exchange Square, Hong Kong.
Templeton Developing Markets Trust -
33
PAGE
Templeton Funds - The U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund.
Trust Company - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly-owned subsidiaries of Resources.
U.S. - United States.
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly-owned
subsidiaries of Resources.
- Templeton Developing Markets Trust
34
PAGE
INSERT APP HERE
PAGE
PART B
STATEMENT OF ADDITIONAL INFORMATION
PAGE
TEMPLETON DEVELOPING MARKETS TRUST
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 1, 1997
700 CENTRAL AVENUE
ST. PETERSBURG, FL 33701 1-800/DIAL BEN
<TABLE>
<CAPTION>
TABLE OF CONTENTS Page
<S> <C>
How does the Fund Invest its Assets?...........................................................................
What are the Fund's Potential Risks?...........................................................................
Investment Restrictions........................................................................................
Officers and Trustees..........................................................................................
Investment Management and Other Services.......................................................................
How does the Fund Buy Securities for its Portfolio?............................................................
How Do I Buy, Sell and Exchange Shares?........................................................................
How are Fund Shares Valued?....................................................................................
Additional Information on Distributions and Taxes..............................................................
The Fund's Underwriter.........................................................................................
How does the Fund Measure Performance?.........................................................................
Miscellaneous Information......................................................................................
Financial Statements...........................................................................................
Useful Terms and Definitions...................................................................................
Appendices.....................................................................................................
</TABLE>
WHEN READING THIS SAI, YOU WILL SEE CERTAIN
TERMS BEGINNING WITH CAPITAL LETTERS. THIS MEANS THE TERM
IS EXPLAINED UNDER "USEFUL TERMS AND DEFINITIONS."
Templeton Developing Markets Trust (the "Fund") is a diversified, open-end
management investment company. The Fund's investment objective is long-term
capital appreciation. The Fund seeks to achieve its objective by investing
primarily in equity securities of issuers in countries having developing
markets. This SAI relates to the Advisor Class shares of the Fund.
Advisor Class shares are only available for purchase by certain persons,
including, among others, certain broker-dealers and qualified registered
investment advisors; participants in Franklin Templeton's 401(k) and Profit
Sharing Plans; Franklin Templeton Fund Allocator Series; and directors,
trustees, officers and full time employees (and their family members) of
Franklin Templeton Group and the Franklin Templeton Group of Funds.
The Fund's Prospectus relating to the Advisor Class, dated January 1, 1997, as
may be amended from time to time, contains the basic information you should
know before investing in the Fund. For a free copy, call 1-800/DIAL BEN or
write the Fund at the address shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN
MORE DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE
YOU WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE
FUND, AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
<PAGE>
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
- - ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
- - ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
- - ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How Does the Fund Invest its Assets?"
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. TAML 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, i.e., banks or broker-dealers which have been
determined by TAML to present no serious risk of becoming involved in
bankruptcy proceedings within the time frame contemplated by the repurchase
transaction.
Debt Securities. The Fund may invest in debt securities which are rated at least
C by Moody's or C by S&P or unrated debt securities deemed to be of comparable
quality by TAML. 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
-2-
<PAGE>
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.
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
-3-
<PAGE>
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 U.S. 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
-4-
<PAGE>
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 TAML, 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
-5-
<PAGE>
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 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.
-6-
<PAGE>
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 TAML'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.
WHAT ARE THE FUND'S POTENTIAL RISKS?
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 U.S. Foreign companies
are not generally subject to uniform accounting or financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to U.S. 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 NYSE and securities of some foreign companies are less liquid
and more volatile than securities of comparable U.S. companies. Commission
rates in foreign countries, which are generally fixed rather than subject to
negotiation as in the U.S., 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 U.S.
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 U.S. 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
-7-
<PAGE>
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 U.S. 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
-8-
<PAGE>
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 TAML. 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.
-9-
<PAGE>
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 Board considers 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 Board also considers the degree of risk
involved through the holding of portfolio securities in domestic and foreign
securities depositories (see "Investment Management and Other Services -
Shareholder Servicing Agent and Custodian"). However, in the absence of
willful misfeasance, bad faith or gross negligence on the part of TAML, 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 Board's 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 TAML's ability to predict correctly movements in the
direction of the market, as to which no assurance can be given.
Trading Policies. TAML 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;
-10-
<PAGE>
(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.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less.
The Fund MAY 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 TAML, 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)
- --------------
(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.
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<PAGE>
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 NYSE or AMEX, 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 "How does the Fund Buy
Securities for its Portfolio?" as to transactions in the same
securities for the Fund, other clients and/or other mutual
funds within the Franklin Templeton Group of Funds.
11. Invest more than 15% of the Fund's total assets in securities
of foreign issuers that are not listed on a recognized U.S. 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.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in value of portfolio securities
or the amount of assets will not be considered a violation of any of the
foregoing restrictions. 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
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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.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of the Fund under the 1940 Act are indicated by an asterisk ("*").
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME, ADDRESS AND AGE WITH THE FUND PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS
<S> <C> <C>
HARRIS J. ASHTON Trustee Chairman of the Board, president and chief
Metro Center executive officer of General Host Corporation
1 Station Place (nursery and craft centers); and a director of RBC
Stamford, Connecticut Holdings (U.S.A.) Inc. (a bank holding company)
Age 64 and Bar-S Foods; and director or trustee of 55 of
the investment companies in the Franklin
Templeton Group of Funds.
NICHOLAS F. BRADY* Trustee Chairman of Templeton Emerging Markets
The Bullitt House Investment Trust PLC; chairman of Templeton
102 East Dover Street Latin America Investment Trust PLC; chairman of
Easton, Maryland Darby Overseas Investments, Ltd. (an investment
Age 66 firm) (1994-present); chairman and director of
Templeton Central and Eastern European Fund;
director of the Amerada Hess Corporation,
Christiana Companies, and the H.J. Heinz Company;
Secretary of the United States Department of the
Treasury (1988-1993); and chairman of the board of
Dillon, Read & Co. Inc. (investment banking) prior
to 1988; and director or trustee of 23 of the
investment companies in the Franklin Templeton
Group of Funds.
FRANK J. CROTHERS Trustee President and chief executive officer of Atlantic
P.O. Box N-3238 Equipment & Power Ltd.; vice chairman of
Nassau, Bahamas Caribbean Utilities Co., Ltd.; president of Provo
Age 52 Power Corporation; a director of various other
business and non-profit organizations; and director
or trustee of 4 of the investment companies in the
Franklin Templeton Group of Funds.
S. JOSEPH FORTUNATO Trustee Member of the law firm of Pitney, Hardin, Kipp &
200 Campus Drive Szuch; and a director of General Host Corporation
Florham Park, New Jersey (nursery and craft centers); and director or trustee
Age 64 of 57 of the investment companies in the Franklin
Templeton Group of Funds.
</TABLE>
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<TABLE>
<S> <C> <C>
JOHN Wm. GALBRAITH Trustee President of Galbraith Properties, Inc. (personal
360 Central Avenue investment company); director of Gulf West Banks,
Suite 1300 Inc. (bank holding company) (1995-present) and
St. Petersburg, Florida Mercantile Bank (1991-1995); vice chairman of
Age 75 Templeton, Galbraith & Hansberger Ltd.
(1986-1992); and chairman of Templeton Funds
Management, Inc. (1974-1991); and director or
trustee of 22 of the investment companies in the
Franklin Templeton Group of Funds.
ANDREW H. HINES, JR. Trustee Consultant for the Triangle Consulting Group;
150 2nd Avenue N. chairman and director of Precise Power
St. Petersburg, Florida Corporation; executive-in-residence of Eckerd
Age 73 College (1991-present); director of Checkers Drive-
In Restaurants, Inc. and director of various of its
subsidiaries; formerly, chairman of the board and
chief executive officer of Florida Progress
Corporation (1982-1990) and director or trustee of
24 of the investment companies in the Franklin
Templeton Group of Funds.
EDITH HOLIDAY Trustee Director (1993-present) of Amerada Hess
3239 38th Street, N.W. Corporation and Hercules Incorporated; director of
Washington, D.C. Beverly Enterprises, Inc. (1995-present) and H.J.
