TEMPLETON DEVELOPING MARKETS TRUST
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1996
AS AMENDED NOVEMBER 1, 1996
700 CENTRAL AVENUE
ST. PETERSBURG, FL 33701 1-800/DIAL BEN
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TABLE OF CONTENTS PAGE
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How does the Fund Invest its Assets?......................... 2
What are the Fund's Potential Risks?......................... 5
Investment Restrictions...................................... 8
Officers and Trustees........................................ 10
Investment Management and Other Services..................... 15
How does the Fund Buy Securities for its Portfolio?.......... 16
How Do I Buy, Sell and Exchange Shares?...................... 17
How are Fund Shares Valued?.................................. 20
Additional Information on Distributions and Taxes............ 20
The Fund's Underwriter....................................... 25
How does the Fund Measure Performance?....................... 26
Miscellaneous Information.................................... 29
Financial Statements......................................... 30
Useful Terms and Definitions................................. 30
Appendices................................................... 31
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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.
The Prospectus, dated May 1, 1996, 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.
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 the 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 the 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 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 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 or high grade
U.S. governmen 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 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.
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?
You 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 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 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.
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; (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
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 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 WITH
NAME, ADDRESS AND AGE 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); director of RBC
Stamford, Connecticut Holdings (U.S.A.) Inc. (a bank holding company)
Age 64 and Bar-S Foods; and officer and/or director or
trustee of 55 of the investment companies in the
Franklin Templeton Group of Funds.
- --------------------------------- ------------------------------- --------------------------------------------------
</TABLE>
<TABLE>
- --------------------------------- ------------------------------- --------------------------------------------------
<S> <C> <C>
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; formerly, 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
officer and/or director or trustee of 22
of the investment companies in the Franklin
Templeton Group of Funds.
- --------------------------------- ------------------------------- --------------------------------------------------
FRANK J. CROTHERS Trustee President and chief executive officer of
P.O. Box N-3238 Atlantic Equipment & Power Ltd.; vice chairman
Nassua, Bahamas of Caribbean Utilities Co., Ltd.; president of
Age 52 Provo Power Corporation; director of various
other business and non-profit organizations;
and officer and/or 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; director of General Host Corporation
Florham Park, New Jersey (nursery and craft centers); and officer and/or
Age 64 director or trustee of 57 of the investment
companies in the Franklin Templeton Group of
Funds.
- --------------------------------- ------------------------------- --------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
- --------------------------------- ------------------------------- --------------------------------------------------
<S> <C> <C>
JOHN Wm. GALBRAITH Trustee President of Galbraith Properties, Inc.
360 Central Avenue (personal investment company); director of Gulf
Suite 1300 West Banks, Inc. (bank holding company)
St. Petersburg, Florida (1995-present); formerly, director of Mercantile
Age 75 Bank (1991-1995), vice chairman of Templeton,
Galbraith & Hansberger Ltd. (1986-1992), and
chairman of Templeton Funds Management, Inc.
(1974-1991); and officer and/or 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.; formerly, chairman of
the board and chief executive officer of Florida
Progress Corporation (1982-1990) and director
of various of its subsidiaries; and officer
and/or director or trustee of 22 of the investment
companies in the Franklin Templeton Group of
Funds.
- --------------------------------- ------------------------------- --------------------------------------------------
CHARLES B. JOHNSON Trustee, Chairman of the President, chief executive officer, and director
777 Mariners Island Blvd. Board and Vice President of Franklin Resources, Inc.; chairman of the
San Mateo, California board and director of Franklin Advisers, Inc.
Age 63 and 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 companie in the Franklin
Templeton Group of Funds.
