Registration No. 33-42163
As filed with the Securities and Exchange Commission on February 27, 1998
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 9 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 11 X
(Check appropriate box or boxes)
TEMPLETON DEVELOPING MARKETS TRUST
(Exact Name of Registrant as Specified in Charter)
500 E Broward Boulevard, Fort Lauderdale, Florida 33394
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (954) 527-7500
Barbara J. Green
Templeton Worldwide, Inc.
500 E Broward Boulevard
Fort Lauderdale, Florida 33394
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b) of Rule 485
on pursuant to paragraph (b) of Rule 485
60 days after filing pursuant to paragraph (a)(1) of Rule 485
X on May 1, 1998 pursuant to paragraph (a)(1) of Rule 485
75 days after filing pursuant to paragraph (a)(2) of Rule 485
on pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
<PAGE>
TEMPLETON DEVELOPING MARKETS TRUST
CROSS-REFERENCE SHEET
FORM N-1A
PART A
CLASS I AND CLASS II PROSPECTUS
<TABLE>
<CAPTION>
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
<S> <C> <C>
1 Cover page Cover Page
2 Synopsis Expense Summary
3 Condensed Financial Financial Highlights";
Information "How Does the Fund
Measure Performance?"
4 General Description "How Is the Fund Organized?";
of Registrant "How Does the Fund Invest Its Assets?";
"What Are the Risks of Investing in
the Fund?"
5 Management of the Fund "Who Manages the Fund?"
5A Management's Discussion Contained in Registrant's Annual
of Fund Performance Report to Shareholders
6 Capital Stock and Other "How is the Fund Organized?"; "Services
Securities to Help You Manage Your Account"; "What
Distributions Might I Receive From the
Fund?"; "How Taxation Affects the Fund and Its
Shareholders"
7 Purchase of Securities "How Do I Buy Shares?"; "May I Exchange
Being Offered Shares for Shares of Another Fund?";
"Transaction Procedures and Special
Requirements"; "Services to Help You Manage
Your Account"; "Who Manages the Fund?" "Useful
Terms and Definitions"
8 Redemption or Repurchase "May I Exchange Shares for Shares of Another
Fund?"; "How Do I Sell Shares?"; "Transaction
Procedures and Special Requirements"? "Services
to Help You Manage Your Account"
9 Pending Legal Procedures Not Applicable
</TABLE>
<PAGE>
TEMPLETON DEVELOPING MARKETS TRUST
CROSS-REFERENCE SHEET
FORM N-1A
PART A
ADVISOR CLASS PROSPECTUS
<TABLE>
<CAPTION>
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
<S> <C> <C>
1 Cover page Cover Page
2 Synopsis Expense Summary
3 Condensed Financial "Financial Highlights";
Information "How Does the Fund
Measure Performance?"
4 General Description "How Is the Fund Organized?";
of Registrant "How Does the Fund Invest Its Assets?";
"What Are the Risks of Investing in
the Fund?"
5 Management of the Fund "Who Manages the Fund?"
5A Management's Discussion Contained in Registrant's Annual
of Fund Performance Report to Shareholders
6 Capital Stock and Other "How is the Fund Organized?"; "Services
Securities to Help You Manage Your Account"; "What
Distributions Might I Receive From the
Fund?"; "How Taxation Affects the Fund
and Its Shareholders"
7 Purchase of Securities "How Do I Buy Shares?"; "May I Exchange
Being Offered Shares for Shares of Another Fund?";
"Transaction Procedures and Special
Requirements"; "Services to Help You Manage
Your Account"; "Who Manages the Fund?" "Useful
Terms and Definitions"
8 Redemption or Repurchase "May I Exchange Shares for Shares of Another
Fund?"; "How Do I Sell Shares?"; "Transaction
Procedures and Special Requirements"? "Services
to Help You Manage Your Account"
9 Pending Legal Procedures Not Applicable
</TABLE>
<PAGE>
TEMPLETON DEVELOPING MARKETS TRUST
CROSS-REFERENCE SHEET
FORM N-1A
PART B
CLASS I AND CLASS II
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
<S> <C> <C>
10 Cover Page Cover Page
11 Table of Contents Table of Contents
12 General Information and Not Applicable
History
13 Investment Objectives and "How Does the Fund Invest Its Assets?";
Policies "Investment Restrictions"; "What Are the
Risks of Investing in the Fund?"
14 Management of the "Officers and Trustees"; "Investment
Registrant Management and Other Services"
15 Control Persons and "Officers and Trustees"; "Investment
Principal Holders of Management and Other Services"; "Miscellaneous
Securities Information?"
16 Investment Advisory and "Investment Management and Other Services";
Other Services "The Fund's Underwriter"
17 Brokerage Allocation and "How Does the Fund Buy Securities
Other Practices For Its Portfolio?"
18 Capital Stock and Other "Miscellaneous Information"; See Prospectus
Securities "How Is The Fund Organized?"
19 Purchase, Redemption and "How Do I Buy, Sell and Exchange Shares?";
Pricing of Securities "How Are Fund Shares Valued?";
Being Offered "Financial Statements"
20 Tax Status "Additional Information on Distributions
and Taxes"
21 Underwriters "The Fund's Underwriter"
22 Calculation of Performance "How Does the Fund Measure Performance?"
Data
23 Financial Statements Financial Statements
</TABLE>
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<PAGE>
TEMPLETON DEVELOPING MARKETS TRUST
CROSS-REFERENCE SHEET
FORM N-1A
PART B
ADVISOR CLASS
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
<S> <C> <C>
10 Cover Page Cover Page
11 Table of Contents Table of Contents
12 General Information and Not Applicable
History
13 Investment Objectives and "How Does the Fund Invest Its Assets?";
Policies "Investment Restrictions"; "What Are the
Risks of Investing in the Fund?"
14 Management of the "Officers and Trustees"; "Investment
Registrant Management and Other Services"
15 Control Persons and "Officers and Trustees"; "Investment
Principal Holders of Management and Other Services"; "Miscellaneous
Securities Information?"
16 Investment Advisory and "Investment Management and Other Services";
Other Services "The Fund's Underwriter"
17 Brokerage Allocation and "How Does the Fund Buy Securities
Other Practices For Its Portfolio?"
18 Capital Stock and Other "Miscellaneous Information"; See Prospectus
Securities "How Is The Fund Organized?"
19 Purchase, Redemption and "How Do I Buy, Sell and Exchange Shares?";
Pricing of Securities "How Are Fund Shares Valued?";
Being Offered "Financial Statements"
20 Tax Status "Additional Information on Distributions
and Taxes"
21 Underwriters "The Fund's Underwriter"
22 Calculation of Performance "How Does the Fund Measure Performance?"
Data
23 Financial Statements Financial Statement
</TABLE>
<PAGE>
PART A
CLASS I AND CLASS II
PROSPECTUS
<PAGE>
PROSPECTUS & APPLICATION
TEMPLETON DEVELOPING MARKETS TRUST
MAY 1, 1998
INVESTMENT STRATEGY: GLOBAL GROWTH
This prospectus describes Class I and Class II shares of Templeton Developing
Markets Trust (the "Fund"). It contains information you should know before
investing in the Fund. Please keep it for future reference.
The Fund currently offers another class of shares with a different sales charge
and expense structure, which affects performance. This class is described in a
separate prospectus. For more information, contact your investment
representative or call 1-800/DIAL BEN.
The Fund has a Statement of Additional Information ("SAI") for its Class I and
Class II shares, dated May 1, 1998, which may be amended from time to time. It
includes more information about the Fund's procedures and policies. It has been
filed with the SEC and is incorporated by reference into this prospectus. For a
free copy or a larger print version of this prospectus, call 1-800/DIAL BEN.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
<PAGE>
TEMPLETON DEVELOPING MARKETS TRUST
May 1, 1998
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our glossary section.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
ABOUT THE FUND
Expense Summary..........................................
Financial Highlights.....................................
How Does the Fund Invest Its Assets?.....................
What Are the Risks of Investing in the Fund?.............
Who Manages the Fund?....................................
How Does the Fund Measure Performance?...................
How Taxation Affects the Fund and Its Shareholders.......
How Is the Fund Organized?...............................
ABOUT YOUR ACCOUNT
How Do I Buy Shares?.....................................
May I Exchange Shares for Shares of Another Fund?........
How Do I Sell Shares?....................................
What Distributions Might I Receive From the Fund?........
Transaction Procedures and Special Requirements..........
Services to Help You Manage Your Account.................
What If I Have Questions About My Account?...............
GLOSSARY
Useful Terms and Definitions.............................
</TABLE>
100 Fountain Parkway
P.O. Box 33030
St. Petersburg
FL 33733-8030
1-800/DIAL BEN
<PAGE>
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of each class for the fiscal year
ended December 31, 1997. The Fund's actual expenses may vary.
<TABLE>
<CAPTION>
A. SHAREHOLDER TRANSACTION EXPENSES+ CLASS I CLASS II
<S> <C> <C>
Maximum Sales Charge (as a percentage
of Offering Price) 5.75% 1.99%
Paid at time of purchase 5.75%++ 1.00%+++
Paid at redemption++++ NONE 0.99%
B. ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 1.25% 1.25%
Rule 12b-1 Fees 0.27%* 1.00%*
Other Expenses 0.44% 0.44%
Total Fund Operating Expenses 1.96% 2.69%
</TABLE>
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the
Fund.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
CLASS I $76** $115 $157 $273
CLASS II $56 $102 $160 $316
</TABLE>
For the same Class II investment, you would pay projected expenses of $47
if you did not sell your shares at the end of the first year. Your
projected expenses for the remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The Fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each class and are not
directly charged to your account.
+IF YOUR TRANSACTION IS PROCESSED THROUGH YOUR SECURITIES DEALER, YOU MAY BE
CHARGED A FEE BY YOUR SECURITIES DEALER FOR THIS SERVICE.
++THERE IS NO FRONT-END SALES CHARGE IF YOU INVEST $1 MILLION OR MORE
IN CLASS I SHARES.
+++ALTHOUGH CLASS II HAS A LOWER FRONT-END SALES CHARGE THAN CLASS I, ITS RULE
12B-1 FEES ARE HIGHER. OVER TIME YOU MAY PAY MORE FOR CLASS II SHARES. PLEASE
SEE "HOW DO I BUY SHARES? - CHOOSING A SHARE CLASS."
++++A CONTINGENT DEFERRED SALES CHARGE MAY APPLY TO ANY CLASS II PURCHASE IF YOU
SELL THE SHARES WITHIN 18 MONTHS AND TO CLASS I PURCHASES OF $1 MILLION OR MORE
IF YOU SELL THE SHARES WITHIN ONE YEAR. A CONTINGENT DEFERRED SALES CHARGE MAY
ALSO APPLY TO PURCHASES BY CERTAIN RETIREMENT PLANS THAT QUALIFY TO BUY CLASS I
SHARES WITHOUT A FRONT-END SALES CHARGE. THE CHARGE IS 1% OF THE VALUE OF THE
SHARES SOLD OR THE NET ASSET VALUE AT THE TIME OF PURCHASE, WHICHEVER IS LESS.
THE NUMBER IN THE TABLE SHOWS THE CHARGE AS A PERCENTAGE OF OFFERING PRICE.
WHILE THE PERCENTAGE IS DIFFERENT DEPENDING ON WHETHER THE CHARGE IS SHOWN BASED
ON THE NET ASSET VALUE OR THE OFFERING PRICE, THE DOLLAR AMOUNT YOU WOULD PAY IS
THE SAME. SEE "HOW DO I SELL SHARES? - CONTINGENT DEFERRED SALES CHARGE" FOR
DETAILS.
*THESE FEES MAY NOT EXCEED 0.35% FOR CLASS I AND 1.00% FOR CLASS II. THE
COMBINATION OF FRONT-END SALES CHARGES AND RULE 12B-1 FEES COULD CAUSE LONG-TERM
SHAREHOLDERS TO PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE MAXIMUM FRONT-END
SALES CHARGE PERMITTED UNDER THE NASD'S RULES.