Age 44 Heinz Company (1994-present); chairman (1995-
present) and trustee (1993-present) of National
Child Research Center; formerly, assistant to the
President of the United States and Secretary of the
Cabinet (1990-1993), general counsel to the United
States Treasury Department (1989-1990), and
counselor to the Secretary and Assistant Secretary
for Public Affairs and Public Liaison - United
States Treasury Department (1988-1989); and
director or trustee of 15 of the investment
companies in the Franklin Templeton Group of Funds.
CHARLES B. JOHNSON Trustee, Chairman of President, chief executive officer, and director of
777 Mariners Island Blvd. the Board and Vice Franklin Resources, Inc.; chairman of the board
San Mateo, California President and director of Franklin Advisers, Inc. and
Age 63 Franklin Templeton Distributors, Inc.; director of
General Host Corporation (nursery and craft
centers), Franklin Templeton Investor Services,
Inc. and Templeton Global Investors, 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 56 of
the investment companies in the Franklin Templeton
Group of Funds.
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
CHARLES E. JOHNSON Trustee and Vice Senior vice president and director of Franklin
500 East Broward Blvd. President Resources, Inc.; senior vice president of Franklin
Fort Lauderdale, Florida Templeton Distributors, Inc.; president and chief
Age 40 executive officer of Templeton Worldwide, Inc.;
president and director of Franklin Institutional
Services Corporation; chairman of the board of
Templeton Investment Counsel, Inc.; and officer
and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc. and
officer and/or director or trustee of 39 of the
investment companies in the Franklin Templeton
Group of Funds.
BETTY P. KRAHMER Trustee Director or trustee of various civic associations;
2201 Kentmere Parkway formerly, economic analyst, U.S. government; and
Wilmington, Delaware director or trustee of 23 of the investment
Age 67 companies in the Franklin Templeton Group of
Funds.
GORDON S. MACKLIN Trustee Chairman of White River Corporation (information
8212 Burning Tree Road services); director of Fund America Enterprises
Bethesda, Maryland Holdings, Inc., MCI Communications Corporation,
Age 68 Fusion Systems Corporation, Infovest Corporation,
MedImmune, Inc., Source One Mortgage Services
Corporation, and Shoppers Express, Inc. (on-line
shopping service); and formerly held the following
positions: chairman of Hambrecht and Quist Group;
director of H&Q Healthcare Investors and Lockheed
Martin Corporation; and president of the National
Association of Securities Dealers, Inc.; and
director or trustee of 52 of the investment
companies in the Franklin Templeton Group of Funds.
CONSTANTINE DEAN Trustee Physician, Lyford Cay Hospital (July
TSERETOPOULOS 1987--present); cardiology fellow, University of
Lyford Cay Hospital Maryland (July 1985-July 1987); internal medicine
P.O. Box N-7776 intern, Greater Baltimore Medical Center (July
Nassau, Bahamas 1982-July 1985); and director or trustee of 4 of the
Age 42 investment companies in the Franklin Templeton
Group of Funds.
FRED R. MILLSAPS Trustee Manager of personal investments (1978-present);
2665 N.E. 37th Drive director of various business and non-profit
Fort Lauderdale, Florida organizations; chairman and chief executive officer
Age 67 of Landmark Banking Corporation (1969-1978);
financial vice president of Florida Power and Light
(1965-1969); vice president of The Federal Reserve
Bank of Atlanta (1958-1965); and director or
trustee of 24 of the investment companies in the
Franklin Templeton Group of Funds.
J. MARK MOBIUS President Portfolio manager of various Templeton advisory
TWO EXCHANGE SQUARE affiliates; managing director of Templeton Asset
HONG KONG Management Ltd.; formerly, president of
Age 60 International Investment Trust Company Limited
(investment manager of Taiwan R.O.C. Fund)
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
(1983-1986); director of Vickers da Costa, Hong
Kong (1980-1983); and officer of 8 of the
investment companies in the Franklin Templeton
Group of Funds.
RUPERT H. JOHNSON, JR.* Vice President Executive vice president and director of Franklin
777 Mariners Island Blvd. Resources, Inc. and Franklin Templeton
San Mateo, California Distributors, Inc.; president and director of
Age 56 Franklin Advisers, Inc.; director of Franklin
Templeton Investor Services, 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 60 of
the investment companies in the Franklin Templeton
Group of Funds.
HARMON E. BURNS Vice President Executive vice president, secretary and director of
777 Mariners Island Blvd. Franklin Resources, Inc.; executive vice president
San Mateo, California and director of Franklin Templeton Distributors,
Age 51 Inc.; executive vice president of Franklin Advisers,
Inc.; and officer and/or director, as the case may
be, of other subsidiaries of Franklin Resources,
Inc. and officer and/or director or trustee of 60
of the investment companies in the Franklin
Templeton Group of Funds.
DEBORAH R. GATZEK Vice President Senior vice president and general counsel of
777 Mariners Island Blvd. Franklin Resources, Inc.; senior vice president of
San Mateo, California Franklin Templeton Distributors, Inc.; vice
Age 47 president of Franklin Advisers, Inc. and officer of
60 of the investment companies in the Franklin
Templeton Group of Funds.
MARK G. HOLOWESKO Vice President President and director of Templeton Global
Lyford Cay Advisors Limited; chief investment officer of
Nassau, Bahamas global equity research for Templeton Worldwide,
Age 36 Inc.; president or vice president of the Templeton
Funds; formerly, investment administrator with Roy
West Trust Corporation (Bahamas) Limited
(1984-1985); and officer of 23 of the investment
companies in the Franklin Templeton Group of Funds.
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
MARTIN L. FLANAGAN Vice President 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
Age 36 Counsel, Inc.; director, president and chief
executive officer of Templeton Global Investors,
Inc.; 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; and
officer and/or director, as the case may be, of
other subsidiaries of Franklin Resources, Inc.; and
officer and/or director or trustee of 60 of the
investment companies in the Franklin Templeton
Group of Funds.
JOHN R. KAY Vice President Vice president and treasurer of Templeton Global
500 East Broward Blvd. Investors, Inc. and Templeton Worldwide, Inc.;
Fort Lauderdale, Florida assistant vice president of Franklin Templeton
Age 56 Distributors, Inc.; formerly, vice president and
controller of the Keystone Group, Inc.; and officer
of 27 of the investment companies in the Franklin
Templeton Group of Funds.
ELIZABETH M. KNOBLOCK Vice President - General counsel, secretary and a senior vice
500 East Broward Blvd. Compliance president of Templeton Investment Counsel, Inc.;
Fort Lauderdale, Florida formerly, vice president and associate general
Age 41 counsel of Kidder Peabody & Co. Inc.
(1989-1990), assistant general counsel of Gruntal &
Co., Incorporated (1988), vice president and
associate general counsel of Shearson Lehman
Hutton Inc. (1988), vice president and assistant
general counsel of E.F. Hutton & Co. Inc.
(1986-1988), and special counsel of the division of
investment management of the Securities and
Exchange Commission (1984-1986); and officer of
23 of the investment companies in the Franklin
Templeton Group of Funds.
JAMES R. BAIO Treasurer Certified public accountant; senior vice president of
500 East Broward Blvd. Templeton Worldwide, Inc., Templeton Global
Fort Lauderdale, Florida Investors, Inc., and Templeton Funds Trust
Age 42 Company; formerly, senior tax manager with Ernst
& Young (certified public accountants) (1977-1989);
and treasurer of 23 of the investment companies in
the Franklin Templeton Group of Funds.
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
BARBARA J. GREEN Secretary Senior vice president of Templeton
500 East Broward Blvd. Worldwide, Inc. and Templeton Global Investors,
Fort Lauderdale, Florida Inc.; secretary of the Templeton Funds; formerly,
Age 49 deputy director of the Division of Investment
Management, executive assistant and senior advisor
to the chairman, counsellor to the chairman,
special counsel and attorney fellow, U.S.
Securities and Exchange Commission (1986-1995);
attorney, Rogers & Wells; and judicial clerk, U.S.
District Court (District of Massachusetts); and
officer of 23 of the investment companies in the
Franklin Templeton Group of Funds.