- --------------------------------- ------------------------------- --------------------------------------------------
</TABLE>
<TABLE>
- --------------------------------- ------------------------------- --------------------------------------------------
<S> <C> <C>
CHARLES E. JOHNSON Trustee and Vice President Senior vice president and director of Franklin
500 East Broward Blvd. Resources, Inc.; senior vice president of
Fort Lauderdale, Florida Franklin Templeton Distributors, Inc.; president
Age 40 and chief executive officer of Templeton
Worldwide, Inc.; president and director of
Franklin Institutional Services Corporation;
chairman of the board of Templeton Investment
Counsel, Inc.;officer and/or director, as
the case may be, of other subsidiaries
of Franklin Resources, Inc.; and officer and/or
director or trustee of 39 of the investment
companies in the Franklin Templeton Group of
Funds.
- --------------------------------- ------------------------------- --------------------------------------------------
BETTY P. KRAHMER Trustee Director or trustee of various civic
2201 Kentmere Parkway associations; formerly, economic analyst, U.S.
Wilmington, Delaware government; and officer and/or director or
Age 67 trustee of 22 of the investment 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, InfovestCorporation,
MedImmune, Inc., Source One Mortgage Services
Corporation, and Shoppers Express, Inc.(on-line
shopping service); formerly, 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 officer and/or
director or trustee of 52 of the investment
companies in the Franklin Templeton Group of
Funds.
- --------------------------------- ------------------------------- --------------------------------------------------
</TABLE>
<TABLE>
- --------------------------------- ------------------------------- --------------------------------------------------
<S> <C> <C>
CONSTANTINE DEAN TSERETOPOULOS Trustee Physician, Lyford Cay Hospital (1987-present);
Lyford Cay Hospital formerly, cardiology fellow, University of
P.O. Box N-7776 Maryland (1985-1987) and internal medicine
Nassau, Bahamas intern, Greater Baltimore Medical Center
Age 42 (1982-1985); and officer and/or director or
trustee of 4 of the 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 nonprofit
Fort Lauderdale, Florida organizations; formerly, chairman and chief
Age 67 executive officer of Landmark Banking Corporation
(1969-1978),financial vice president of
Florida Power and Light (1965-1969), and vice
president of The Federal Reserve Bank of Atlanta
(1958-1965); and officer and/or director or
trustee of 22 of the investment companies in
the Franklin Templeton Group of Funds.
- --------------------------------- ------------------------------- --------------------------------------------------
J. MARK MOBIUS President Portfolio manager of various Templeton advisory
affiliates; managing director of Templeton Asset
Two Exchange Square Management Ltd.; formerly, president of
Hong Kong International Investment Trust Company Limited
Age 60 (investment manager of Taiwan R.O.C. Fund)
(1983-1986) and 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
777 Mariners Island Blvd. Franklin 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.
- --------------------------------- ------------------------------- --------------------------------------------------
</TABLE>
<TABLE>
- --------------------------------- ------------------------------- --------------------------------------------------
<S> <C> <C>
HARMON E. BURNS Vice President Executive vice president, secretary and director
777 Mariners Island Blvd. of Franklin Resources, Inc.; executive vice
San Mateo, California president and director of Franklin Templeton
Age 51 Distributors, Inc.; executive vice president of
Franklin Advisers,Inc.; officer and/or director, as
the case may be, of other subsidiaries of Franklin
Resources, Inc.; and officer and/or director or
trustee of 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
San Mateo, California of 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 22 of the
investment companies in the Franklin Templeton
Group of Funds.
- --------------------------------- ------------------------------- --------------------------------------------------
</TABLE>
<TABLE>
- --------------------------------- ------------------------------- --------------------------------------------------
<S> <C> <C>
MARTIN L. FLANAGAN Vice President Senior vice president, treasurer and chief
President financial officer of Franklin Resources, Inc.;
777 Mariners Island Blvd. director and executive vice president of
San Mateo, California Templeton Investment Counsel, Inc.; director,
Age 36 president and chief executive officer of
Templeton Global Investors, Inc.; a member
of the International Society of Financial
Analysts and the American Institute of
Certified Public Accountants; formerly,
accountant with Arthur Andersen &Company
(1982-1983); officer and/or director, as
the case may be, of othersubsidiaries
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 44 counsel of Kidder Peabody & Co. Inc.