**ASSUMES A CONTINGENT DEFERRED SALES CHARGE WILL NOT APPLY.
<PAGE>
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by McGladrey & Pullen, LLP, the Fund's independent auditors. Their audit
report covering each of the most recent five years appears in the financial
statements in the Fund's Annual Report to Shareholders for the fiscal year ended
December 31, 1997. The Annual Report to Shareholders also includes more
information about the Fund's performance. For a free copy, please call Fund
Information.
<TABLE>
<CAPTION>
CLASS I SHARES
YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout
the year)
Net Asset Value, beginning of year $ 15.40 $ 13.01 $ 13.42 $ 15.27 $ 8.86 $ 10.02
-------- -------- ------- -------- -------- --------
Income from investment operations:
Net investment income .16 .16 .21 .14 .04 .08
Net realized and unrealized
gain (loss) (1.62) 2.75 (.18) (1.44) 6.55 (1.06)
-------- -------- -------- ---------- ------- ---------
Total from investment operations (1.46) 2.91 .03 (1.30) 6.59 (.98)
-------- -------- --------- ---------- ------- ---------
Less distributions from:
Net investment income (.16) (.17) (.20) (.12) (.05) (.07)
In excess of net investment
income -- (.01) -- -- -- --
Net realized gains (.53) (.34) (.24) (.43) (.13) (.11)
In excess of net realized gain (.31) -- -- -- -- --
Other sources -- -- -- -- -- --
------- --------- -------- --------- -------- --------
Total distributions (1.00) (.52) (.44) (.55) (.18) (.18)
------- -------- -------- --------- -------- --------
Net Asset Value, end of year $ 12.94 $ 15.40 $ 13.01 $ 13.42 $ 15.27 $ 8.86
======= ======= ======= ======= ========= =========
TOTAL RETURN <F2> (9.41%) 22.51% .36% (8.64)% 74.50% (9.75)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $3,444,029 $3,308,753 $2,147,664 $2,009,154 $1,396,392 $180,189
Ratios to average net assets:
Expenses 1.96% 2.03% 2.10% 2.11% 2.20% 2.52%
Expenses, net of reimbursement 1.96% 2.03% 2.10% 2.11% 2.20% 2.25%
Net investment income 0.99% 1.16% 1.66% 1.08% 0.57% 1.30%
Portfolio turnover rate 30.06% 12.47% 9.76% 18.57% 16.01% 21.98%
Average commission rate paid <F4> $ .0019 $ .0024 -- -- -- --
YEAR ENDED DECEMBER 31, 1991<F1>
- ------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout
the year)
Net Asset Value, beginning of year $ 10.00
--------
Income from investment operations:
Net investment income .01
Net realized and unrealized
gain (loss) .03
--------
Total from investment operations .04
--------
Less distributions from:
Net investment income (.01)
In excess of net investment
income --
Net realized gains
In excess of net realized gain --
Other sources (.01)
-------
Total distributions (.02)
-------
Net Asset Value, end of year $ 10.02
=======
TOTAL RETURN <F2> .40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $ 23,744
Ratios to average net assets:
Expenses 3.78%<F3>
Expenses, net of reimbursement 2.25%<F3>
Net investment income 0.86%<F3>
Portfolio turnover rate --
Average commission rate paid <F4> --
<FN>
1 FOR THE PERIOD OCTOBER 17, 1991 (COMMENCEMENT OF OPERATIONS) THROUGH
DECEMBER 31, 1991.
2 TOTAL RETURN DOES NOT REFLECT SALES COMMISSIONS AND IS NOT ANNUALIZED FOR
PERIODS OF LESS THAN ONE YEAR.
3 ANNUALIZED.
4 RELATES TO PURCHASES AND SALES OF EQUITY SECURITIES. PRIOR TO FISCAL YEAR 1996
DISCLOSURE OF AVERAGE COMMISSION RATE WAS NOT REQUIRED.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CLASS II SHARES
YEAR ENDED DECEMBER 31, 1997 1996 1995<F1>
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net Asset Value, beginning of year $ 15.27 $ 12.95 $ 13.10
------- -------- -------
Income from investment operations:
Net investment income .09 .17 .02
Net realized and unrealized gain (loss) (1.64) 2.60 .19
------- ------- -------
Total from investment operations (1.55) 2.77 .21
-------- ------- -------
Less distributions from:
Net investment income (.07) (.10) (.18)
In excess of net investment income -- (.01) --
Net realized gains (.53) (.34) (.18)
In excess of net realized gains (.31) -- --
------- -------- --------
Total distributions (.91) (.45) (.36)
------- -------- --------
Net Asset Value, end of year $ 12.81 $ 15.27 $ 12.95
======== ======== =======
TOTAL RETURN <F2> (10.10)% 21.58% 1.70%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $ 402,542 $ 226,629 $ 41,012
Ratios to average net assets:
Expenses 2.69% 2.74% 2.73%<F3>
Net investment income 0.21% 0.33% 0.19%<F3>
Portfolio turnover rate 30.06% 12.47% 9.76%
Average commission rate paid<F4> $ .0019 $ .0024 --
<FN>
1 FOR THE PERIOD MAY 1, 1995 (COMMENCEMENT OF OPERATIONS) THROUGH
DECEMBER 31, 1995.
2 TOTAL RETURN DOES NOT REFLECT SALES COMMISSIONS OR THE CONTINGENT DEFERRED
SALES CHARGE AND IS NOT ANNUALIZED FOR PERIODS LESS THAN ONE YEAR.
3 ANNUALIZED.
4 RELATES TO PURCHASES AND SALES OF EQUITY SECURITIES. PRIOR TO FISCAL YEAR 1996
DISCLOSURE OF AVERAGE COMMISSION RATE WAS NOT REQUIRED.
</FN>
</TABLE>
<PAGE>
HOW DOES THE FUND INVEST ITS ASSETS?
WHAT IS THE FUND'S GOAL?
The investment goal of the Fund is long-term capital appreciation. This goal is
fundamental which means that it may not be changed without shareholder approval.
WHAT IS THE FUND'S INVESTMENT STRATEGY?
The Fund tries to achieve its investment goal by investing, under normal market
conditions, at least 65% of its total assets in equity securities of developing
market issuers. The Fund normally will invest in at least three developing
market countries.
For purposes of the Fund's investments, developing or emerging market countries
include those considered such by the World Bank, the International Finance
Corporation, or the United Nations. In addition, developing market equity
securities means those issued by:
companies with their principal securities trading market within a
developing market country, as defined above; or
companies that derive 50% or more of their total revenue from either goods
or services produced or sales made in developing market countries; or
companies organized under the laws of, and with a principal office in, a
developing market country.
WHAT KINDS OF SECURITIES DOES THE FUND PURCHASE?
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. These include common stock; preferred stock;
convertible securities; warrants or rights. The Fund's primary investments are
in common stock.
In selecting these equity securities, Asset Management does a company-by-company
analysis, rather than focusing on a specific industry or economic sector. Asset
Management concentrates primarily on the market price of a company's securities
relative to its view regarding the company's long-term earnings potential. A
company's historical value measures, including price/earnings ratios, profit
margins and liquidation value, will also be considered.
DEBT SECURITIES represent an obligation of the issuer to repay a loan of money
to it, and generally, provide for the payment of interest. These include bonds,
notes and debentures; commercial paper; time deposits; bankers' acceptances; and
structured investments which are described more fully in the SAI.
The Fund may buy both rated and unrated debt securities. Independent rating
organizations rate debt securities based upon their assessment of the financial
soundness of the issuer. Generally, a lower rating indicates higher risk. The
Fund may invest up to 35% of its total assets in debt securities which are rated
C or better by Moody's or S&P or unrated debt which it determines to be of
comparable quality. At present, the Fund does not intend to invest more than 5%
of its total assets in non-investment grade securities (rated lower than BBB by
S&P or Baa by Moody's). Please see the SAI for more details on the risks
associated with lower-rated securities.
DEPOSITARY RECEIPTS. The Fund may also invest in American, European and Global
Depositary Receipts. Depositary Receipts are certificates typically issued by a
bank or trust company that give their holders the right to receive securities
issued by a foreign or domestic corporation.
GENERAL. With respect to 75% of its total assets, the Fund may invest up to 5%
of its total assets in securities issued by any one company or foreign
government. The Fund may invest any amount of its assets in U.S. government
securities. The Fund may invest in any industry although it will not concentrate
(invest more than 25% of its total assets) in any one industry. The Fund may
invest up to 15% of its total assets in foreign securities that are not listed
on a recognized U.S. or foreign securities exchange, including up to 10% of its
total assets in restricted securities, securities that are not readily
marketable, repurchase agreements with more than seven days to maturity, and
over-the-counter options bought by the Fund.
Please see the SAI for more details on the types of securities in which the Fund
invests.
WHAT ARE SOME OF THE FUND'S OTHER INVESTMENT STRATEGIES AND PRACTICES?
TEMPORARY INVESTMENTS.
When Asset Management believes that the securities trading markets or the
economy are experiencing excessive volatility or a prolonged general decline, or
other adverse conditions exist, for example, it may invest the Fund's portfolio
in a temporary defensive manner.
Under such circumstances, the Fund may invest up to 100% of its assets in money
market securities denominated in the currency of any nation. These may include:
short-term (maturities of less than 12 months) and medium-term (maturities
up to 5 years) securities issued or guaranteed by the U.S. or a foreign
government, their agencies or instrumentalities;
finance company and corporate commercial paper, and other short-term
corporate obligations, rated A by S&P or Prime-1 by Moody's or, if unrated,
determined to be of comparable quality;
bank obligations (including CDs, time deposits and bankers' acceptances;
and
repurchase agreements with banks and broker-dealers.
CLOSED-END INVESTMENT COMPANIES.
To encourage indirect foreign investment in their capital markets, some
countries, including South Korea, Chile and India, have permitted the creation
of closed-end investment companies. The Fund may invest up to 10% of its total
assets in securities of these companies.
REPURCHASE AGREEMENTS.
The Fund will generally have a portion of its assets in cash or cash equivalents
for a variety of reasons including waiting for a special investment opportunity
or taking a defensive position. To earn income on this portion of its assets,
the Fund may enter into repurchase agreements with certain banks and
broker-dealers. Under a repurchase agreement, the Fund agrees to buy a U.S.
government security from one of these issuers and then to sell the security back
to the issuer after a short period of time (generally, less than seven days) at
a higher price. The bank or broker-dealer must transfer to the Fund's custodian
securities with an initial value of at least 102% of the dollar amount invested
by the Fund in each repurchase agreement.
OPTIONS ON SECURITIES AND SECURITIES INDICES.
The Fund may buy and sell options on securities and securities indices to earn
additional income and/or to help protect its portfolio against market and/or
exchange rate movements, although it presently has no intention of doing so. An
option on a security is a contract that allows the buyer of the option the right
to buy or sell a specific security at a stated price during the option's term.
An option on a securities index is a contract that allows the buyer of the
option the right to receive from the seller cash, in an amount equal to the
difference between the index's closing price and the option's exercise price.
The Fund will limit the sale of options on its securities to 15% or less of its
total assets. The Fund may only buy options if the total premiums it paid for
such options is 5% or less of its total assets.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS.
To help protect its portfolio against adverse changes in foreign currency
exchange rates, the Fund may (1) buy and sell foreign currency at the prevailing
rate in the foreign currency exchange market; (2) enter into forward foreign
currency contracts which are agreements to buy or sell a specific currency at a
set price on a future date (generally within one year). The Fund may only commit
up to 20% of its total assets to these contracts; and (3) buy and sell put and
call options on foreign currencies.
FUTURES CONTRACTS.