</TABLE>
The table above shows the officers and Board members who are affiliated with
Distributors and TAML. Nonaffiliated members of the Board and Mr. Brady are
currently paid 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 the
Fund. Accordingly, the Fund currently pays the independent members of the
Board and Mr. Brady an annual retainer of $6,000 and a fee of $500 per meeting
of the Board and its portion of a flat fee of $2,000 for each Audit Committee
meeting and/or Nominating and Compensation Committee meeting attended. As
shown above, some of the nonaffiliated Board members also serve as directors,
trustees or managing general partners of other investment companies in the
Franklin Templeton Group of Funds. They may receive fees from these funds for
their services. The following table provides the total fees paid to
nonaffiliated Board members and Mr. Brady by the Fund and by other funds in the
Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
TOTAL FEES RECEIVED NUMBER OF BOARDS IN
FROM THE FRANKLIN THE FRANKLIN TEMPLETON
TOTAL FEES RECEIVED TEMPLETON GROUP GROUP OF FUNDS ON
NAME FROM THE FUND* OF FUNDS* WHICH EACH SERVES**
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Harris J. Ashton $ 8,000 $327,925 56
Nicholas F. Brady 8,000 98,225 24
Frank J. Crothers 8,863 22,975 4
S. Joseph Fortunato 8,000 344,745 58
John Wm. Galbraith 6,000 70,100 23
Andrew H. Hines, Jr. 8,000 106,325 24
Betty P. Krahmer 6,000 93,475 24
Gordon S. Macklin 8,000 321,525 53
Fred R. Millsaps 8,711 104,325 24
Constantine Dean Tseretopoulos 8,863 22,975 4
</TABLE>
*For the fiscal year ended December 31, 1995.
**We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the
total number of series or funds within each investment company for which the
Board members are responsible. The Franklin Templeton Group of Funds currently
includes 60 registered investment companies, with approximately 164 U.S. based
funds or series.
Nonaffiliated members of the Board and Mr. Brady are reimbursed for expenses
incurred in connection with attending board meetings, and paid pro rata by each
fund in the Franklin Templeton Group of Funds for which they serve as director,
trustee or managing general partner. No officer or Board member received any
other compensation, including pension or retirement benefits, directly or
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<PAGE>
indirectly from the Fund or other funds in the Franklin Templeton Group of
Funds. Certain officers or Board members who are shareholders of Resources may
be deemed to receive indirect remuneration by virtue of their participation, if
any, in the fees paid to its subsidiaries.
As of December 1, 1996, the officers and Board members, as a group, owned of
record and beneficially approximately 36,513, or less than 1% of each class of
the Fund.
Many of the Board members also own shares in other funds in the Franklin
Templeton Group of Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are
brothers and the father and uncle, respectively, of Charles E. Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Manager and Services Provided. TAML provides investment research and
portfolio management services, including the selection of securities for the
Fund to buy, hold or sell and the selection of brokers through whom the Fund's
portfolio transactions are executed. TAML renders its services to the Fund from
outside the U.S. and its activities are subject to the review and supervision
of the Board to whom TAML renders periodic reports of the Fund's investment
activities. TAML is covered by fidelity insurance on its officers, directors
and employees for the protection of the Fund.
TAML and its affiliates act as investment manager to numerous other investment
companies or funds and accounts. TAML may give advice and take action with
respect to any of the other funds it manages, or for its own account, that may
differ from action taken by TAML on behalf of the Fund. Similarly, with respect
to the Fund, TAML is not obligated to recommend, buy or sell, or to refrain
from recommending, buying or selling any security that TAML and access persons,
as defined by the 1940 Act, may buy or sell for its or their own account or for
the accounts of any other fund. TAML is not obligated to refrain from investing
in securities held by the Fund or other funds that it manages. Of course, any
transactions for the accounts of TAML and other access persons will be made in
compliance with the Fund's Code of Ethics. Please see "Miscellaneous
Information - Summary of Code of Ethics."
Investment Management Fees. Under its investment management agreement the Fund
pays TAML a monthly fee equal to an annual rate of 1.25% of its average daily
net assets. Each class pays its proportionate share of the management fee. For
the fiscal years ended December 31, 1995, 1994 and 1993, the investment
management fees totaled $26,314,151, $23,325,167 and $6,765,008, respectively.
Investment Management Agreement. The investment management agreement for the
Fund may continue in effect for successive annual periods if its continuance is
specifically approved at least annually by a vote of the Board or by a vote of
the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Board members who are not parties to the
investment management agreement or interested persons of any such party (other
than as members of the Board), cast in person at a meeting called for that
purpose. The investment management agreement may be terminated without penalty
at any time by the Board or by a vote of the holders of a majority of the
Fund's outstanding voting securities, or by TAML on 60 days' written notice,
and will automatically terminate in the event of its assignment, as defined in
the 1940 Act.
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<PAGE>
Administrative Services. Under an agreement with the Fund, FT Services provides
certain administrative services and facilities for the Fund. These include
preparing and maintaining books, records, and tax and financial reports, and
monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under the administration agreement, the Fund pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the average daily net
assets of the Fund up to $200 million, 0.135% of average daily net assets over
$200 million up to $700 million, 0.10% of average daily net assets over $700
million up to $1.2 billion, and 0.075% of average daily net assets over $1.2
billion. Since FT Services' fee covers services often provided by investment
advisers to other funds, the Fund's combined expenses for advisory and
administrative services together may be higher than those of some other
investment companies. Each class of shares pays its proportionate share of the
administration fee.
For the fiscal years ended December 31, 1995, 1994 and 1993, the Fund's
administrative services fees totaled $2,153,848, $1,974,513 and $760,331,
respectively.
Shareholder Servicing Agent. Investor Services, a wholly-owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account.
Custodian. The Chase Manhattan Bank, at its principal office at MetroTech
Center, Brooklyn, NY 11245, and at the offices of its branches and agencies
throughout the world, acts as custodian of the Fund's assets. The custodian
does not participate in decisions relating to the purchase and sale of
portfolio securities.
Auditors. McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, NY 10017, are
the Fund's independent auditors. During the fiscal year ended December 31,
1995, their auditing services consisted of rendering an opinion on the
financial statements of the Fund included in the Fund's Annual Report to
Shareholders for the fiscal year ended December 31, 1995, and review of the
Fund's filings with the SEC and the IRS. Advisor Class shares of the Fund were
not offered to the public before January 1, 1997.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
The selection of brokers and dealers to execute transactions in the Fund's
portfolio is made by TAML in accordance with criteria set forth in the
investment management agreement and any directions that the Board may give.
When placing a portfolio transaction, TAML seeks to obtain prompt execution of
orders at the most favorable net price. When portfolio transactions are done on
a securities exchange, the amount of commission paid by the Fund is negotiated
between TAML and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid in
connection with portfolio transactions are based to a large degree on the
professional opinions of the persons responsible for the placement and review
of the transactions. These opinions are based on the experience of these
individuals in the securities industry and information available to them about
the level of commissions being paid by other institutional investors of
comparable size. TAML will
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<PAGE>
ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in the
opinion of TAML, a better price and execution can otherwise be obtained.
Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask price.
The amount of commission is not the only factor TAML considers in the selection
of a broker to execute a trade. If TAML believes it is in the Fund's best
interest, it may place portfolio transactions with brokers who provide the
types of services described below, even if it means the Fund will pay a higher
commission than if no weight were given to the broker's furnishing of these
services. This will be done only if, in the opinion of TAML, the amount of any
additional commission is reasonable in relation to the value of the services.
Higher commissions will be paid only when the brokerage and research services
received are bona fide and produce a direct benefit to the Fund or assist TAML
in carrying out its responsibilities to the Fund, or when it is otherwise in
the best interest of the Fund to do so, whether or not such services may also
be useful to TAML in advising other clients. When TAML believes several brokers
are equally able to provide the best net price and execution, it may decide to
execute transactions through brokers who provide quotations and other services
to the Fund, in an amount of total brokerage as may reasonably be required in
light of these services. Specifically, these services may include providing the
quotations necessary to determine the Fund's Net Asset Value, as well as
research, statistical and other data.