(1989-1990), assistant general counsel of
Gruntal & Co., Inc. (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
22 of the investment companies in the Franklin
Templeton Group of Funds.
- --------------------------------- ------------------------------- --------------------------------------------------
</TABLE>
<TABLE>
- --------------------------------- ------------------------------- --------------------------------------------------
<S> <C> <C>
JAMES R. BAIO Treasurer Certified public accountant; senior vice
500 East Broward Blvd. president of Templeton Worldwide, Inc.,
Fort Lauderdale, Florida Templeton Global Investors, Inc., and Templeton
Age 42 Funds Trust Company; formerly, senior tax
manager with Ernst & Young (certified public
accountants)(1977-1989); and treasurer
of 22 of the investment companies in the Franklin
Templeton Group of Funds.
- --------------------------------- ------------------------------- --------------------------------------------------
BARBARA J. GREEN Secretary Senior vice president of Templeton Worldwide,
500 East Broward Blvd. Inc. and Templeton Global Investors, Inc.;
Fort Lauderdale, Florida formerly, deputy director of the Division of
Age 49 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 secretary of 22 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>
NUMBER OF BOARDS IN THE
FRANKLIN TEMPLETON GROUP
TOTAL FEES RECEIVED FROM OF FUNDS ON WHICH EACH
TOTAL FEES RECEIVED THE FRANKLIN TEMPLETON SERVES**
NAME FROM THE FUND* GROUP OF FUNDS*
<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 8,863 22,975 4
Tseretopoulos
</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 61 registered investment companies, with approximately 171 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
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 October 1, 1996, the officers and Board members, as a group, owned of
record and beneficially approximately 34,923 shares, or less than 1% of the
Fund's total outstanding shares. 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. The Fund's investment manager is TAML.
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 acts 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. (See "Miscellaneous Information - Summary of Code of
Ethics.")
BUSINESS MANAGER AND SERVICES PROVIDED. The Fund's business manager is TGII
(and, prior to April 1, 1993, Templeton Funds Management, Inc.). TGII provides
office space and furnishings, facilities and equipment required for managing the
business affairs of the Fund. TGII also maintains all internal bookkeeping,
clerical, secretarial and administrative personnel and services and provides
certain telephone and other mechanical services. TGII is covered by fidelity
insurance on its officers, directors and employees for the protection of the
Fund.
INVESTMENT MANAGEMENT AND BUSINESS 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.
The investment management fee will be reduced as necessary to comply with the
most stringent limits on Fund expenses of any state where the Fund offers it
shares. Currently, the most restrictive limitation on the Fund's allowable
expenses for each fiscal year, as a percentage of its average net assets, is
2.5% of the first $30 million in assets, 2% of the next $70 million, and 1.5% of
assets over $100 million. Expense reductions have not been necessary based on
state requirements.
Under its business management agreement, the Fund pays TGII a monthly fee equal
on an annual basis to 0.15% of the first $200 million in assets, 0.135% of the
next $500 million, 0.1% of the next $500 million, and 0.075% of assets over
$1,200 million. Each class of shares of the Fund pays a portion of the fee,
determined by the proportion of the Fund that it represents.
For the fiscal years ended December 31, 1995, 1994 and 1993, investment
management fees, and business management fees were as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1995 1994 1993
- --------------------------------- ------------------- --------------- ---------------
<S> <C> <C> <C>
Investment Management Fees $26,314,151 $23,325,167 $6,765,008
Business Management Fees 2,153,848 1,974,513 760,331
</TABLE>
INVESTMENT MANAGEMENT AGREEMENTS. The investment management agreement 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
investmen 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.
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 service 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.
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 n 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 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 the 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.
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
The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities Dealers may at times receive the entire
sales charge. A Securities Dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the 1933 Act.
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. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - Purchase
Price of Fund Shares" in the Prospectus.
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.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.