Changes in interest rates, securities prices or foreign currency valuations may
affect the value of the Fund's investments. To reduce its exposure to these
factors, the Fund may buy and sell financial futures contracts, stock index
futures contracts, foreign currency futures contracts and options on any of
these contracts. A financial futures contract is an agreement to buy or sell a
specific security or commodity at a specified future date and price. An index
futures contract is an agreement to take or make delivery of an amount of cash
based on the difference between the value of the index at the beginning and end
of the contract period. A futures contract on a foreign currency is an agreement
to buy or sell a specific amount of a currency for a set price on a future date.
The Fund may not commit more than 5% of its total assets to initial margin
deposits on futures contracts and related options. In addition, the value of the
securities on which the futures contracts are based will not exceed 25% of the
Fund's total assets.
SECURITIES LENDING.
To generate additional income, the Fund may lend its portfolio securities to
qualified securities dealers or other institutional investors. Such loans may
not exceed 33 1/3% of the value of the Fund's total assets measured at the time
of the most recent loan. For each loan the Fund must receive in return
collateral with a value at least equal to 100% of the current market value of
the loaned securities.
SHORT-TERM TRADING AND PORTFOLIO TURNOVER.
The Fund invests for long-term capital appreciation and does not intend to
emphasize short-term trading profits. It is anticipated, therefore, that the
Fund's annual portfolio turnover rate generally will be below 50%; although this
rate may be higher or lower, in relation to market conditions. A portfolio
turnover rate of less than 50% means that in a one year period, less than
one-half of the Fund's portfolio is changed.
OTHER POLICIES AND RESTRICTIONS.
The Fund has a number of additional investment restrictions that govern its
activities. Some of these restrictions may only be changed with shareholder
approval and some may be changed by the Board alone. For a list of these
restrictions and more information about the Fund's investment policies,
including those described above, and their associated risks, please see "How
Does the Fund Invest its Assets?" and "Investment Restrictions" in the SAI.
The policies and restrictions discussed in this prospectus and in the SAI are
applied at the time the Fund makes an investment. The Fund is generally not
required to sell a security because of a change in circumstances.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
GENERAL RISK.
There is no assurance that the Fund's investment goal will be met. The Fund will
seek to spread investment risk by diversifying its investments but the
possibility of losses remains. Generally, if the securities owned by the Fund
increase in value, the value of the shares of the Fund which you own will
increase. Similarly, if the securities owned by the Fund decrease in value, the
value of your shares will also decline. In this way, you participate in any
change in the value of the securities owned by the Fund.
FOREIGN SECURITIES RISK. The value of foreign (and U.S.) securities is affected
by general economic conditions and individual company and industry earnings
prospects. While foreign securities may offer significant opportunities for
gain, they also involve additional risks that can increase the potential for
losses in the Fund. These risks can be significantly greater for investments in
emerging markets.Investments in Depositary Receipts also involve some or all of
the risks described below.
The political, economic and social structures of some countries in which the
Fund invests may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the imposition
of exchange controls, expropriation, restrictions on removal of currency or
other assets, nationalization of assets, and punitive taxes.
There may be less publicly available information about a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they may not have uniform accounting,
auditing and financial reporting standards and may have less government
supervision of financial markets. Foreign securities markets may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S. Transaction costs on
foreign securities markets are generally higher than in the U.S. The settlement
practices may be cumbersome and result in delays that may affect portfolio
liquidity. The Fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with respect
to foreign investments in foreign courts than with respect to domestic issuers
in U.S. courts.
Some of the countries in which the Fund may invest such as Russia and certain
Asian and Eastern European countries are considered developing or emerging
markets. Investments in these markets are subject to all of the risks of foreign
investing generally, and have additional and heightened risks due to a lack of
legal, business and social frameworks to support securities markets.
EMERGING MARKETS involve additional significant risks, including:
political and social uncertainty (for example, regional conflicts and risk
of war)
currency exchange rate volatility
pervasiveness of corruption and crime
delays in settling portfolio transactions
risk of loss arising out of the system of share registration and custody
comparatively smaller and less liquid than developed markets
dependency upon foreign economic assistance and international trade
less government supervision and regulation of business and industry
practices, stock exchanges, brokers and listed companies than in the United
States
ALL OF THESE FACTORS MAKE DEVELOPING MARKET EQUITY SECURITIES' PRICES GENERALLY
MORE VOLATILE THAN SECURITIES ISSUED IN DEVELOPED MARKETS. The Fund may invest
up to 100% of its total assets in emerging markets, including up to 5% of its
total assets in Russian securities. For more information on the risks associated
with emerging markets securities, please see the SAI.
MARKET, CURRENCY, AND INTEREST RATE RISK.
General market movements in any country where the Fund has investments are
likely to affect the value of the securities which the Fund owns in that country
and the Fund's share price may also be affected. The Fund's investments may be
denominated in foreign currencies so that changes in foreign currency exchange
rates will also affect the value of what the Fund owns, and thus the price of
its shares. To the extent the Fund invests in debt securities, changes in
interest rates in any country where the Fund is invested will affect the value
of the Fund's portfolio and, consequently, its share price. Rising interest
rates, which often occur during times of inflation or a growing economy, are
likely to cause the face value of a debt security to decrease, having a negative
effect on the value of the Fund's shares. Of course, individual and worldwide
stock markets, interest rates and currency valuations have both increased and
decreased, sometimes very dramatically, in the past. These changes are likely to
occur again in the future at unpredictable times.
CREDIT AND ISSUER RISK.
The Fund's investments in debt securities involve credit risk. This is the risk
that the issuer of a debt security will be unable to make principal and interest
payments in a timely manner and the debt security will go into default. The Fund
may invest up to 10% of its total assets in defaulted debt securities. The
purchase of defaulted debt securities involves significant additional risks,
such as the possibility of complete loss of the investment in the event the
issuer does not restructure or reorganize to enable it to resume paying interest
and principal to holders.
DERIVATIVE SECURITIES RISK.
Derivative investments are those whose values are dependent upon the performance
of one or more other securities or investments or indices; in contrast to common
stock, for example, whose value is dependent upon the operations of the issuer.
Option transactions, foreign currency exchange transactions and futures
contracts are considered derivative investments. To the extent the Fund enters
into these transactions, their success will depend upon Asset Managements'
ability to predict pertinent market movements.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist among the
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Asset Management Hong Kong manages the Fund's assets and
makes its investment decisions. Asset Management Hong Kong also performs similar
services for other funds. It is wholly owned by Resources, a publicly owned
company engaged in the financial services industry through its subsidiaries.
Charles B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources. Together, Asset Management Hong Kong and its affiliates manage over
$221 billion in assets. The Templeton organization has been investing globally
since 1940. Asset Management Hong Kong and its affiliates have offices in
Argentina, Australia, Bahamas, Brazil, Canada, China, France, Germany, Hong
Kong, India, Italy, Japan, Korea, Luxembourg, the Netherlands, Poland, Russia,
Singapore, South Africa, Switzerland, Taiwan, United Kingdom, U.S. and Vietnam.
Please see "Investment Management and Other Services" and "Miscellaneous
Information" in the SAI for information on securities transactions and a summary
of the Fund's Code of Ethics.
PORTFOLIO MANAGEMENT. The Fund's lead portfolio manager since its inception is
Dr. J. Mark Mobius. Dr. Mobius, a German citizen, is Managing Director of
Templeton Asset Management Ltd., of which Asset Management Hong Kong is a
representative office. In addition, Dr. Mobius serves as a director and/or
officer of many other funds within the Franklin Templeton Group of Funds and
many investment advisory subsidiaries of Resources. He holds a BA in fine arts
from Boston University, an MA in mass communications from Boston University, and
a Ph.D. in economics from the Massachusetts Institute of Technology. Prior to
joining the Templeton organization in 1987, Dr. Mobius was president of the
International Investment Trust Company Limited (investment manager of Taiwan,
R.O.C. Fund) (1986-1987) and a director of Vickers da Costa, Hong Kong (an
international securities firm) (1983-1986). Dr. Mobius began working in Vickers
da Costa's Hong Kong office in 1980 and moved to Taiwan in 1983 to open the
firm's office there and to direct operations in India, Indonesia, Thailand, the
Philippines, and Korea. Before joining Vickers da Costa, Dr. Mobius operated his
own consulting firm in Hong Kong from 1970 until 1980.
Allan Lam and Tom Wu have secondary portfolio management responsibilities for
the Fund. Mr. Lam holds a BA in accounting from Rutgers University. Prior to
joining the Templeton organization in 1987, he worked as an auditor with two
international accounting firms in Hong Kong: Deloitte Haskins & Sells CPA and
KPMG Peat Marwick CPA. Mr. Wu is a Director of Templeton Asset Management Ltd.
He holds a BSS in economics from the University of Hong Kong and an MBA in
finance from the University of Oregon. Prior to joining the Templeton
organization in 1987, Mr. Wu worked as an investment analyst, specializing in
Hong Kong companies, with Vickers da Costa.
MANAGEMENT FEES. During the fiscal year ended December 31, 1997, management fees
totaling 1.25% of the average daily net assets of the Fund were paid to Asset
Management Hong Kong. Total expenses, including fees paid to Asset Management
Hong Kong, were 1.96% for Class I and 2.69% for Class II.
PORTFOLIO TRANSACTIONS. Asset Management Hong Kong tries to obtain the best
execution on all transactions. If Asset Management Hong Kong believes more than
one broker or dealer can provide the best execution, it may consider research
and related services and the sale of Fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "How Does the Fund Buy Securities for Its Portfolio?" in the
SAI for more information.
ADMINISTRATIVE SERVICES. FT Services provides certain administrative services
and facilities for the Fund. During the fiscal year ended December 31, 1997,
administration fees totaling 0.09% of the average daily net assets of the Fund
were paid to FT Services. These fees are included in the amount of total
expenses shown above. Please see "Investment Management and Other Services" in
the SAI for more information.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
Fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by the Fund under the Class I plan may not exceed 0.35% per year of
Class I's average daily net assets. Expenses not reimbursed in any quarter may
be reimbursed in future quarters or years. This includes expenses not reimbursed
because they exceeded the applicable limit under the plan. As of December 31,
1997, there were no unreimbursed expenses under the Class I plan. During the
first year after certain Class I purchases made without a sales charge,
Securities Dealers may not be eligible to receive the Rule 12b-1 fees associated
with the purchase.
Under the Class II plan, the Fund may pay Distributors up to 0.75% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Securities
Dealers may not be eligible to receive this portion of the Rule 12b-1 fees
associated with the purchase.
The Fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, each class of the Fund advertises its performance. A commonly
used measure of performance is total return. Performance figures are usually
calculated using the maximum sales charges, but certain figures may not include
sales charges.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested.
The investment results of each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How Does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
ON AUGUST 5, 1997, PRESIDENT CLINTON SIGNED INTO LAW THE TAXPAYER RELIEF ACT OF
1997 (THE "1997 ACT"). THIS NEW LAW MAKES SWEEPING CHANGES IN THE CODE. BECAUSE
MANY OF THESE CHANGES ARE COMPLEX THEY ARE DISCUSSED IN THE SAI.
<TABLE>
<CAPTION>
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TAXATION OF THE FUND'S INVESTMENTS. The Fund invests your HOW DOES THE FUND EARN INCOME AND GAINS?
money in the stocks, bonds and other securities that are THE FUND EARNS DIVIDENDS AND INTEREST (THE FUND'S
described in the section "How Does the Fund Invest Its "INCOME") ON ITS INVESTMENTS. WHEN THE FUND SELLS A
Assets?" Special tax rules may apply in determining the SECURITY FOR A PRICE THAT IS HIGHER THAN IT PAID, IT
income and gains that the Fund earns on its investments. HAS A GAIN. WHEN THE FUND SELLS A SECURITY FOR A PRICE
These rules may, in turn, affect the amount of THAT IS LOWER THAN IT PAID, IT HAS A LOSS. IF THE FUND
distributions that the Fund pays to you. These special tax HAS HELD THE SECURITY FOR MORE THAN ONE YEAR, THE GAIN
rules are discussed in the SAI. OR LOSS WILL BE A LONG-TERM CAPITAL GAIN OR LOSS. IF
THE FUND HAS HELD THE SECURITY FOR ONE YEAR OR LESS,
TAXATION OF THE FUND. As a regulated investment company, THE GAIN OR LOSS WILL BE A SHORT-TERM CAPITAL GAIN OR
the Fund generally pays no federal income tax on LOSS. THE FUND'S GAINS AND LOSSES ARE NETTED TOGETHER,
the income and gains that it distributes to you. AND, IF THE FUND HAS A NET GAIN (THE FUND'S "GAINS"),
THAT GAIN WILL GENERALLY BE DISTRIBUTED TO YOU.