It is not possible to place a dollar value on the special executions or on the
research services received by TAML from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits TAML to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staff of other securities firms. As long as it is lawful and
appropriate to do so, TAML and its affiliates may use this research and data in
their investment advisory capacities with other clients. If the Fund's officers
are satisfied that the best execution is obtained, the sale of Fund shares
(which shall be deemed to include also shares of other funds which have either
the same investment adviser or an investment adviser affiliated with TAML) may
also be considered a factor in the selection of broker-dealers to execute the
Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next
investment management fee payable to TAML will be reduced by the amount of any
fees received by Distributors in cash, less any costs and expenses incurred in
connection with the tender.
If purchases or sales of securities of the Fund and one or more other
investment companies or clients supervised by TAML are considered at or about
the same time, transactions in these securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all by
TAML, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
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<PAGE>
During the fiscal years ended December 31, 1995, 1994 and 1993, the Fund paid
brokerage commissions totaling $4,305,521, $4,035,106 and $3,109,324,
respectively.
As of December 31, 1995, the Fund did not own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as Securities Dealers.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the Fund we may impose a $10 charge against your account for each returned
item.
Reinvestment Date. Shares acquired through the reinvestment of dividends will
be purchased at the Net Asset Value determined on the business day following
the dividend record date (sometimes known as the "ex-dividend date"). The
processing date for the reinvestment of dividends may vary and does not affect
the amount or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional
costs related to such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money. If this
occurs, it is the Fund's general policy to initially invest this money in
short-term, interest-bearing money market instruments, unless it is believed
that attractive investment opportunities consistent with the Fund's investment
objective exist immediately. This money will then be withdrawn from the
short-term money market instruments and invested in portfolio securities in as
orderly a manner as is possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will
be effected at Net Asset Value at the close of business on the day the request
for exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
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<PAGE>
ADDITIONAL INFORMATION ON SELLING SHARES
Systematic Withdrawal Plan. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th business day of the month in
which a payment is scheduled.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of
the shareholder's death or incapacity.
Through Your Securities Dealer. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do
so must be settled between you and your Securities Dealer.
Redemptions in Kind. The Fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If
this happens, however, you may not be able to recover your investment in a
timely manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location
services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell
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<PAGE>
shares denominated in any other currency or (b) honor the transaction or make
adjustments to your account for the transaction as of a date and with a foreign
currency exchange factor determined by the drawee bank.
Special Services. The Franklin Templeton Institutional Services Department
provides specialized services, including recordkeeping, for institutional
investors. The cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions that maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for
recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, the Fund may reimburse Investor
Services an amount not to exceed the per account fee that the Fund normally
pays Investor Services. These financial institutions may also charge a fee for
their services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share of each class as of the scheduled
close of the NYSE, generally 4:00 p.m. Eastern time, each day that the NYSE is
open for trading. As of the date of this SAI, the Fund is informed that the
NYSE observes the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by TAML.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of
business of the NYSE on each day that the NYSE is open. Trading in European or
Far Eastern securities generally, or in a particular country or countries, may
not take place on every NYSE business day. Furthermore, trading takes place in
various foreign markets on days that are not business days for the NYSE and on
which the Net Asset Value of each class is not calculated. Thus, the
calculation of the Net Asset Value of each class does not take place
contemporaneously with the determination of the prices of many of the portfolio
securities used in the calculation and, if events materially affecting the
values of these foreign securities occur, the securities will be valued at fair
value as determined by management and approved in good faith by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value
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<PAGE>
of these securities used in computing the Net Asset Value of each class is
determined as of such times. Occasionally, events affecting the values of these
securities may occur between the times at which they are determined and the
scheduled close of the NYSE that will not be reflected in the computation of the
Net Asset Value of each class. If events materially affecting the values of
these securities occur during this period, the securities will be valued at
their fair value as determined in good faith by the Board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets for
which market prices are not readily available are valued at fair value as
determined following procedures approved by the Board. With the approval of
the Board, the Fund may utilize a pricing service, bank or Securities Dealer to
perform any of the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the form of
dividends, interest and other income derived from its investments. This income,
less the expenses incurred in the Fund's operations, is its net investment
income from which income dividends may be distributed. Thus, the amount of
dividends paid per share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any capital loss carryforward or post October
loss deferral) may generally be made twice each year. One distribution may be
made in December to reflect any net short-term and net long-term capital gains
realized by the Fund as of October 31 of that year. Any net short-term and net
long-term capital gains realized by the Fund during the remainder of the fiscal
year may be distributed following the end of the fiscal year.
TAXES
As stated in the Prospectus, the Fund has elected to be treated as a regulated
investment company under Subchapter M of 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
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<PAGE>
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.
The Board reserves the right not to maintain the qualification of the Fund as a
regulated investment company if it determines this course of action to be
beneficial to shareholders. In that case, the Fund will be subject to federal
and possibly state corporate taxes on its taxable income and gains, and
distributions to shareholders will be taxable to the extent of the Fund's
available earnings and profits.
Some of the debt securities that may be acquired by the 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.
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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 "What are the Fund's
Potential Risks?" 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.
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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.
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.
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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.
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.
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
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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.
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 U.S. source income.
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 (1) who fail to provide the Fund with their
correct taxpayer identification number or to make required certifications, (2)
where the Fund or shareholder has been notified by the IRS that they are
subject to backup withholding or (3) when required to do so, the shareholder
fails to certify that he is not subject to backup withholding. Corporate
shareholders and certain other shareholders specified in the Code generally are
exempt from such 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.
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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.
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).
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering for shares of the Fund. The
underwriting agreement will continue in effect for successive annual periods if
its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the Board members
who are not parties to the underwriting agreement or interested persons of any
such party (other than as members of the Board), cast in person at a meeting
called for that purpose. The underwriting agreement terminates automatically in
the event of its assignment and may be terminated by either party on 60 days'
written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Distributors will not receive compensation from the Fund for acting as
underwriter with respect to the Advisor Class shares.
Distributors and/or its affiliates provide financial support to various
Securities Dealers which sell shares of the Franklin Templeton Group of Funds.
Such support is based primarily upon the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of Securities Dealers' sales and marketing efforts
in the Franklin Templeton Group of Funds; Securities Dealers' support of, and
participation in, Distributors' marketing programs; Securities Dealers'
compensation programs for their registered representatives; and the extent of
the Securities Dealers' marketing programs relating to the Franklin Templeton
Group of Funds. Financial support to Securities Dealers may be made by payments
from Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds which have distribution plans pursuant to
Rule 12b-1, from payments to Distributors pursuant to such plans. In addition,
certain Securities Dealers may receive brokerage commissions generated by fund
portfolio transactions in accordance with the Rules of the NASD.
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<PAGE>
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Current yield and average annual total return quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the Fund to compute or express performance for the Advisor Class shares
follows. For any period prior to January 1, 1997, the standardized performance
quotations for the Advisor Class will be calculated by substituting the
performance of Class I for the relevant time period, and excluding the effect
of the maximum sales charge and including the effect of the Rule 12b-1 fees
applicable to Class I. Regardless of the method used, past performance is not
necessarily indicative of future results, but is an indication of the return to
shareholders only for the limited historical period used.
TOTAL RETURN
Average Annual Total Return. Average annual total return is determined by
finding the average annual rates of return over one-, five- and ten-year
periods, or fractional portion thereof, that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes income dividends and capital gain distributions are reinvested at Net
Asset Value. The quotation assumes the account was completely redeemed at the
end of each one-, five- and ten-year period and the deduction of all applicable
charges and fees.
The average annual total return for the Advisor Class for the one-year period
ended December 31, 1995 and since inception (October 17, 1991) would have been
0.36% and 1.52%, respectively.
These figures were calculated according to the SEC formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the one-, five- or ten-year periods at the
end of the one-, five- or ten-year periods (or fractional
portion thereof)
Cumulative Total Return. The Fund may also quote its cumulative total return,
in addition to its average annual total return. These quotations are computed
the same way, except the cumulative total return will be based on the Fund's
actual return for a specified period rather than on its average return over the
period. The cumulative total return for the Advisor Class for the one-year
period ended December 31, 1995 and since inception (October 17, 1991) would
have been 0.36% and 45.00%, respectively.