Class I shares of the Fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
<TABLE>
<CAPTION>
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE
- ------------------------------- ------------
<S> <C>
Under $30,000 3.0%
$30,000 but less than $50,000 2.5%
$50,000 but less than $100,000 2.0%
$100,000 but less than $200,000 1.5%
$200,000 but less than $400,000 1.0%
$400,000 or more 0%
</TABLE>
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors will pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares of $1 million or more: 1% on
sales of $1 million to $2 million, plus 0.80% on sales over $2 million to $3
million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on sales
over $50 million to $100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases of Class I shares by certain retirement plans pursuant to a sales
charge waiver, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on sales
over $3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million. Distributors may make these
payments in the form of contingent advance payments, which may be recovered from
the Securities Dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy Class
I shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds, including Class II shares, acquired more than 90 days before the Letter
is filed, will be counted towards completion of the Letter but will not be
entitled to a retroactive downward adjustment in the sales charge. Any
redemptions you make during the 13 month period, except in the case of certain
retirement plans, will be subtracted from the amount of the purchases for
purposes of determining whether the terms of the Letter have been completed. If
the Letter is not completed within the 13 month period, there will be an upward
adjustment of the sales charge, depending on the amount actually purchased (less
redemptions) during the period. The upward adjustment does not apply to certain
retirement plans. If you execute a Letter prior to a change in the sales charge
structure of the Fund, you may complete the Letter at the lower of the new sales
charge structure or the sales charge structure in effect at the time the Letter
was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the Fund registered in
your name until you fulfill the Letter. This policy of reserving shares does not
apply to certain retirement plans. If total purchases, less redemptions, equal
the amount specified under the Letter, the reserved shares will be deposited to
an account in your name or delivered to you or as you direct. If total
purchases, less redemptions, exceed the amount specified under the Letter and is
an amount that would qualify for a further quantity discount, a retroactive
price adjustment will be made by Distributors and the Securities Dealer through
whom purchases were made pursuant to the Letter (to reflect such further
quantity discount) on purchases made within 90 days before and on those made
after filing the Letter. The resulting difference in Offering Price will be
applied to the purchase of additional shares at the Offering Price applicable to
a single purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified under the
Letter, you will remit to Distributors an amount equal to the difference in the
dollar amount of sales charge actually paid and the amount of sales charge that
would have applied to the aggregate purchases if the total of the purchases had
been made at a single time. Upon remittance, the reserved shares held for your
account will be deposited to an account in your name or delivered to you or as
you direct. If within 20 days after written request the difference in sales
charge is not paid, the redemption of an appropriate number of reserved shares
to realize the difference will be made. In the event of a total redemption of
the account prior to fulfillment of the Letter, the additional sales charge due
will be deducted from the proceeds of the redemption, and the balance will be
forwarded to you.
If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
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.
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 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 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 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 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 a Fund may be treated as
debt securities that are originally issued at a discount. Original issue
discount can generally be defined as the difference between the price at which a
security was issued and its stated redemption price at maturity. Although no
cash income is actually received by the Fund in a given year, original issue
discount on a taxable debt security earned in that given year generally is
treated for federal income tax purposes as interest and, therefore, such income
would be subject to the distribution requirements of the Code. Thus, the Fund
may have to dispose of its portfolio securities under disadvantageous
circumstances to generate cash or leverage itself by borrowing cash, so that it
may satisfy the distribution requirement.
Some of the debt securities may be purchased by the Fund at a discount which
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount will be treated as ordinary income to the extent it does not exceed the
accrued market discount on such debt security. Generally, market discount
accrues on a daily basis for each day the debt security is held by the Fund at a
constant rate over the time remaining to the debt security's maturity or, at the
election of the Fund, at a constant yield to maturity which takes into account
the semiannual compounding of interest.
Exchange control regulations that may restrict repatriation of investment
income, capital, or the proceeds of securities sales by foreign investors may
limit the Fund's ability to make sufficient distributions to satisfy the 90% and
calendar year distribution requirements. See "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.
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.