</TABLE>
FOREIGN TAXES. Foreign governments may impose taxes on the income and gains from
the Fund's investments in foreign stocks and bonds. These taxes will reduce the
amount of the Fund's distributions to you, but, depending upon the amount of the
Fund's assets that are invested in foreign securities and foreign taxes paid,
may be passed through to you as a foreign tax credit on your income tax return.
The Fund may also invest in the securities of foreign companies that are
"passive foreign investment companies" ("PFICs"). These investments in PFICs may
cause the Fund to pay income taxes and interest charges. If possible, the Fund
will adopt strategies to avoid PFIC taxes and interest charges.
TAXATION OF SHAREHOLDERS
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DISTRIBUTIONS. Distributions from the Fund, whether you WHAT IS A DISTRIBUTION?
receive them in cash or in additional shares, are AS A SHAREHOLDER, YOU WILL RECEIVE YOUR SHARE OF THE
generally subject to income tax. The Fund will send you a FUND'S INCOME AND GAINS ON ITS INVESTMENTS IN STOCKS,
statement in January of the current year that reflects the BONDS AND OTHER SECURITIES. THE FUND'S INCOME AND SHORT
amount of ordinary dividends, capital gain distributions TERM CAPITAL GAINS ARE PAID TO YOU AS ORDINARY
and non-taxable distributions you received from the Fund DIVIDENDS. THE FUND'S LONG-TERM CAPITAL GAINS ARE PAID
in the prior year. This statement will include TO YOU AS CAPITAL GAIN DISTRIBUTIONS. IF THE FUND PAYS
distributions declared in December and paid to you in YOU AN AMOUNT IN EXCESS OF ITS INCOME AND GAINS, THIS
January of the current year, but which are taxable as if EXCESS WILL GENERALLY BE TREATED AS A NON-TAXABLE
paid on December 31 of the prior year. The IRS requires DISTRIBUTION. THESE AMOUNTS, TAKEN TOGETHER, ARE WHAT
you to report these amounts on your income tax return for WE CALL THE FUND'S DISTRIBUTIONS TO YOU.
the prior year. The Fund's statement for the prior year
will tell you how much of your capital gain distribution
represents 28% rate gain. The remainder of the
capital gain distribution represents 20% rate gain.
</TABLE>
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your qualified
retirement plan, such as a Section 401(k) plan or IRA, are generally
tax-deferred; this means that you are not required to report Fund distributions
on your income tax return when paid to your plan, but, rather, when your plan
makes payments to you. Be aware, however, that special rules apply to payouts
from Roth and education IRAs.
DIVIDENDS-RECEIVED DEDUCTION. It is anticipated that no portion of the Fund's
distributions will qualify for the corporate dividends-received deduction.
<TABLE>
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REDEMPTIONS AND EXCHANGES. If you redeem your shares or if WHAT IS A REDEMPTION?
you exchange your shares in the Fund for shares in another A REDEMPTION IS A SALE BY YOU TO THE FUND OF SOME OR
Franklin Templeton Fund, you will generally have a gain or ALL OF YOUR SHARES IN THE FUND. THE PRICE PER SHARE YOU
loss that the IRS requires you to report on your income RECEIVE WHEN YOU REDEEM FUND SHARES MAY BE MORE OR LESS
tax return. If you exchange Fund shares held for 90 days THAN THE PRICE AT WHICH YOU PURCHASED THOSE SHARES. AN
or less and pay no sales charge, or a reduced sales EXCHANGE OF SHARES IN THE FUND FOR SHARES OF ANOTHER
charge, for the new shares, all or a portion of the sales FRANKLIN TEMPLETON FUND IS TREATED AS A REDEMPTION OF
charge you paid on the purchase of the shares you FUND SHARES AND THEN A PURCHASE OF SHARES OF THE OTHER
exchanged is not included in their cost for purposes of FUND. WHEN YOU REDEEM OR EXCHANGE YOUR SHARES, YOU WILL
computing gain or loss on the exchange. If you hold your GENERALLY HAVE A GAIN OR LOSS, DEPENDING UPON WHETHER
shares for six months or less, any loss you have will be THE BASIS IN YOUR SHARES IS MORE OR LESS THAN YOUR COST
treated as a long-term capital loss to the extent of any OR OTHER BASIS IN THE SHARES. CALL FUND INFORMATION FOR
capital gain distributions received by you from the Fund. A FREE SHAREHOLDER TAX INFORMATION HANDBOOK IF YOU NEED
All or a portion of any loss on the redemption or exchange MORE INFORMATION IN CALCULATING THE GAIN OR LOSS ON THE
of your shares will be disallowed by the IRS if you REDEMPTION OR EXCHANGE OF YOUR SHARES.
purchase other shares in the Fund within 30 days before or
after your redemption or exchange.
FOREIGN TAXES. If more than 50% of the value of the Fund's WHAT IS A FOREIGN TAX CREDIT?
assets consist of foreign securities, the Fund may elect A FOREIGN TAX CREDIT IS
to pass-through to you the amount of foreign A TAX CREDIT FOR THE AMOUNT OF
taxes it paid. If the Fund makes this election, TAXES IMPOSED BY A FOREIGN COUNTRY ON EARNINGS OF THE
your year-end statement will show more taxable FUND. WHEN A FOREIGN COMPANY IN WHICH THE FUND INVESTS
income than was actually distributed to you. However, PAYS A DIVIDEND TO THE FUND, THE DIVIDEND WILL
you will be entitled to either deduct your share GENERALLY BE SUBJECT TO A WITHHOLDING TAX. THE TAXES
of such taxes in computing your taxable income or WITHHELD IN FOREIGN COUNTRIES CREATE CREDITS
claim a foreign tax credit for such THAT YOU MAY USE TO OFFSET YOUR U.S. FEDERAL INCOME TAX.
taxes against your U.S. federal income tax. Your year-end
statement, showing the amount of deduction or credit
available to you, will be distributed to you in January
along with other shareholder information records
including your Fund Form 1099-DIV.
</TABLE>
The 1997 Act includes a provision that allows you to claim these credits
directly on your income tax return (Form 1040) and eliminates the previous
requirement that you complete a detailed supporting form. To qualify, you must
have $600 or less in joint return foreign taxes ($300 or less on a single
return), all of which are reported to you on IRS Form 1099-DIV. THIS SIMPLIFIED
PROCEDURE APPLIES ONLY FOR CALENDAR YEARS 1998 AND BEYOND, AND IS NOT AVAILABLE
IN 1997.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income
tax withholding. Your home country may also tax ordinary dividends, capital gain
distributions and gains arising from redemptions or exchanges of your Fund
shares. Fund shares held by the estate of a non-U.S. investor may be subject to
U.S. estate tax. You may wish to contact your tax advisor to determine the U.S.
and non-U.S. tax consequences of your investment in the Fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you receive
from the Fund, and gains arising from redemptions or exchanges of your Fund
shares will generally be subject to state and local income tax. The holding of
Fund shares may also be subject to state and local intangibles taxes. You may
wish to contact your tax advisor to determine the state and local tax
consequences of your investment in the Fund.
<PAGE>
<TABLE>
<CAPTION>
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BACKUP WITHHOLDING. When you open an account, IRS WHAT IS A BACKUP WITHHOLDING?
regulations require that you provide your taxpayer BACKUP WITHHOLDING OCCURS WHEN THE FUND IS REQUIRED TO
identification number ("TIN"), certify that it is correct, WITHHOLD AND PAY OVER TO THE IRS 31% OF YOUR
and certify that you are not subject to backup withholding DISTRIBUTIONS AND REDEMPTION PROCEEDS. YOU CAN AVOID
under IRS rules. If you fail to provide a correct TIN or BACKUP WITHHOLDING BY PROVIDING THE FUND WITH YOUR TIN,
the proper tax certifications, the Fund is required to AND BY COMPLETING THE TAX CERTIFICATIONS ON YOUR
withhold 31% of all the distributions (including ordinary SHAREHOLDER APPLICATION THAT YOU WERE ASKED TO SIGN
dividends and capital gain distributions), and redemption WHEN YOU OPENED YOUR ACCOUNT. HOWEVER, IF THE IRS
proceeds paid to you. The Fund is also required to begin INSTRUCTS THE FUND TO BEGIN BACKUP WITHHOLDING, IT IS
backup withholding on your account if the IRS instructs REQUIRED TO DO SO EVEN IF YOU PROVIDED THE FUND WITH
the Fund to do so. The Fund reserves the right not to open YOUR TIN AND THESE TAX CERTIFICATIONS, AND BACKUP
your account, or, alternatively, to redeem your shares at WITHHOLDING WILL REMAIN IN PLACE UNTIL THE FUND IS
the current net asset value, less any taxes withheld, if INSTRUCTED BY THE IRS THAT IT IS NO LONGER REQUIRED.
you fail to provide a correct TIN, fail to provide the
proper tax certifications, or the IRS instructs the Fund
to begin backup withholding on your account.
</TABLE>
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND. A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS IS CONTAINED IN THE SECTION
ENTITLED DISTRIBUTIONS, FOREIGN TAXES PAID AND INCOME TAXES WITHHELD IS ALSO
DISCUSSED IN A FREE SHAREHOLDER TAX INFORMATION HANDBOOK, WHICH YOU MAY
REQUEST BY CONTACTING FUND INFORMATION.
HOW IS THE FUND ORGANIZED?
The Fund is a diversified, open-end management investment company, commonly
called a mutual fund. It was organized as a Massachusetts business trust on
August 9, 1991, and is registered with the SEC. As of January 1, 1997, the Fund
began offering a new class of shares designated Templeton Developing Markets
Trust - Advisor Class. All shares outstanding before the offering of Advisor
Class shares have been designated Templeton Developing Markets Trust - Class I
and Templeton Developing Markets Trust - Class II. Additional series and classes
of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters affecting only that class, or expressly required
to be voted on separately by state or federal law. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of the trust for matters that affect the trust as a whole.
The Fund has noncumulative voting rights. This gives holders of more than 50% of
the shares voting the ability to elect all of the members of the Board. If this
happens, holders of the remaining shares voting will not be able to elect anyone
to the Board.
The Fund does not intend to hold annual shareholder meetings. It may hold
special meetings, however, for matters requiring shareholder approval. A meeting
may also be called by the Board in its discretion or for the purpose of
considering the removal of a Board member if requested in writing to do so by
shareholders holding at least 10% of the outstanding shares. In certain
circumstances, we are required to help you communicate with other shareholders
about the removal of a Board member.
<PAGE>
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, please follow the steps below. This will help avoid any
delays in processing your request. PLEASE KEEP IN MIND THAT THE FUND DOES NOT
CURRENTLY ALLOW INVESTMENTS BY MARKET TIMERS.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The Fund's minimum
investments are:
To open your account: $100*
To add to your account: $25*
*We may waive these minimums for retirement plans. We also reserve the
right to refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application, including
the optional shareholder privileges section. By applying for privileges now,
you can avoid the delay and inconvenience of having to send an additional
application to add privileges later. PLEASE ALSO INDICATE WHICH CLASS OF
SHARES YOU WANT TO BUY. IF YOU DO NOT SPECIFY A CLASS, WE WILL AUTOMATICALLY
INVEST YOUR PURCHASE IN CLASS I SHARES. It is important that we receive a
signed application since we will not be able to process any redemptions
from your account until we receive your signed application.