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VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities in
which the fund invests. A beta of more than 1.00 indicates volatility greater
than the market and a beta of less than 1.00 indicates volatility less than the
market. Another measure of volatility or risk is standard deviation. Standard
deviation is used to measure variability of Net Asset Value or total return
around an average over a specified period of time. The idea is that greater
volatility means greater risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
For any period prior to January 1, 1997, sales literature about the Advisor
Class may quote a current distribution rate, yield, cumulative total return,
average total return and other measures of performance as described elsewhere
in this SAI by substituting the performance of Class I for the relevant time
period and excluding the effect of the maximum sales charge, if applicable, and
Rule 12b-1 fees applicable to Class I.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Templeton Group of Funds. Resources is the parent company of the advisors and
underwriter of both the Franklin Group of Funds and Templeton Group of Funds.
COMPARISONS AND OTHER INFORMATION
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment
in the Fund. The advertisements or information may include symbols, headlines,
or other material that highlights or summarizes the information discussed in
more detail in the communication.
Advertisements or information may also compare the performance of the Advisor
Class to the return on CDs or other investments. You should be aware, however,
that an investment in the Fund involves the risk of fluctuation of principal
value, a risk generally not present in an investment in a CD issued by a bank.
For example, as the general level of interest rates rise, the value of the
Fund's fixed-income investments, if any, as well as the value of its shares
that are based upon the value of such portfolio investments, can be expected to
decrease. Conversely, when interest rates decrease, the
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value of the Fund's shares can be expected to increase. Cds are frequently
insured by an agency of the U.S. government. An investment in the Fund is not
insured by any federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the Fund to calculate its figures. In
addition, there can be no assurance that the Fund will continue its performance
as compared to these other averages.
Performance information for the Fund may be compared, in reports and promotional
literature, to: (i) 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 for inflation) to assess
the real rate of return from an investment in the Fund. Unmanaged indices may
assume the reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.
Performance information for the Fund reflects only the performance of a
hypothetical investment in the Fund during the particular time period on which
the calculations are based. Performance information should be considered in
light of the Fund's investment objective and policies, characteristics and
quality of the portfolio and the market conditions during the given time
period, and should not be considered as a representation of what may be
achieved in the future.
From time to time, the Fund and TAML may also refer to the following
information:
(1) TAML'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.
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(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 of 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,(3) advocating the virtues of diversification and long-term
investing, including the following:
- "Never follow the crowd. Superior performance is possible only if
you invest differently from the crowd."
- "Diversify by company, by industry and by country."
- "Always maintain a long-term perspective."
- "Invest for maximum total real return."
- "Invest - don't trade or speculate."
- "Remain flexible and open-minded about types of investment."
- "Buy low."
- "When buying stocks, search for bargains among quality stocks."
- --------------
(3) Sir John Templeton sold the Templeton organization to
Resources in October, 1992 and resigned from the Fund's Board on
April 16, 1995. He is no longer involved with the investment
management process.
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<PAGE>
- "Buy value, not market trends or the economic outlook."
- "Diversify. In stocks and bonds, as in much else, there is safety
in numbers."
- "Do your homework or hire wise experts to help you."
- "Aggressively monitor your investments."
- "Don't panic."
- "Learn from your mistakes."
- "Outperforming the market is a difficult task."
- "An investor who has all the answers doesn't even understand all
the questions."
- "There's no free lunch."
- "And now the last principle: Do not be fearful or negative too
often."
MISCELLANEOUS INFORMATION
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 48 years
and now services more than 2.5 million shareholder accounts. In 1992, Franklin,
a leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Together, the Franklin Templeton Group has over
$151 billion in assets under management for more than 4.2 million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers 115 U.S. based mutual funds to the public. The Fund may identify
itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past eight years.
[NOTE: THE FOLLOWING INFORMATION SHOULD BE AS OF A DATE NO MORE THAN 30 DAYS
PRIOR TO THE FILING OF THE REGISTRATION STATEMENT.] As of [INSERT DATE], 1996,
the principal holders of the Fund, beneficial or of record, were as follows:
-36-
<PAGE>
[INSERT NAME, ADDRESS, SHARE AMOUNT AND PERCENTAGE, AS APPROPRIATE.]
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations. The
Fund's Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the Fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the Fund's assets if you are held personally liable for
obligations of the Fund. The Declaration of Trust provides that the Fund shall,
upon request, assume the defense of any claim made against you for any act or
obligation of the Fund and satisfy any judgment thereon. All such rights are
limited to the assets of the Fund. The Declaration of Trust further provides
that the Fund may maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the Fund, its
shareholders, trustees, officers, employees and agents to cover possible tort
and other liabilities. Furthermore, the activities of the Fund as an investment
company, as distinguished from an operating company, would not likely give rise
to liabilities in excess of the Fund's total assets. Thus, the risk of you
incurring financial loss on account of shareholder liability is limited to the
unlikely circumstances in which both inadequate insurance exists and the Fund
itself is unable to meet its obligations.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, prior to
executing instructions regarding the account; (b) interplead disputed funds or
accounts with a court of competent jurisdiction; or (c) surrender ownership of
all or a portion of the account to the IRS in response to a Notice of Levy.
Summary of Code of Ethics. Employees of Resources or its subsidiaries who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed within 24 hours after clearance; (ii) copies of all brokerage
confirmations must be sent to a 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; and (iii) access persons involved in
preparing and making investment decisions must, in addition to (i) and (ii)
above, file annual reports of their securities holdings each January and 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.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Fund, for the fiscal year ended December 31, 1995, including the
auditors' report, and the unaudited financial statements contained in the
Semi-Annual Report to Shareholders of the Fund, for the six months ended June
30, 1996, are incorporated herein by reference. These audited and unaudited
financial
-37-
<PAGE>
statements do not include information for the Advisor Class as those shares were
not publicly offered prior to the date of this SAI.
-38-
<PAGE>
USEFUL TERMS AND DEFINITIONS
1933 Act - Securities Act of 1933, as amended.
1940 Act - Investment Company Act of 1940, as amended.
AMEX - American Stock Exchange, Inc.
Board - The Board of Trustees of the Fund.
CD - Certificate of deposit.
CFTC - Commodity Futures Trading Commission.
Class I, Class II and Advisor Class - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. Class I and Class II differ,
however, primarily in their sales charge structures and Rule 12b-1 plans.
Advisor Class shares are purchased without a sales charge and do not have a
Rule 12b-1 plan.
Code - Internal Revenue Code of 1986, as amended.
Contingency Period - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the
contingency period is 18 months. Regardless of when during the month you
purchased shares, they will age one month on the last day of that month and
each following month.
Contingent Deferred Sales Charge (CDSC) - A sales charge of 1% that may apply
if you sell your shares within the Contingency Period.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
Franklin Funds - The mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust.
Franklin Templeton Funds - The Franklin Funds and the Templeton Funds.
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries.
Franklin Templeton Group of Funds - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds.
FT Services - Franklin Templeton Services, Inc., the Fund's administrator.
-39-
<PAGE>
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing agent and transfer agent.
IRS - Internal Revenue Service.
Market Timer(s) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
Moody's - Moody's Investors Service, Inc.
Mutual Series - Franklin Mutual Series Fund Inc., a member of the Franklin
Group of Funds, formerly Mutual Series Fund Inc. Each series of Mutual Series
began offering three classes of shares on November 1, 1996, Class I, Class II
and Class Z. All shares sold before that time are designated Class Z.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NSCC - National Securities Clearing Corporation.
NYSE - New York Stock Exchange, Inc.
Offering Price - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge, if applicable. The
maximum front-end sales charge is 5.75% for Class I and 1% for Class II. The
Advisor Class has no front- end sales charge.
Qualified Retirement Plan(s) - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust.
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information.
S&P - Standard & Poor's Corporation.
SEC - U.S. Securities and Exchange Commission.
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
-40-
<PAGE>
TAML - Templeton Asset Management Ltd. - Hong Kong Branch, the Fund's
investment manager, is located at Two Exchange Square, Hong Kong.
Templeton Funds - The U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., the Templeton Variable
Annuity Fund, and the Templeton Variable Products Series Fund.
Trust Company - Franklin Templeton Trust Company. Trust Company is the
affiliate of Distributors and both are wholly-owned subsidiaries of Resources.
U.S. - United States.