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 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 who fail to provide the Fund with their correct
taxpayer identification number or to make required certifications, where the
Fund or shareholder has been notified by the IRS that they are subject to backup
withholding. Corporate shareholders and certain other shareholders specified in
the Code generally are exempt from such backup withholding, or when required to
do so, the shareholder fails to certify that he is not subject to backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. federal income tax liability.
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 both classes of the Fund's
shares. 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.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal years ended December 31, 1995, 1994 and 1993, were
$15,575,347, $40,832,421 and $29,913,850, respectively. After allowances to
dealers, Distributors retained $2,087,056, $7,272,994 and $5,079,530 in net
underwriting discounts, commissions and compensation received in connection with
redemptions or repurchases of shares, for the respective years. Distributors may
be entitled to reimbursement under the Rule 12b-1 plan for each class, as
discussed below. Except as noted, istributors received no other compensation
from the Fund for acting as underwriter.
THE RULE 12B-1 PLANS
The Fund has adopted a distribution plan or "Rule 12b-1 plan" with respect to
each class of shares pursuant to Rule 12b-1 of the 1940 Act.
THE CLASS I PLAN. Under the Class I plan the Fund may reimburse Distributors or
others up to a maximum of 0.35% per year of Class I's average daily net assets,
payable quarterly, for costs and expenses incurred in connection with any
activity which is primarily intended to result in the sale of the Fund's shares.
Under the Class I plan, the costs and expenses not reimbursed in any one given
quarter (including costs and expenses not reimbursed because they exceed 0.35%
of the Fund's average daily net assets attributable to Class I shares) may be
reimbursed in subsequent quarters or years.
THE CLASS II PLAN. Under the Class II plan, the Fund pays Distributors up to
0.75% per year of Class II's average daily net assets, payable quarterly, for
costs and expenses incurred by Distributors or others in connection with any
activity which is primarily intended to result in the sale of the Fund's shares.
The Fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets to dealers for personal service and/or maintenance of
shareholder accounts.
During the first year after a purchase of Class II shares, Distributors may keep
this portion of the Rule 12b-1 fees associated with the Class II purchase.
THE CLASS I AND CLASS II PLANS. For both the Class I and Class II plans,
payments to Distributors or others could be for various types of activities,
including (i) payments to broker-dealers who provide certain services of value
to the Fund's shareholders (sometimes referred to as a "trail fee"); (ii)
reimbursement of expenses relating to selling and servicing efforts or of
organizing and conducting sales seminars; (iii) payments to employees or agents
of the Distributors who engage in or support distribution of shares; (iv)
payments of the costs of preparing, printing and distributing prospectuses and
reports to prospective investors and of printing and advertising expenses; (v)
payment of dealer commissions and wholesaler compensation in connection with
sales of the Fund's shares and interest or carrying charges in connection
therewith; and (vi) such other similar services as the Board determines to be
reasonably calculated to result in the sale of shares.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the Board, including a majority vote
of the Board members who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such Board members be done by the non-interested
members of the Board. The plans and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of the
investment management agreement with TAML, or by vote of a majority of the
outstanding shares of the class. Distributors or any dealer or other firm may
also terminate their respective distribution or service agreement at any time
upon written notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the non-interested
members of the Board, cast in person at a meeting called for the purpose of
voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plans should be continued.
For the fiscal year ended December 31, 1995, the total amounts paid by the Fund
pursuant to the Class I and Class II plans were $7,316,486 and $125,940,
respectively, which were used for the following purposes:
<TABLE>
<CAPTION>
CLASS I CLASS II
<S> <C> <C>
Advertising $1,117,498 $ 1,173
Printing and mailing of prospectuses 275,724 509
other than to current shareholders
Payments to underwriters 223,810 113,602
Payments to broker-dealers 5,491,320 10,334
Other 208,134 322
</TABLE>
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 each class follows. 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 the maximum front-end sales charge is deducted from the initial $1,000
purchase, and 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. If a change is made to the sales charge structure,
historical performance information will be restated to reflect the maximum
front-end sales charge currently in effect.