4. Make your investment using the table below.
<PAGE>
METHOD STEPS TO FOLLOW
- ----------------------- -----------------------------------------------------
BY MAIL For an initial investment:
Return the application to the Fund
with your check made payable to the
Fund.
For additional investments:
Send a check made payable to the
Fund. Please include your account
number on the check.
- ---------------------- -------------------------------------------------------
BY WIRE 1. Call Shareholder Services or, if that number is busy,
call 1-650/312-2000 collect, to receive a wire
control number and wire instructions. You need a new
wire control number every time you wire money into
your account. If you do not have a currently
effective wire control number, we will return the
money to the bank, and we will not credit the
purchase to your account.
2. For initial investments you must also return your
signed shareholder application to the Fund.
IMPORTANT DEADLINES: If we receive your call before
4:00 p.m. Eastern time and the bank receives the wired
funds and reports the receipt of wired funds to the
Fund by 6:00 p.m. Eastern time, we will credit the
purchase to your account that day. If we receive your
call after 4:00 p.m. or the bank receives the wire
after 6:00 p.m., we will credit the purchase to your
account the following business day.
- ----------------------- ------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. The class that may be best for
you depends on a number of factors, including the amount and length of time you
expect to invest. Generally, Class I shares may be more attractive for long-term
investors or investors who qualify to buy Class I shares at a reduced sales
charge. Your financial representative can help you decide.
<TABLE>
<CAPTION>
CLASS I CLASS II
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Higher front-end sales charges than Class II Lower front-end sales charges
shares. There are several ways to reduce these than Class I shares
charges, as described below. There is no front-end
sales charge for purchases of $1 million or more.*
Contingent Deferred Sales Charge on purchases of $1 Contingent Deferred
million or more sold within one year Sales Charge on purchases
sold within 18 months
Lower annual expenses than Class II shares Higher annual expenses than Class I shares
</TABLE>
*If you are investing $1 million or more, it is generally more beneficial for
you to buy Class I shares because there is no front-end sales charge and the
annual expenses are lower. Therefore, ANY PURCHASE OF $1 MILLION OR MORE IS
AUTOMATICALLY INVESTED IN CLASS I SHARES. You may accumulate more than $1
million in Class II shares through purchases over time. If you plan to do this,
however, you should determine if it would be better for you to buy Class I
shares through a Letter of Intent.
PURCHASE PRICE OF FUND SHARES
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
<TABLE>
<CAPTION>
TOTAL SALES CHARGE AMOUNT PAID TO
AS A PERCENTAGE OF DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
<S> <C> <C> <C>
CLASS I
Under $50,000 5.75% 6.10% 5.00%
$50,000 but less than $100,000 4.50% 4.71% 3.75%
$100,000 but less than $250,000 3.50% 3.63% 2.80%
$250,000 but less than $500,000 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000 2.00% 2.04% 1.60%
$1,000,000 or more* None None None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
</TABLE>
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Choosing a Share
Class."
SALES CHARGE REDUCTIONS AND WAIVERS
IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH
EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't
include this statement, we cannot guarantee that you will receive the
sales charge reduction or waiver.
CUMULATIVE QUANTITY DISCOUNTS - CLASS I ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds, as well as those of your spouse, children under the
age of 21 and grandchildren under the age of 21. If you are the sole owner of a
company, you may also add any company accounts, including retirement plan
accounts. Companies with one or more retirement plans may add together the total
plan assets invested in the Franklin Templeton Funds to determine the sales
charge that applies.
LETTER OF INTENT - CLASS I ONLY. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES - CLASS I ONLY. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions. 403(b) plans that only allow salary deferral
contributions and that purchased Class I shares of the Fund at a reduced sales
charge under the group purchase privilege before February 1, 1998, however, may
continue to do so.
SALES CHARGE WAIVERS. If one of the following sales charge waivers applies to
you or your purchase of Fund shares, you may buy shares of the Fund without a
front-end sales charge or a Contingent Deferred Sales Charge. All of the sales
charge waivers listed below apply to purchases of Class I shares only, except
for items 1 and 2 which also apply to Class II purchases.
Certain distributions, payments or redemption proceeds that you receive may be
used to buy shares of the Fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton
Fund. The distributions generally must be reinvested in the SAME CLASS
of shares. Certain exceptions apply, however, to Class II shareholders
who chose to reinvest their distributions in Class I shares of the Fund
before November 17, 1997, and to Advisor Class or Class Z shareholders
of a Franklin Templeton Fund who may reinvest their distributions in
Class I shares of the Fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton
Fund if you originally paid a sales charge on the shares and you
reinvest the money in the SAME CLASS of shares. This waiver does not
apply to exchanges.
If you paid a Contingent Deferred Sales Charge when you redeemed your
shares from a Franklin Templeton Fund, a Contingent Deferred Sales
Charge will apply to your purchase of Fund shares and a new Contingency
Period will begin. We will, however, credit your Fund account with
additional shares based on the Contingent Deferred Sales Charge you
paid and the amount of redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Bank
CD, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date the CD matures, including any
rollover.
3. Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
4. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any
tax consequences that may apply.
5. Distributions from an existing retirement plan invested in the
Franklin Templeton Funds
6. Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a contingent deferred sales charge when you redeemed your
Class A shares from a Templeton Global Strategy Fund, a Contingent
Deferred Sales Charge will apply to your purchase of Fund shares and a
new Contingency Period will begin. We will, however, credit your Fund
account with additional shares based on the contingent deferred sales
charge you paid and the amount of the redemption proceeds that you
reinvest.
If you immediately placed your redemption proceeds in a Franklin
Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date they are
redeemed from the money fund.
7. Tender proceeds from the Templeton Vietnam Opportunities Fund, Inc. if
you have directed the proceeds to be invested in the Fund under the
terms of the "Offer to Purchase" dated December 19, 1997.
Various individuals and institutions also may buy Class I shares without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. Trust companies and bank trust departments agreeing to invest in
Franklin Templeton Funds over a 13 month period at least $1 million of
assets held in a fiduciary, agency, advisory, custodial or similar
capacity and over which the trust companies and bank trust departments
or other plan fiduciaries or participants, in the case of certain
retirement plans, have full or shared investment discretion. We will
accept orders for these accounts by mail accompanied by a check or by
telephone or other means of electronic data transfer directly from the
bank or trust company, with payment by federal funds received by the
close of business on the next business day following the order.
2. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments
by the Fund on arbitrage rebate calculations.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for
clients participating in comprehensive fee programs
4. Registered Securities Dealers and their affiliates, for their
investment accounts only
5. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
6. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family
members, consistent with our then-current policies
7. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
8. Accounts managed by the Franklin Templeton Group
9. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
10. Group annuity separate accounts offered to retirement plans
11. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with at
least 100 employees, or (ii) have plan assets of $1 million or more, or (iii)
agree to invest at least $500,000 in the Franklin Templeton Funds over a 13
month period may buy Class I shares without a front-end sales charge. Retirement
plans that are not Qualified Retirement Plans, SIMPLEs or SEPs must also meet
the requirements described under "Group Purchases - Class I Only" above to be
able to buy Class I shares without a front-end sales charge. We may enter into a
special arrangement with a Securities Dealer, based on criteria established by
the Fund, to add together certain small Qualified Retirement Plan accounts for
the purpose of meeting these requirements.
For retirement plan accounts opened on or after May 1, 1997, a Contingent
Deferred Sales Charge may apply if the retirement plan is transferred out of the
Franklin Templeton Funds or terminated within 365 days of the retirement plan
account's initial purchase in the Franklin Templeton Funds. Please see "How Do I
Sell Shares? - Contingent Deferred Sales Charge" for details.
Any retirement plan that does not meet the requirements to buy Class I shares
without a front-end sales charge and that was a shareholder of the Fund on or
before February 1, 1995, may buy shares of the Fund subject to a maximum sales
charge of 4% of the Offering Price, 3.2% of which will be retained by Securities
Dealers.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not by
the Fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 1% of the amount invested.
3. Class I purchases made without a front-end sales charge by certain
retirement plans described under "Sales Charge Reductions and Waivers
Retirement Plans" above - up to 1% of the amount invested.
4. Class I purchases by trust companies and bank trust departments,
Eligible Governmental Authorities, and broker-dealers or others on
behalf of clients participating in comprehensive fee programs - up to
0.25% of the amount invested.
5. Class I purchases by Chilean retirement plans - up to 1% of the amount
invested.
A Securities Dealer may receive only one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1, 2 or 5 above or a payment of up to 1% for investments
described in paragraph 3 will be eligible to receive the Rule 12b-1 fee
associated with the purchase starting in the thirteenth calendar month after the
purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
FOR INVESTORS OUTSIDE THE U.S.
The distribution of this prospectus and the offering of Fund shares may be
limited in many jurisdictions. An investor who wishes to buy shares of the Fund
should determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums. Some Franklin Templeton Funds do not offer Class II shares.
<PAGE>
METHOD STEPS TO FOLLOW
- ------------------------ -----------------------------------------------------
BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates for
the shares you want to exchange
BY PHONE Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to
exchange by phone to apply to your
account, please let us know.
THROUGH YOUR DEALER Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
CONTINGENT DEFERRED SALES CHARGE. For accounts with shares subject to a
Contingent Deferred Sales Charge, we will first exchange any shares in your
account that are not subject to the charge. If there are not enough of these to
meet your exchange request, we will exchange shares subject to the charge in the
order they were purchased.
If you exchange Class I shares into one of our money funds, the time your shares
are held in that fund will not count towards the completion of any Contingency
Period. If you exchange your Class II shares for shares of Money Fund II,
however, the time your shares are held in that fund will count towards the
completion of any Contingency Period.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
You may only exchange shares within the SAME CLASS, except as noted below.
The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. PLEASE NOTIFY US IN WRITING IF YOU DO NOT WANT THIS
OPTION TO BE AVAILABLE ON YOUR ACCOUNT. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
Trust Company IRA or 403(b) retirement plan accounts may exchange shares
as described above. Restrictions may apply to other types of retirement
plans. Please contact Retirement Plan Services for information on exchanges
within these plans.
The fund you are exchanging into must be eligible for sale in your state.
We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
Currently, the Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and share-
holders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
The Fund offers a class of shares designated "Advisor Class," which is described
in a separate prospectus. If you do not qualify to buy Advisor Class shares of
the Fund, but you own Advisor Class shares of another Franklin Templeton Fund,
you may exchange those Advisor Class shares for Class I shares of the Fund at
Net Asset Value. If you do so and you later decide you would like to exchange
into a fund that offers an Advisor Class, you may exchange your Class I shares
for Advisor Class shares of that fund. Certain shareholders of Class Z shares of
Franklin Mutual Series Fund Inc. may also exchange their Class Z shares for
Class I shares of the Fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
- ---------------------- --------------------------------------------------------
BY MAIL 1. Send us signed written instructions. If you would
like your redemption proceeds wired to a bank account,
your instructions should include:
The name, address and telephone number of the
bank where you want the proceeds sent
Your bank account number
The Federal Reserve ABA routing number
If you are using a savings and loan or credit
union, the name of the corresponding bank and the
account number
2. Include any outstanding share certificates for the
shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to
send additional documents. Accounts under court
jurisdiction may have other requirements.
- --------------------- -------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other than
an escrow account, you must first sign up for the
wire feature. To sign up, send us written instructions,
with a signature guarantee. To avoid any delay in
processing, the instructions should include the items
listed in "By Mail" above.
Telephone requests will be accepted:
If the request is $50,000 or less. Institutional
accounts may exceed $50,000 by completing a separate
agreement. Call Institutional Services to receive a
copy.
If there are no share certificates issued for the
shares you want to sell or you have already
returned them to the Fund
Unless you are selling shares in a Trust Company
retirement plan account
Unless the address on your account was changed by
phone within the last 15 days
If you do not want the ability to redeem by
phone to apply to your account, please let us know.