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly-owned
subsidiaries of Resources.
-41-
<PAGE>
APPENDICES
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
Moody's
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest
a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
-42-
<PAGE>
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
COMMERCIAL PAPER RATINGS
Moody's
Moody's commercial paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Fund, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
-43-
<PAGE>
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger likelihood
of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
-44-
<PAGE>
PAGE
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS: Incorporated by reference from
Registrant's 1995 Annual Report:
Independent Auditor's Report Investment Portfolio as
of December 31, 1995 Statement of Assets and
Liabilities as of December 31, 1995 Statement of
Operations for the year ended December 31, 1995
Statement of Changes in Net Assets for the years
ended December 31, 1995 and 1994 Notes to Financial
Statements
Incorporated by reference from the Registrant's
(unaudited) June 30, 1996 Semi-Annual Report:
Investment Portfolios
Statements of Assets and Liabilities
Statements of Operations
Statement of Changes in Net Assets
Notes to Financial Statements
(b) EXHIBITS
(1) (a) Amended and Restated Declaration of
Trust 1
(c) Establishment and Designation of Classes
of Shares of Beneficial Interest 2
(d) Establishment and Designation of Classes
of Shares of Beneficial Interest
(2) By-Laws 1
(3) Not Applicable
(4) Specimen Security 3
(5) Amended and Restated Investment Management
Agreement 1
(6) Distribution Agreement 1
(7) Not Applicable
(8) Custody Agreement 1
(9) (a) Transfer Agent Agreement 1
(b) Fund Administratin Agreement
(c) Shareholder Sub-Accounting Services
Agreement 1
(d) Sub-Transfer Agent Services Agreement 1
(10) Opinion and consent of Counsel (filed with Rule
24f-2 Notice)
(11) Consent of independent public accountants 1
(12) Not Applicable
(13) (a) Letter concerning initial capital 4
(b) Investment Letter 2
(14) Not Applicable
(15) (a) Distribution Plan -- Class I Shares 2
(b) Distribution Plan -- Class II Shares 2
(16) Schedule showing computation of performance
quotations provided in response to Item
22 (unaudited)2
(18) Form of Multiclass Plan 2
(27) Financial Data Schedule
- ---------------
1 Previously filed with Post-Effective Amendment No. 5 to the
Registration Statement on April 29, 1996.
2 Previously filed with Post-Effective Amendment No. 4 to the
Registration Statement on April 28, 1995.
3 Previously filed with Pre-Effective Amendment No. 1 to the
Registration Statement on September 19, 1991.
4 Previously filed with Pre-Effective Amendment No. 2 to the
Registration Statement on October 16, 1991.
PAGE
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 26. NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest, par value $0.01 per share -
Class I: 234,137 Shareholders as of November 30, 1996.
Shares of Beneficial Interest, par value $0.01 per share -
Class II: 16,272 Shareholders as of November 30, 1996.
ITEM 27. INDEMNIFICATION.
Reference is made to Article IV of the Registrant's
Declaration of Trust, which is filed herewith.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers
and controlling persons of the Registrant by the Registrant
pursuant to the Declaration of Trust or otherwise, the
Registrant is aware that in the opinion of the Securities and
Exchange Commission, such indemnification is against public
policy as expressed in the Act and, therefore, is
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by trustees, officers
or controlling persons of the Registrant in connection with
the successful defense of any act, suit or proceeding) is
asserted by such trustees, officers or controlling persons in
connection with the shares being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issues.
PAGE
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER AND ITS
OFFICERS AND DIRECTORS
The business and other connections of Registrant's Investment
Managers are described in Part B of this Registration
Statement.
For information relating to the directors and officers of the
Investment Manager, reference is made to the Form ADV filed
with the Commission under the Investment Advisers Act of
1940 by Templeton Asset Management Ltd., which is
incorporated herein by reference.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Franklin Templeton Distributors, Inc. also acts as
principal underwriter of shares of:
Franklin Templeton Japan Fund
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
Franklin Asset Allocation Fund
Franklin California Tax Free Income Fund, Inc.
Franklin California Tax Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Premier Return Fund
Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Advantaged High Yield Securities Fund
Franklin Tax-Advantaged International Bond Fund
Franklin Tax-Advantaged U.S. Government Securities
Fund
Franklin Tax Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
(b) The directors and officers of FTD, located at 777
Mariners Island Blvd., San Mateo, California 94404,
are as follows:
<TABLE>
<CAPTION>
Position with Position with
NAME UNDERWRITER THE REGISTRANT
<S> <C> <C>
Charles B. Johnson Chairman of the Vice President
Board and Director
Gregory E. Johnson President None
Rupert H. Johnson, Jr. Executive Vice Vice President
President and
Director
Harmon E. Burns Executive Vice Vice President
President and
Director
Edward V. McVey Senior Vice None
President
Kenneth V. Domingues Senior Vice None
President
William J. Lippman Senior Vice None
President
Richard C. Stoker Senior Vice None
President
Charles E. Johnson Senior Vice Vice President
500 E. Broward Blvd. President Trustee
Ft. Lauderdale, FL 33394
Deborah R. Gatzek Senior Vice Vice President
President and
Assistant Secretary
Daniel T. O'Lear Senior Vice President None
Peter Jones Senior Vice President None
700 Central Avenue
St. Petersburg, FL 33701
Bert W. Feuss Vice President None
James K. Blinn Vice President None
Richard O. Conboy Vice President None
James A. Escobedo Vice President None
Loretta Fry Vice President None
Robert N. Geppner Vice President None
Mike Hackett Vice President None
Philip J. Kearns Vice President None
Ken Leder Vice President None
Jack Lemein Vice President None
John R. McGee Vice President None
Harry G. Mumford Vice President None
Vivian J. Palmieri Vice President None
Kent P. Strazza Vice President None
Francie Arnone Asst. Vice President None
Sarah Stypa Asst. Vice President None
Alison Hawksley Asst. Vice President None
John R. Kay Asst. Vice President Vice President
500 E. Broward Blvd.
Ft. Lauderdale, FL 33394
Andrea Dover Asst. Vice President None
Laura Komar Asst. Vice President None
Virginia Marans Asst. Vice President None
Bernadette Marino Howard Asst. Vice President None
Susan Thompson Asst. Vice President None
Kenneth A. Lewis Treasurer None
Philip A. Scatena Asst. Treasurer None
Karen DeBellis Asst. Treasurer Asst. Treasurer
700 Central Avenue
St. Petersburg, Fl 33701
Leslie M. Kratter Secretary None
</TABLE>
(c) Not Applicable (Information on unaffiliated underwriters).
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books, and other documents required to be
maintained by Registrant pursuant to Section 31(a) of the
Investment Company Act of 1940 and rules promulgated
thereunder are in the possession of Franklin Templeton
Services, Inc., 500 East Broward Blvd., Fort Lauderdale,
Florida 33394.
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS.
(a) Not Applicable.
(b) Not Applicable.
(c) Registrant undertakes to call a meeting of
Shareholders for the purpose of voting upon the
question of removal of a Trustee or Trustees when
requested to do so by the holders of at least 10% of
the Registrant's outstanding shares of beneficial
interest and in connection with such meeting to
comply with the shareholder communications provisions
of Section 16(c) of the Investment Company Act of
1940.
(d) Registrant undertakes to furnish to each person to
whom its Prospectus is provided a copy of its latest
Annual Report, upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of the Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of St. Petersburg in the State of Florida
on the 30th of December, 1996.
TEMPLETON DEVELOPING MARKETS TRUST
By:
J. Mark Mobius, President*
*By: /s/JOHN K. CARTER
John K. Carter
as attorney-in-fact**
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
____________________ President (Chief December 30, 1996
J. Mark Mobius* Executive Officer)
____________________ Treasurer (Chief December 30, 1996
James R. Baio* Financial and
Accounting Officer)
____________________ Trustee December 30, 1996
Charles B. Johnson*
____________________ Trustee December 30, 1996
Charles E. Johnson*
____________________ Trustee December 30, 1996
Nicholas F. Brady*
____________________ Trustee December 30, 1996
Fred R. Millsaps*
_____________________ Trustee December 30, 1996
Betty P. Krahmer*
____________________ Trustee December 30, 1996
Constantine Dean
Tseretopoulos*
____________________ Trustee December 30, 1996
Frank J. Crothers*
____________________ Trustee December 30, 1996
Harris J. Ashton*
____________________ Trustee December 30, 1996
S. Joseph Fortunato*
____________________ Trustee December 30, 1996
Andrew H. Hines, Jr.*
____________________ Trustee December 30, 1996
John Wm. Galbraith*
____________________ Trustee December 30, 1996
Gordon S. Macklin*
*By: /s/JOHN K.CARTER
John K. Carter**
as attorney-in-fact
- -------------------
** Powers of Attorney were previously filed with Registration
Statement No. 33-42163 and are incorporated by reference or are
attached hereto.