When considering the average annual total return quotations, you should keep in
mind that the maximum front-end sales charge reflected in each quotation is a
one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the Fund. For
Class I shares, the average annual total return for the one-year period ended
December 31, 1995 and for the period from October 17, 1991 (commencement of
operations) to December 31, 1995 was -5.42% and 7.70%, respectively. For Class
II shares, the average annual total return for the period May 1, 1995
(commencement of sales) through December 31, 1995 was -0.27%.
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. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at Net Asset Value. Cumulative total return, however, will be based
on the actual return for each class for a specified period rather than on the
average return over one-, five- and ten-year periods, or fractional portion
thereof. For Class I shares, the cumulative total return for the one-year period
ended December 31, 1995 and for the period from October 17, 1991 (commencement
of operations) to December 31, 1995 was -5.42% and []%, respectively. For Class
II shares, the cumulative total return for the period May 1, 1995 (commencement
of sales) through December 31, 1995 was -0.27%.
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 investors who are permitted to buy Class I shares without a sales charge,
sales literature about Class I may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
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
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 a class' performance 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 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.
(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) Each 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,* advocating the virtues of diversification and long-term
investing, including the following:
(infinity) "Never follow the crowd. Superior performance is
possible only if you invest differently from the
crowd."
(infinity) "Diversify by company, by industry and by country."
(infinity) "Always maintain a long-term perspective."
(infinity) "Invest for maximum total real return."
(infinity) "Invest - don't trade or speculate."
(infinity) "Remain flexible and open-minded about types of
investment."
(infinity) "Buy low."
(infinity) "When buying stocks, search for bargains among
quality stocks."
(infinity) "Buy value, not market trends or the economic
outlook."
(infinity) "Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
(infinity) "Do your homework or hire wise experts to help you."
(infinity) "Aggressively monitor your investments."
(infinity) "Don't panic."
(infinity) "Learn from your mistakes."
(infinity) "Outperforming the market is a difficult task."
(infinity) "An investor who has all the answers doesn't even
understand all the questions."
(infinity) "There's no free lunch."
(infinity) "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.
As of September 30, 1996, the principal shareholders of the Fund, beneficial or
of record, were as follows:
<TABLE>
<CAPTION>
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
CLASS I
<S> <C> <C>
Merrill Lynch, Pierce, Fenner & Smith, Inc. 15,538,069 7%
P.O. Box 45286
Jacksonville, FL 32232-5286
CLASS II
Merrill Lynch, Pierce, Fenner & Smith, Inc. 1,834,108 15%
4800 Deer Lake Drive East
Third Floor
Jacksonville, FL 32246-6484
</TABLE>
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.
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 AND CLASS II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN FUNDS - the mutual funds in the Franklin Group of FundsAE 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 mutual funds in the
Franklin Group of FundsAE and the Templeton Group of Funds
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc.
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
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.
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. The maximum
front-end sales charge is 5.75% for Class I and 1% for Class II.
PROSPECTUS - the prospectus for the Fund dated May 1, 1996, as may be amended
from time to time
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 which, 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 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
TGII - Templeton Global Investors, Inc., the Fund's business manager
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
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.
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:
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.
TL711 STMT 11/96
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1 As a non-fundamental policy, the Fund will not invest more than
10% of its assets in real estate investment trusts. In addition,
the Fund has undertaken with a state securities commission that
(1) the Fund will invest in other open-end investment companies
only (a) for short term investment of cash balances in money
market funds, or (b) for investment in securities in the
portfolios of such other open-end investment companies, direct
investment in which is unavailable to the Fund; and (2) the Fund
will not pay an investment management fee with respect to any
portion of its portfolio comprising shares of other open-end
investment companies.
2 The Fund has undertaken with a state securities commission that,
with respect to 100% of its assets, the Fund will not purchase
more than 10% of a company's outstanding voting securities. As a
non-fundamental policy, the Fund will not invest in any company
for the purpose of exercising control or management.
* Sir John Templeton sold the Templeton organization to 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.