- ----------------------- ------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 4:00 p.m. Eastern time, your wire payment will be
sent the next business day. For requests received in proper form after 4:00 p.m.
Eastern time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
For Class I purchases, if you did not pay a front-end sales charge because you
invested $1 million or more or agreed to invest $1 million or more under a
Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell all
or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class I investments you make without
a sales charge may also be subject to a Contingent Deferred Sales Charge if they
are sold within the Contingency Period. For any Class II purchase, a Contingent
Deferred Sales Charge may apply if you sell the shares within the Contingency
Period. The charge is 1% of the value of the shares sold or the Net Asset Value
at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class I shares without a front-end sales charge may also be
subject to a Contingent Deferred Sales Charge if the retirement plan is
transferred out of the Franklin Templeton Funds or terminated within 365 days of
the account's initial purchase in the Franklin Templeton Funds.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
Account fees
Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997,
or (ii) the Securities Dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the Securities Dealer of
record has entered into a supplemental agreement with Distributors
Redemptions by the Fund when an account falls below the minimum required
account size
Redemptions following the death of the shareholder or beneficial owner
Redemptions through a systematic withdrawal plan set up before
February 1, 1995
Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, at a rate of up to 1% a month of an account's Net Asset
Value. For example, if you maintain an annual balance of $1 million in
Class I shares, you can redeem up to $120,000 annually through a systematic
withdrawal plan free of charge. Likewise, if you maintain an annual balance
of $10,000 in Class II shares, $1,200 may be redeemed annually free of
charge.
Distributions from IRAs due to death or disability or upon periodic
distributions based on life expectancy
Tax-free returns of excess contributions from employee benefit plans
Redemptions by Trust Company employee benefit plans or employee benefit
plans serviced by ValuSelect(R)
Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund intends to pay a dividend at least annually representing substantially
all of its net investment income and any net realized capital gains.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of Class I and Class II.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge) by
reinvesting capital gain distributions, dividend distributions, or both. This is
a convenient way to accumulate additional shares and maintain or increase your
earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy shares of another Franklin Templeton Fund (without a sales
charge or imposition of a Contingent Deferred Sales Charge). Many shareholders
find this a convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive capital gain distributions,
dividend distributions, or both in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee.
Distributions may be reinvested only in the SAME CLASS of shares, except as
follows: (i) Class II shareholders who chose to reinvest their distributions in
Class I shares of the Fund or another Franklin Templeton Fund before November
17, 1997, may continue to do so; and (ii) Class II shareholders may reinvest
their distributions in shares of any Franklin Templeton money fund.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days before the record date for us
to process the new option. For Trust Company retirement plans, special forms are
required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value per
share of the class you wish to purchase, plus any applicable sales charges. When
you sell shares, you receive the Net Asset Value per share minus any applicable
Contingent Deferred Sales Charges.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the close of the NYSE, normally 4:00
p.m. Eastern time. You can find the prior day's closing Net Asset Value and
Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
Your name,
The Fund's name,
The class of shares,
A description of the request,
For exchanges, the name of the fund you are exchanging into,
Your account number,
The dollar amount or number of shares, and
A telephone number where we may reach you during the day, or in the
evening if preferred.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of transactions
or account changes. These include transactions or account changes that you could
also make by phone, such as certain redemptions of $50,000 or less, exchanges
between identically registered accounts, and changes to the address of record.
For most other types of transactions or changes, written instructions must be
signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed by
all registered owners on the account.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential
claims based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account by phone. Please
refer to the sections of this prospectus that discuss the transaction you would
like to make or call Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to ask
your investment representative for assistance or send us written instructions,
as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we are
not reasonably satisfied that the instructions are genuine. If this occurs, we
will not be liable for any loss. We also will not be liable for any loss if we
follow instructions by phone that we reasonably believe are genuine or if you
are unable to execute a transaction by phone.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, we cannot accept instructions to change owners on the account unless ALL
owners agree in writing, even if the law in your state says otherwise.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- --------------------------- ------------------------------------------------
CORPORATION Corporate Resolution
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
TRUST 1. The pages from the trust document that
identify the trustees, or
2. A certification for trust
- ----------------------------- ------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have told us that
you do not want telephone privileges to apply to your account.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the shareholder application included with this
prospectus or contact your investment representative. The market value of the
Fund's shares may fluctuate and a systematic investment plan such as this will
not assure a profit or protect against a loss. You may discontinue the program
at any time by notifying Investor Services by mail or phone.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
obtain information about your account;
obtain price and performance information about any Franklin Templeton
Fund;
exchange shares (within the same class) between identically registered
Franklin Templeton Class I and Class II accounts; and
request duplicate statements and deposit slips for Franklin Templeton
accounts.
You will need the code number for each class to use TeleFACTS(R). The code
number is 711 for Class I and 791 for Class II.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. PLEASE
VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
Financial reports of the Fund will be sent every six months. To reduce
Fund expenses, we attempt to identify related shareholders within a
household and send only one copy of a report. Call Fund Information if you
would like an additional free copy of the Fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 100 Fountain Parkway, P.O. Box 33030, St. Petersburg, Florida 33733-8030.
The Fund and Distributors are also located at this address. Asset Management
Hong Kong is located at Two Exchange Square, Hong Kong. You may also contact us
by phone at one of the numbers listed below.
<TABLE>
<CAPTION>
HOURS OF OPERATION
(EASTERN TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY
<S> <C> <C>
Shareholder Services 1-800/632-2301 8:30 a.m. to 8:00 p.m.
Dealer Services 1-800/524-4040 8:30 a.m. to 8:00 p.m.
Fund Information 1-800/DIAL BEN 8:30 a.m. to 11:00 p.m.
(1-800/342-5236) 9:30 a.m. to 5:30 p.m.
(Saturday)
Retirement Plan Services 1-800/527-2020 8:30 a.m. to 8:00 p.m.
Institutional Services 1-800/321-8563 9:00 a.m. to 8:00 p.m.
TDD (hearing impaired) 1-800/851-0637 8:30 a.m. to 8:00 p.m.
</TABLE>
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
<PAGE>
GLOSSARY
USEFUL TERMS AND DEFINITIONS
ASSET MANAGEMENT HONG KONG - Templeton Asset Management Ltd. - Hong Kong Branch,
the Fund's investment manager
BOARD - The Board of Trustees of the Fund
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DEPOSITARY RECEIPTS - are certificates that give their holders the right to
receive securities (a) of a foreign issuer deposited in a U.S. bank or trust
company (American Depositary Receipts, "ADRs"); or (b) of a foreign or U.S.
issuer deposited in a foreign bank or trust company (Global Depositary Receipts,
"GDRs" or European Depositary Receipts, "EDRs").
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable Products
Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRA - Individual retirement account or annuity qualified under section 408 of
the Code
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
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.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
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.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
SIMPLE (Savings Incentive Match Plan for Employees) - An employer sponsored
salary deferral plan established under section 408(p) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
<PAGE>
PART A
ADVISOR CLASS
PROSPECTUS
<PAGE>
PROSPECTUS & APPLICATION
TEMPLETON DEVELOPING MARKETS TRUST - ADVISOR CLASS
MAY 1, 1998
INVESTMENT STRATEGY: GLOBAL GROWTH
This prospectus describes the Advisor Class shares of Templeton Developing
Markets Trust (the "Fund"). It contains information you should know before
investing in the Fund. Please keep it for future reference.
The Fund currently offers other classes of shares with different sales charge
and expense structures, which affect performance. These classes are described in
a separate prospectus. For more information, contact your investment
representative or call 1-800/DIAL BEN.
The Fund has a Statement of Additional Information ("SAI") for its Advisor
Class, dated May 1, 1998, which may be amended from time to time. It includes
more information about the Fund's procedures and policies. It has been filed
with the SEC and is incorporated by reference into this prospectus. For a free
copy or a larger print version of this prospectus, call 1-800/DIAL BEN.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
<PAGE>
TEMPLETON DEVELOPING MARKETS TRUST - ADVISOR CLASS
May 1, 1998
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our glossary section.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
ABOUT THE FUND
Expense Summary..........................................
Financial Highlights.....................................
How Does the Fund Invest Its Assets?.....................
What Are the Risks of Investing in the Fund?.............
Who Manages the Fund?....................................
How Does the Fund Measure Performance?...................
How Taxation Affects the Fund and Its Shareholders.......
How Is the Fund Organized?...............................
ABOUT YOUR ACCOUNT
How Do I Buy Shares?.....................................
May I Exchange Shares for Shares of Another Fund?........
How Do I Sell Shares?....................................
What Distributions Might I Receive From the Fund?........
Transaction Procedures and Special Requirements..........
Services to Help You Manage Your Account.................
What If I Have Questions About My Account?...............
GLOSSARY
Useful Terms and Definitions.............................
</TABLE>
100 Fountain Parkway
P.O. Box 33030
St. Petersburg
FL 33733-8030
1-800/DIAL BEN
<PAGE>
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of the Advisor Class for the fiscal
period ended December 31, 1997. The expenses are annualized. The Fund's actual
expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge Imposed on Purchases NONE
B. ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 1.25%
Rule 12b-1 Fees NONE
Other Expenses 0.44%
------
Total Fund Operating Expenses 1.69%
======
C. EXAMPLE
Assume the annual return for the class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the
Fund.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C>
$17 $53 $92 $200
</TABLE>
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The Fund pays its operating expenses. The effects of these expenses are
reflected in its Net Asset Value or dividends and are not directly charged
to your account.
+IF YOUR TRANSACTION IS PROCESSED THROUGH YOUR SECURITIES DEALER, YOU MAY BE
CHARGED A FEE BY YOUR SECURITIES DEALER FOR THIS SERVICE.
<PAGE>
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by McGladrey & Pullen, LLP, the Fund's independent auditors. Their audit
report covering the period shown below appears in the financial statements in
the Fund's Annual Report to Shareholders for the fiscal year ended December 31,
1997. The Annual Report to Shareholders also includes more information about the
Fund's performance. For a free copy, please call Fund Information.
<TABLE>
<CAPTION>
ADVISOR CLASS SHARES
YEAR ENDED DECEMBER 31, 1997<F1>
<S> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net Asset Value, beginning of year .................. $ 15.43
-------
Income from investment operations:
Net investment income ............................. .17
Net realized and unrealized loss .................. (1.63)
-------
Total from investment operations .................... (1.46)
-------
Less distributions from:
Net investment income ............................. (.20)
Net realized gains ................................ (.53)
-------
In excess of net realized gains (.31)
-------
Total distributions ................................. (1.04)
-------
Net Asset Value, end of year ........................ $ 12.93
=======
TOTAL RETURN<F2> .................................... (9.36)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $ 98,101
Ratios to average net assets:
Expenses .......................................... 1.69%<F3>
Net investment income ............................. 1.04%<F3>
Portfolio turnover rate ............................. 30.06%
Average commission rate paid4 ........................ $.0019
<FN>
1 FOR THE PERIOD JANUARY 2, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
DECEMBER 31, 1997. BASED ON AVERAGE WEIGHTED SHARES OUTSTANDING.
2 TOTAL RETURN IS NOT ANNUALIZED.
3 ANNUALIZED.
4 RELATES TO PURCHASES AND SALES OF EQUITY SECURITIES.
</FN>
</TABLE>
<PAGE>
HOW DOES THE FUND INVEST ITS ASSETS?
WHAT IS THE FUND'S GOAL?
The investment goal of the Fund is long-term capital appreciation. This goal is
fundamental which means that it may not be changed without shareholder approval.
WHAT IS THE FUND'S INVESTMENT STRATEGY?
The Fund tries to achieve its investment goal by investing, under normal market
conditions, at least 65% of its total assets in equity securities of developing
market issuers. The Fund normally will invest in at least three developing
market countries.
For purposes of the Fund's investments, developing or emerging market countries
include those considered such by the World Bank, the International Finance
Corporation, or the United Nations. In addition, developing market equity
securities means those issued by:
companies with their principal securities trading market within a
developing market country, as defined above; or
companies that derive 50% or more of their total revenue from either goods
or services produced or sales made in developing market countries; or
companies organized under the laws of, and with a principal office in, a
developing market country.