PAGE
POWER OF ATTORNEY
The undersigned officers and Trustees of TEMPLETON DEVELOPING
MARKETS TRUST (the "Registrant") hereby appoint Allan S. Mostoff, Jeffrey L.
Steele, William J. Kotapish, Deborah R. Gatzek, Barbara J. Green, Larry L.
Greene, and John K. Carter (with full power to each of them to act alone) his
attorney-in-fact and agent, in all capacities, to execute, and to file any of
the documents referred to below relating to Post-Effective Amendments to the
Registrant's registration statement on Form N-1A under the Investment Company
Act of 1940, as amended, and under the Securities Act of 1933 covering the sale
of shares by the Registrant under prospectuses becoming effective after this
date, including any amendment or amendments increasing or decreasing the amount
of securities for which registration is being sought, with all exhibits and any
and all documents required to be filed with respect thereto with any regulatory
authority. Each of the undersigned grants to each of said attorneys, full
authority to do every act necessary to be done in order to effectuate the same
as fully, to all intents and purposes as he could do if personally present,
thereby ratifying all that said attorneys-in-fact and agents, may lawfully do or
cause to be done by virtue hereof.
The undersigned officers and Trustees hereby execute this
Power of Attorney as of this 12th day of December, 1996.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
/s/HARRIS J. ASHTON /s/CHARLES B. JOHNSON
Harris J. Ashton, Trustee Charles B. Johnson, Trustee
/s/NICHOLAS F.BRADY /s/CHARLES E. JOHNSON
Nicholas F. Brady, Trustee Charles E. Johnson, Trustee
/s/FRANK J. CROTHERS /s/BETTY P. KRAHMER
Frank J. Crothers, Trustee Betty P. Krahmer, Trustee
/s/S. JOSEPH FORTUNATO /s/GORDON S.MACKLIN
S. Joseph Fortunato, Trustee Gordon S. Macklin, Trustee
/s/JOHN WM. GALBRAITH /s/FRED R.MILLSAPS
John Wm. Galbraith, Trustee Fred R. Millsaps, Trustee
/s/ANDREW H. HINES, JR. /s/CONSTANTINE d. TSERETOPOULOS
Andrew H. Hines, Jr., Trustee Constantine D. Tseretopoulos, Trustee
/s/EDITH E.HOLIDAY /s/J. MARK MOBIUS
Edith E. Holiday, Trustee J. Mark Mobius, President
/s/JAMES R.BAIO
James R. Baio, Treasurer
</TABLE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
FILED WITH
POST-EFFECTIVE AMENDMENT NO. 6 TO
REGISTRATION STATEMENT
ON
FORM N-1A
TEMPLETON DEVELOPING MARKETS TRUST
PAGE
EXHIBIT LIST
Exhibit Number Name of Exhibit
( 1)(d) Establishment and Designation of Classes of Shares
( 9)(b) Fund Administration Agreement
(27) Financial Data Schedule
PAGE
Establishment and Designation
Of Classes of Shares of Beneficial Interest
Par Value $0.01 Per Share
The undersigned, being a majority of the Trustees of Templeton
Developing Markets Trust, a Massachusetts business trust (the "Trust"), acting
pursuant to Section 5.12 of the Declaration of Trust dated August 9, 1991, as
previously amended (the "Declaration of Trust") of the Trust, hereby divide the
shares of beneficial interest of the Trust into three separate classes, each
class to have the following special and relative rights:
1. The classes shall be designated "Templeton Developing
Markets Trust Class I," "Templeton Developing Markets Trust Class II" and
"Templeton Developing Markets Trust Advisor Class."
2. The Trust shall be authorized to invest in cash,
securities, instruments and other property as from time to time described in the
Trust's then currently effective registration statement under the Securities Act
of 1933. Each share of beneficial interest of the Trust ("Share") shall be
redeemable, shall be entitled to one vote (or fraction thereof in respect of a
fractional Share) on matters on which Shares of the Trust shall be entitled to
vote (subject to paragraph 3 below), shall represent a pro rata beneficial
interest in the assets of the Trust (subject to paragraph 4 below) and shall be
entitled to receive its pro rata share of net assets of the Trust upon
liquidation of the Trust, all as provided in the Declaration of Trust.
3. Shareholders of the Trust shall vote together as a single
class on any matter, except to the extent required by the Investment Company Act
of 1940, as amended (the "1940 Act"), or when the Trustees have determined that
the matter affects only the interests of Shareholders of a particular class of
Shares, in which case only the Shareholders of such class shall be entitled to
vote thereon. Any matter shall be deemed to have been effectively acted upon
with respect to any class as provided in Rule 18f-2 under the 1940 Act, or any
successor rule, and in the Declaration of Trust.
4. Liabilities, expenses, costs, charges and reserves related
to the distribution of, and other identified expenses that should properly be
allocated to, the Shares of a particular class may be charged to and borne
solely by such class and the bearing of expenses solely by a class of Shares may
be appropriately reflected (in a manner determined by the Trustees), and cause
differences in, the net asset value attributable to, and the dividend,
redemption and liquidation rights of, the Shares of different classes. Each
allocation of liabilities, expenses, costs, charges and reserves by the Trustees
shall be conclusive and binding upon the Shareholders of all classes for all
purposes.
5. Shares of each class of the Trust may vary between
themselves as to rights of redemption and conversion rights, as may be approved
by the Trustees and set forth in the Trust's then-current prospectus.
6. The Trustees shall have the right at any time and from time
to time to reallocate assets and expenses or to change the designation of any
series or any class thereof hitherto or hereafter created, or to otherwise
change the special and relative rights of any series or any class thereof,
provided that such change shall not adversely affect to rights of the
Shareholders of such series or class.
IN WITNESS WHEREOF, the undersigned have executed this
instrument this 26th day of December, 1996.
<TABLE>
<CAPTION>
<S> <C>
/s/HARRIS J. ASHTON
Harris J. Ashton, Trustee Charles B. Johnson, Trustee
Nicholas F. Brady, Trustee Charles E. Johnson, Trustee
/s/BETTY P. KRAHMER
Frank J. Crothers, Trustee Betty P. Krahmer, Trustee
/s/S. JOSEPH FORTUNATO /s/GORDON S. MACKLIN
S. Joseph Fortunato, Trustee Gordon S. Macklin, Trustee
/s/FRED R.MILLSAPS
John Wm. Galbraith, Trustee Fred R. Millsaps, Trustee
/s/ANDREW H.HINES, JR. /s/CONSTANTINE D. TSERETOPOULOS
Andrew H. Hines, Jr., Trustee Constantine D. Tseretopoulos, Trustee
Edith E. Holiday, Trustee
</TABLE>
PAGE
CERTIFICATE
Pursuant to Section 10.1 of the Declaration of Trust, the undersigned
Trustee hereby acknowledges and certifies that this instrument is made in
accordance with the provisions of the Declaration of Trust, and shall be
effective upon its filing with the Secretary of the Commonwealth of
Massachusetts.
IN WITNESS WHEREOF, the undersigned has executed this instrument this
26th day of December, 1996.
/s/ANDREW H. HINES, JR.
Andrew H. Hines, Jr., Trustee
FUND ADMINISTRATION AGREEMENT BETWEEN
TEMPLETON DEVELOPING MARKETS TRUST
AND
FRANKLIN TEMPLETON SERVICES, INC.
AGREEMENT dated as of October 1, 1996, between Templeton
Developing Markets Trust (the "Fund"), an investment company registered under
the Investment Company Act of 1940 ("1940 Act"), and Franklin Templeton
Services, Inc. ("FTS" or "Administrator").
In consideration of the mutual promises herein made the
parties hereby agree as follows:
(1) The Administrator agrees, during the life of this Agreement,
to provide the following services to the Fund:
(a) providing office space, telephone, office equipment
and supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless
these facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for
payment on behalf of the Fund;
(d) supervising preparation of periodic reports to
shareholders, notices of dividends, capital gains distributions and tax credits;
and attending to routine correspondence and other communications with individual
shareholders when asked to do so by the Fund's shareholder servicing agent or
other agents of the Fund;
(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services engaged by the
Fund; providing fund accounting services, including preparing and supervising
publication of daily net asset value quotations, periodic earnings reports and
other financial data; and coordinating trade settlements;
(f) monitoring relationships with organizations serving the
Fund, including custodians, transfer agents, public accounting firms, law firms,
printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping
requirements under the federal securities laws, including the 1940 Act and the
rules and regulations thereunder, and under other applicable state and federal
laws; and maintaining books and records for the Fund (other than those
maintained by the custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's
income tax returns, and monitoring the Fund's compliance with subchapter M of
the Internal Revenue Code, as amended, and other applicable tax laws and
regulations;
(i) monitoring the Fund's compliance with: 1940 Act and other
federal securities laws, and rules and regulations thereunder; state and foreign
laws and regulations applicable to the operation of investment companies; the
Fund's investment objectives, policies and restrictions; and the Code of Ethics
and other policies adopted by the Fund's Board of Trustees ("Board") or by the
Fund's investment adviser and applicable to the Fund;
(j) providing executive, clerical and secretarial
personnel needed to carry out the above responsibilities;
(k) preparing and filing regulatory reports, including
without limitation Forms N-1A and N-SAR, proxy statements, information
statements and U.S. and foreign ownership reports; and
(l) providing support services incidental to carrying
out these duties.
Nothing in this Agreement shall obligate the Fund to pay any compensation to the
officers of the Fund. Nothing in this Agreement shall obligate FTS to pay for
the services of third parties, including attorneys, auditors, printers, pricing
services or others, engaged directly by the Fund to perform services on behalf
of the Fund.
(2) The Fund agrees, during the life of this Agreement, to pay to FTS
as compensation for the foregoing a monthly fee equal on an annual basis to
0.15% of the first $200 million of the average daily net assets of each Fund
during the month preceding each payment, reduced as follows: on such net assets
in excess of $200 million up to $700 million, a monthly fee equal on an annual
basis to 0.135%; on such net assets in excess of $700 million up to $1.2
billion, a monthly fee equal on an annual basis to 0.10%; and on such net assets
in excess of $1.2 billion, a monthly fee equal on an annual basis to 0.075%.
From time to time, FTS may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in the purchase price
of its services. FTS shall be contractually bound hereunder by the terms of any
publicly announced waiver of its fee, or any limitation of each affected Fund's
expenses, as if such waiver or limitation were fully set forth herein.
(3) This Agreement shall remain in full force and effect through for
one year after its execution and thereafter from year to year to the extent
continuance is approved annually by the Board of the Fund.
(4) This Agreement may be terminated by the Fund at any time on sixty
(60) days' written notice without payment of penalty, provided that such
termination by the Fund shall be directed or approved by the vote of a majority
of the Board of the Fund in office at the time or by the vote of a majority of
the outstanding voting securities of the Fund (as defined by the 1940 Act); and
shall automatically and immediately terminate in the event of its assignment (as
defined by the 1940 Act).
(5) In the absence of willful misfeasance, bad faith or gross
negligence on the part of FTS, or of reckless disregard of its duties and
obligations hereunder, FTS shall not be subject to liability for any act or
omission in the course of, or connected with, rendering services hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their duly authorized officers.
FRANKLIN TEMPLETON SERVICES, INC.
By:/s/MARTIN L. FLANAGAN
Martin L. Flanagan
President
TEMPLETON DEVELOPING MARKETS TRUST
By:/s/JOHN R. KAY
John R. Kay
Vice President
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
TEMPLETON DEVELOPING MARKETS TRUST JUNE 30, 1996 SEMI-ANNUAL REPORT AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000878087
<NAME> TEMPLETON DEVELOPING MARKETS TRUST CLASS I
<SERIES>
<NUMBER> 001
<NAME>TEMPLETON DEVELOPING MARKETS TRUST
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 2824162645
<INVESTMENTS-AT-VALUE> 3127397188
<RECEIVABLES> 36512436
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 1928644
<TOTAL-ASSETS> 3165838268
<PAYABLE-FOR-SECURITIES> 22928955
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9779603
<TOTAL-LIABILITIES> 32708558
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2776656546
<SHARES-COMMON-STOCK> 198555307
<SHARES-COMMON-PRIOR> 165080709
<ACCUMULATED-NII-CURRENT> 29979993
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 23258628
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 303234543
<NET-ASSETS> 3133129710
<DIVIDEND-INCOME> 47619235
<INTEREST-INCOME> 11510715
<OTHER-INCOME> 0
<EXPENSES-NET> 28558630
<NET-INVESTMENT-INCOME> 30571320
<REALIZED-GAINS-CURRENT> 24204698
<APPREC-INCREASE-CURRENT> 320132415
<NET-CHANGE-FROM-OPS> 374908433
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2696810)
<DISTRIBUTIONS-OF-GAINS> (7234166)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 50842217
<NUMBER-OF-SHARES-REDEEMED> (17956031)
<SHARES-REINVESTED> 588412
<NET-CHANGE-IN-ASSETS> 944453653
<ACCUMULATED-NII-PRIOR> 2196486
<ACCUMULATED-GAINS-PRIOR> 6537420
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 17240080
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 28558630
<AVERAGE-NET-ASSETS> 2671196175
<PER-SHARE-NAV-BEGIN> 13.01
<PER-SHARE-NII> .15
<PER-SHARE-GAIN-APPREC> 1.92
<PER-SHARE-DIVIDEND> (.02)
<PER-SHARE-DISTRIBUTIONS> (.04)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.02
<EXPENSE-RATIO> 2.04
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
TEMPLETON DEVELOPING MARKETS TRUST JUNE 30, 1996 SEMI-ANNUAL REPORT AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000878087
<NAME> TEMPLETON DEVELOPING MARKETS TRUST CLASS II
<SERIES>
<NUMBER> 002
<NAME>TEMPLETON DEVELOPING MARKETS TRUST
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 2824162645
<INVESTMENTS-AT-VALUE> 3127397188
<RECEIVABLES> 36512436
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 1928644
<TOTAL-ASSETS> 3165838268
<PAYABLE-FOR-SECURITIES> 22928955
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9779603
<TOTAL-LIABILITIES> 32708558
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2776656546
<SHARES-COMMON-STOCK> 10162502
<SHARES-COMMON-PRIOR> 3167973
<ACCUMULATED-NII-CURRENT> 29979993
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 23258628
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 303234543
<NET-ASSETS> 3133129710
<DIVIDEND-INCOME> 47619235
<INTEREST-INCOME> 11510715
<OTHER-INCOME> 0
<EXPENSES-NET> 28558630
<NET-INVESTMENT-INCOME> 30571320
<REALIZED-GAINS-CURRENT> 24204698
<APPREC-INCREASE-CURRENT> 320132415
<NET-CHANGE-FROM-OPS> 374908433
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (91003)
<DISTRIBUTIONS-OF-GAINS> (249324)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7402350
<NUMBER-OF-SHARES-REDEEMED> (427488)
<SHARES-REINVESTED> 19667
<NET-CHANGE-IN-ASSETS> 944453653
<ACCUMULATED-NII-PRIOR> 2196486
<ACCUMULATED-GAINS-PRIOR> 6537420
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 17240080
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 28558630
<AVERAGE-NET-ASSETS> 102657008
<PER-SHARE-NAV-BEGIN> 12.95
<PER-SHARE-NII> .21
<PER-SHARE-GAIN-APPREC> 1.79
<PER-SHARE-DIVIDEND> (.02)
<PER-SHARE-DISTRIBUTIONS> (.04)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.89
<EXPENSE-RATIO> 2.73
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