WHAT KINDS OF SECURITIES DOES THE FUND PURCHASE?
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. These include common stock; preferred stock;
convertible securities; warrants or rights. The Fund's primary investments are
in common stock.
In selecting these equity securities, Asset Management does a company-by-company
analysis, rather than focusing on a specific industry or economic sector. Asset
Management concentrates primarily on the market price of a company's securities
relative to its view regarding the company's long-term earnings potential. A
company's historical value measures, including price/earnings ratios, profit
margins and liquidation value, will also be considered.
DEBT SECURITIES represent an obligation of the issuer to repay a loan of money
to it, and generally, provide for the payment of interest. These include bonds,
notes and debentures; commercial paper; time deposits; bankers' acceptances; and
structured investments which are described more fully in the SAI.
The Fund may buy both rated and unrated debt securities. Independent rating
organizations rate debt securities based upon their assessment of the financial
soundness of the issuer. Generally, a lower rating indicates higher risk. The
Fund may invest up to 35% of its total assets in debt securities which are rated
C or better by Moody's or S&P or unrated debt which it determines to be of
comparable quality. At present, the Fund does not intend to invest more than 5%
of its total assets in non-investment grade securities (rated lower than BBB by
S&P or Baa by Moody's). Please see the SAI for more details on the risks
associated with lower-rated securities.
DEPOSITARY RECEIPTS. The Fund may also invest in American, European and Global
Depositary Receipts. Depositary Receipts are certificates typically issued by a
bank or trust company that give their holders the right to receive securities
issued by a foreign or domestic corporation.
GENERAL. With respect to 75% of its total assets, the Fund may invest up to 5%
of its total assets in securities issued by any one company or foreign
government. The Fund may invest any amount of its assets in U.S. government
securities. The Fund may invest in any industry although it will not concentrate
(invest more than 25% of its total assets) in any one industry. The Fund may
invest up to 15% of its total assets in foreign securities that are not listed
on a recognized U.S. or foreign securities exchange, including up to 10% of its
total assets in restricted securities, securities that are not readily
marketable, repurchase agreements with more than seven days to maturity, and
over-the-counter options bought by the Fund.
Please see the SAI for more details on the types of securities in which the Fund
invests.
WHAT ARE SOME OF THE FUND'S OTHER INVESTMENT STRATEGIES AND PRACTICES?
TEMPORARY INVESTMENTS.
When Asset Management believes that the securities trading markets or the
economy are experiencing excessive volatility or a prolonged general decline, or
other adverse conditions exist, for example, it may invest the Fund's portfolio
in a temporary defensive manner.
Under such circumstances, the Fund may invest up to 100% of its assets in money
market securities denominated in the currency of any nation. These may include:
short-term (maturities of less than 12 months) and medium-term (maturities
up to 5 years) securities issued or guaranteed by the U.S. or a foreign
government, their agencies or instrumentalities;
finance company and corporate commercial paper, and other short-term
corporate obligations, rated A by S&P or Prime-1 by Moody's or, if unrated,
determined to be of comparable quality;
bank obligations (including CDs, time deposits and bankers' acceptances;
and
repurchase agreements with banks and broker-dealers.
CLOSED-END INVESTMENT COMPANIES.
To encourage indirect foreign investment in their capital markets, some
countries, including South Korea, Chile and India, have permitted the creation
of closed-end investment companies. The Fund may invest up to 10% of its total
assets in securities of these companies.
REPURCHASE AGREEMENTS.
The Fund will generally have a portion of its assets in cash or cash equivalents
for a variety of reasons including waiting for a special investment opportunity
or taking a defensive position. To earn income on this portion of its assets,
the Fund may enter into repurchase agreements with certain banks and
broker-dealers. Under a repurchase agreement, the Fund agrees to buy a U.S.
government security from one of these issuers and then to sell the security back
to the issuer after a short period of time (generally, less than seven days) at
a higher price. The bank or broker-dealer must transfer to the Fund's custodian
securities with an initial value of at least 102% of the dollar amount invested
by the Fund in each repurchase agreement.
OPTIONS ON SECURITIES AND SECURITIES INDICES.
The Fund may buy and sell options on securities and securities indices to earn
additional income and/or to help protect its portfolio against market and/or
exchange rate movements, although it presently has no intention of doing so. An
option on a security is a contract that allows the buyer of the option the right
to buy or sell a specific security at a stated price during the option's term.
An option on a securities index is a contract that allows the buyer of the
option the right to receive from the seller cash, in an amount equal to the
difference between the index's closing price and the option's exercise price.
The Fund will limit the sale of options on its securities to 15% or less of its
total assets. The Fund may only buy options if the total premiums it paid for
such options is 5% or less of its total assets.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS.
To help protect its portfolio against adverse changes in foreign currency
exchange rates, the Fund may (1) buy and sell foreign currency at the prevailing
rate in the foreign currency exchange market; (2) enter into forward foreign
currency contracts which are agreements to buy or sell a specific currency at a
set price on a future date (generally within one year). The Fund may only commit
up to 20% of its total assets to these contracts; and (3) buy and sell put and
call options on foreign currencies.
FUTURES CONTRACTS.
Changes in interest rates, securities prices or foreign currency valuations may
affect the value of the Fund's investments. To reduce its exposure to these
factors, the Fund may buy and sell financial futures contracts, stock index
futures contracts, foreign currency futures contracts and options on any of
these contracts. A financial futures contract is an agreement to buy or sell a
specific security or commodity at a specified future date and price. An index
futures contract is an agreement to take or make delivery of an amount of cash
based on the difference between the value of the index at the beginning and end
of the contract period. A futures contract on a foreign currency is an agreement
to buy or sell a specific amount of a currency for a set price on a future date.
The Fund may not commit more than 5% of its total assets to initial margin
deposits on futures contracts and related options. In addition, the value of the
securities on which the futures contracts are based will not exceed 25% of the
Fund's total assets.
SECURITIES LENDING.
To generate additional income, the Fund may lend its portfolio securities to
qualified securities dealers or other institutional investors. Such loans may
not exceed 33 1/3% of the value of the Fund's total assets measured at the time
of the most recent loan. For each loan the Fund must receive in return
collateral with a value at least equal to 100% of the current market value of
the loaned securities.
SHORT-TERM TRADING AND PORTFOLIO TURNOVER.
The Fund invests for long-term capital appreciation and does not intend to
emphasize short-term trading profits. It is anticipated, therefore, that the
Fund's annual portfolio turnover rate generally will be below 50%; although this
rate may be higher or lower, in relation to market conditions. A portfolio
turnover rate of less than 50% means that in a one year period, less than
one-half of the Fund's portfolio is changed.
OTHER POLICIES AND RESTRICTIONS.
The Fund has a number of additional investment restrictions that govern its
activities. Some of these restrictions may only be changed with shareholder
approval and some may be changed by the Board alone. For a list of these
restrictions and more information about the Fund's investment policies,
including those described above, and their associated risks, please see "How
Does the Fund Invest its Assets?" and "Investment Restrictions" in the SAI.
The policies and restrictions discussed in this prospectus and in the SAI are
applied at the time the Fund makes an investment. The Fund is generally not
required to sell a security because of a change in circumstances.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
GENERAL RISK.
There is no assurance that the Fund's investment goal will be met. The Fund will
seek to spread investment risk by diversifying its investments but the
possibility of losses remains. Generally, if the securities owned by the Fund
increase in value, the value of the shares of the Fund which you own will
increase. Similarly, if the securities owned by the Fund decrease in value, the
value of your shares will also decline. In this way, you participate in any
change in the value of the securities owned by the Fund.
FOREIGN SECURITIES RISK.
The value of foreign (and U.S.) securities is affected by general economic
conditions and individual company and industry earnings prospects. While foreign
securities may offer significant opportunities for gain, they also involve
additional risks that can increase the potential for losses in the Fund. These
risks can be significantly greater for investments in emerging markets.
Investments in Depositary Receipts also involve some or all of the risks
described below.
The political, economic and social structures of some countries in which the
Fund invests may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the imposition
of exchange controls, expropriation, restrictions on removal of currency or
other assets, nationalization of assets, and punitive taxes.
There may be less publicly available information about a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they may not have uniform accounting,
auditing and financial reporting standards and may have less government
supervision of financial markets. Foreign securities markets may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S. Transaction costs on
foreign securities markets are generally higher than in the U.S. The settlement
practices may be cumbersome and result in delays that may affect portfolio
liquidity. The Fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with respect
to foreign investments in foreign courts than with respect to domestic issuers
in U.S. courts.
Some of the countries in which the Fund may invest such as Russia and certain
Asian and Eastern European countries are considered developing or emerging
markets. Investments in these markets are subject to all of the risks of foreign
investing generally, and have additional and heightened risks due to a lack of
legal, business and social frameworks to support securities markets.
EMERGING MARKETS involve additional significant risks, including:
political and social uncertainty (for example, regional conflicts and risk
of war)
currency exchange rate volatility
pervasiveness of corruption and crime
delays in settling portfolio transactions
risk of loss arising out of the system of share registration and custody
comparatively smaller and less liquid than developed markets
dependency upon foreign economic assistance and international trade
less government supervision and regulation of business and industry
practices, stock exchanges, brokers and listed companies than in the United
States
ALL OF THESE FACTORS MAKE DEVELOPING MARKET EQUITY SECURITIES' PRICES GENERALLY
MORE VOLATILE THAN SECURITIES ISSUED IN DEVELOPED MARKETS. The Fund may invest
up to 100% of its total assets in emerging markets, including up to 5% of its
total assets in Russian securities. For more information on the risks associated
with emerging markets securities, please see the SAI.
MARKET, CURRENCY, AND INTEREST RATE RISK.
General market movements in any country where the Fund has investments are
likely to affect the value of the securities which the Fund owns in that country
and the Fund's share price may also be affected. The Fund's investments may be
denominated in foreign currencies so that changes in foreign currency exchange
rates will also affect the value of what the Fund owns, and thus the price of
its shares. To the extent the Fund invests in debt securities, changes in
interest rates in any country where the Fund is invested will affect the value
of the Fund's portfolio and, consequently, its share price. Rising interest
rates, which often occur during times of inflation or a growing economy, are
likely to cause the face value of a debt security to decrease, having a negative
effect on the value of the Fund's shares. Of course, individual and worldwide
stock markets, interest rates and currency valuations have both increased and
decreased, sometimes very dramatically, in the past. These changes are likely to
occur again in the future at unpredictable times.
CREDIT AND ISSUER RISK.
The Fund's investments in debt securities involve credit risk. This is the risk
that the issuer of a debt security will be unable to make principal and interest
payments in a timely manner and the debt security will go into default. The Fund
may invest up to 10% of its total assets in defaulted debt securities. The
purchase of defaulted debt securities involves significant additional risks,
such as the possibility of complete loss of the investment in the event the
issuer does not restructure or reorganize to enable it to resume paying interest
and principal to holders.
DERIVATIVE SECURITIES RISK.
Derivative investments are those whose values are dependent upon the performance
of one or more other securities or investments or indices; in contrast to common
stock, for example, whose value is dependent upon the operations of the issuer.
Option transactions, foreign currency exchange transactions and futures
contracts are considered derivative investments. To the extent the Fund enters
into these transactions, their success will depend upon Asset Managements'
ability to predict pertinent market movements.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist among the
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Asset Management Hong Kong manages the Fund's assets and
makes its investment decisions. Asset Management Hong Kong also performs similar
services for other funds. It is wholly owned by Resources, a publicly owned
company engaged in the financial services industry through its subsidiaries.
Charles B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources. Together, Asset Management Hong Kong and its affiliates manage over
$221 billion in assets. The Templeton organization has been investing globally
since 1940. Asset Management Hong Kong and its affiliates have offices in
Argentina, Australia, Bahamas, Brazil, Canada, China, France, Germany, Hong
Kong, India, Italy, Japan, Korea, Luxembourg, the Netherlands, Poland, Russia,
Singapore, South Africa, Switzerland, Taiwan, United Kingdom, U.S. and Vietnam.
Please see "Investment Management and Other Services" and "Miscellaneous
Information" in the SAI for information on securities transactions and a summary
of the Fund's Code of Ethics.
PORTFOLIO MANAGEMENT. The Fund's lead portfolio manager since its inception is
Dr. J. Mark Mobius. Dr. Mobius, a German citizen, is Managing Director of
Templeton Asset Management Ltd., of which Asset Management Hong Kong is a
representative office. In addition, Dr. Mobius serves as a director and/or
officer of many other funds within the Franklin Templeton Group of Funds and
many investment advisory subsidiaries of Resources. He holds a BA in fine arts
from Boston University, an MA in mass communications from Boston University, and
a Ph.D. in economics from the Massachusetts Institute of Technology. Prior to
joining the Templeton organization in 1987, Dr. Mobius was president of the
International Investment Trust Company Limited (investment manager of Taiwan,
R.O.C. Fund) (1986-1987) and a director of Vickers da Costa, Hong Kong (an
international securities firm) (1983-1986). Dr. Mobius began working in Vickers
da Costa's Hong Kong office in 1980 and moved to Taiwan in 1983 to open the
firm's office there and to direct operations in India, Indonesia, Thailand, the
Philippines, and Korea. Before joining Vickers da Costa, Dr. Mobius operated his
own consulting firm in Hong Kong from 1970 until 1980.
Allan Lam and Tom Wu have secondary portfolio management responsibilities for
the Fund. Mr. Lam holds a BA in accounting from Rutgers University. Prior to
joining the Templeton organization in 1987, he worked as an auditor with two
international accounting firms in Hong Kong: Deloitte Haskins & Sells CPA and
KPMG Peat Marwick CPA. Mr. Wu is a Director of Templeton Asset Management Ltd.
He holds a BSS in economics from the University of Hong Kong and an MBA in
finance from the University of Oregon. Prior to joining the Templeton
organization in 1987, Mr. Wu worked as an investment analyst, specializing in
Hong Kong companies, with Vickers da Costa.
MANAGEMENT FEES. During the fiscal period ended December 31, 1997, management
fees totaling 1.25% of the average daily net assets of the Fund were paid to
Asset Management Hong Kong. Total expenses of the Fund, including fees paid to
Asset Management Hong Kong, were 1.69% (annualized).
PORTFOLIO TRANSACTIONS. Asset Management Hong Kong tries to obtain the best
execution on all transactions. If Asset Management Hong Kong believes more than
one broker or dealer can provide the best execution, it may consider research
and related services and the sale of Fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "How Does the Fund Buy Securities for Its Portfolio?" in the
SAI for more information.
ADMINISTRATIVE SERVICES. FT Services provides certain administrative services
and facilities for the Fund. During the fiscal period ended December 31, 1997,
administration fees totaling 0.09% of the average daily net assets of the Fund
were paid to FT Services. These fees are included in the amount of total
expenses shown above. Please see "Investment Management and Other Services" in
the SAI for more information.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, the Advisor Class of the Fund advertises its performance. A
commonly used measure of performance is total return.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested.
The investment results of the Advisor Class will vary. Performance figures are
always based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How Does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
ON AUGUST 5, 1997, PRESIDENT CLINTON SIGNED INTO LAW THE TAXPAYER RELIEF ACT OF
1997 (THE "1997 ACT"). THIS NEW LAW MAKES SWEEPING CHANGES IN THE CODE. BECAUSE
MANY OF THESE CHANGES ARE COMPLEX THEY ARE DISCUSSED IN THE SAI.
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TAXATION OF THE FUND'S INVESTMENTS. The Fund invests your HOW DOES THE FUND EARN INCOME AND GAINS?
money in the stocks, bonds and other securities that are THE FUND EARNS DIVIDENDS AND INTEREST (THE FUND'S
described in the section "How Does the Fund Invest Its "INCOME") ON ITS INVESTMENTS. WHEN THE FUND SELLS A
Assets?" Special tax rules may apply in determining the SECURITY FOR A PRICE THAT IS HIGHER THAN IT PAID, IT
income and gains that the Fund earns on its investments. HAS A GAIN. WHEN THE FUND SELLS A SECURITY FOR A PRICE
These rules may, in turn, affect the amount of THAT IS LOWER THAN IT PAID, IT HAS A LOSS. IF THE FUND
distributions that the Fund pays to you. These special tax HAS HELD THE SECURITY FOR MORE THAN ONE YEAR, THE GAIN
rules are discussed in the SAI. OR LOSS WILL BE A LONG-TERM CAPITAL GAIN OR LOSS. IF
THE FUND HAS HELD THE SECURITY FOR ONE YEAR OR LESS,
TAXATION OF THE FUND. As a regulated investment company, THE GAIN OR LOSS WILL BE A SHORT-TERM CAPITAL GAIN OR
the Fund generally pays no federal income tax on LOSS. THE FUND'S GAINS AND LOSSES ARE NETTED TOGETHER,
the income and gains that it distributes to you. AND, IF THE FUND HAS A NET GAIN (THE FUND'S "GAINS"),
THAT GAIN WILL GENERALLY BE DISTRIBUTED TO YOU.
</TABLE>
FOREIGN TAXES. Foreign governments may impose taxes on the income and gains from
the Fund's investments in foreign stocks and bonds. These taxes will reduce the
amount of the Fund's distributions to you, but, depending upon the amount of the
Fund's assets that are invested in foreign securities and foreign taxes paid,
may be passed through to you as a foreign tax credit on your income tax return.
The Fund may also invest in the securities of foreign companies that are
"passive foreign investment companies" ("PFICs"). These investments in PFICs may
cause the Fund to pay income taxes and interest charges. If possible, the Fund
will adopt strategies to avoid PFIC taxes and interest charges.
TAXATION OF SHAREHOLDERS
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DISTRIBUTIONS. Distributions from the Fund, whether you WHAT IS A DISTRIBUTION?
receive them in cash or in additional shares, are AS A SHAREHOLDER, YOU WILL RECEIVE YOUR SHARE OF THE
generally subject to income tax. The Fund will send you a FUND'S INCOME AND GAINS ON ITS INVESTMENTS IN STOCKS,
statement in January of the current year that reflects the BONDS AND OTHER SECURITIES. THE FUND'S INCOME AND SHORT
amount of ordinary dividends, capital gain distributions TERM CAPITAL GAINS ARE PAID TO YOU AS ORDINARY
and non-taxable distributions you received from the Fund DIVIDENDS. THE FUND'S LONG-TERM CAPITAL GAINS ARE PAID
in the prior year. This statement will include TO YOU AS CAPITAL GAIN DISTRIBUTIONS. IF THE FUND PAYS
distributions declared in December and paid to you in YOU AN AMOUNT IN EXCESS OF ITS INCOME AND GAINS, THIS
January of the current year, but which are taxable as if EXCESS WILL GENERALLY BE TREATED AS A NON-TAXABLE
paid on December 31 of the prior year. The IRS requires DISTRIBUTION. THESE AMOUNTS, TAKEN TOGETHER, ARE WHAT
you to report these amounts on your income tax return for WE CALL THE FUND'S DISTRIBUTIONS TO YOU.
the prior year. The Fund's statement for the prior year
will tell you how much of your capital gain distribution
represents 28% rate gain. The remainder of the
capital gain distribution represents 20% rate gain.
</TABLE>
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your qualified
retirement plan, such as a Section 401(k) plan or IRA, are generally
tax-deferred; this means that you are not required to report Fund distributions
on your income tax return when paid to your plan, but, rather, when your plan
makes payments to you. Be aware, however, that special rules apply to payouts
from Roth and education IRAs.
DIVIDENDS-RECEIVED DEDUCTION. It is anticipated that no portion of the Fund's
distributions will qualify for the corporate dividends-received deduction.
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REDEMPTIONS AND EXCHANGES. If you redeem your shares or if WHAT IS A REDEMPTION?
you exchange your shares in the Fund for shares in another A REDEMPTION IS A SALE BY YOU TO THE FUND OF SOME OR
Franklin Templeton Fund, you will generally have a gain or ALL OF YOUR SHARES IN THE FUND. THE PRICE PER SHARE YOU
loss that the IRS requires you to report on your income RECEIVE WHEN YOU REDEEM FUND SHARES MAY BE MORE OR LESS
tax return. If you exchange Fund shares held for 90 days THAN THE PRICE AT WHICH YOU PURCHASED THOSE SHARES. AN
or less and pay no sales charge, or a reduced sales EXCHANGE OF SHARES IN THE FUND FOR SHARES OF ANOTHER
charge, for the new shares, all or a portion of the sales FRANKLIN TEMPLETON FUND IS TREATED AS A REDEMPTION OF
charge you paid on the purchase of the shares you FUND SHARES AND THEN A PURCHASE OF SHARES OF THE OTHER
exchanged is not included in their cost for purposes of FUND. WHEN YOU REDEEM OR EXCHANGE YOUR SHARES, YOU WILL
computing gain or loss on the exchange. If you hold your GENERALLY HAVE A GAIN OR LOSS, DEPENDING UPON WHETHER
shares for six months or less, any loss you have will be THE BASIS IN YOUR SHARES IS MORE OR LESS THAN YOUR COST
treated as a long-term capital loss to the extent of any OR OTHER BASIS IN THE SHARES. CALL FUND INFORMATION FOR
capital gain distributions received by you from the Fund. A FREE SHAREHOLDER TAX INFORMATION HANDBOOK IF YOU NEED
All or a portion of any loss on the redemption or exchange MORE INFORMATION IN CALCULATING THE GAIN OR LOSS ON THE
of your shares will be disallowed by the IRS if you REDEMPTION OR EXCHANGE OF YOUR SHARES.
purchase other shares in the Fund within 30 days before or
after your redemption or exchange.
FOREIGN TAXES. If more than 50% of the value of the Fund's WHAT IS A FOREIGN TAX CREDIT?
assets consist of foreign securities, the Fund may elect A FOREIGN TAX CREDIT IS A TAX CREDIT
to pass-through to you the amount of foreign FOR THE AMOUNT OF TAXES IMPOSED BY A
taxes it paid. If the Fund makes this election, FOREIGN COUNTRY ON EARNINGS OF THE
your year-end statement will show more taxable FUND. WHEN A FOREIGN COMPANY IN WHICH THE
income than was actually distributed to you. However, FUND INVESTS PAYS A DIVIDEND TO THE FUND,
you will be entitled to either deduct your share THE DIVIDEND WILL GENERALLY BE SUBJECT TO A
of such taxes in computing your WITHHOLDING TAX. THE TAXES WITHHELD IN FOREIGN
taxable income or claim a foreign tax credit for such COUNTRIES CREATE CREDITS THAT YOU MAY USE
taxes against your U.S. federal income tax. Your year-end TO OFFSET YOUR U.S. FEDERAL INCOME TAX.
statement, showing the amount of deduction or credit
available to you, will be distributed to you in January
along with other shareholder information records
including your Fund Form 1099-DIV.
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The 1997 Act includes a provision that allows you to claim these credits
directly on your income tax return (Form 1040) and eliminates the previous
requirement that you complete a detailed supporting form. To qualify, you must
have $600 or less in joint return foreign taxes ($300 or less on a single
return), all of which are reported to you on IRS Form 1099-DIV. THIS SIMPLIFIED
PROCEDURE APPLIES ONLY FOR CALENDAR YEARS 1998 AND BEYOND, AND IS NOT AVAILABLE
IN 1997.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income
tax withholding. Your home country may also tax ordinary dividends, capital gain
distributions and gains arising from redemptions or exchanges of your Fund
shares. Fund shares held by the estate of a non-U.S. investor may be subject to
U.S. estate tax. You may wish to contact your tax advisor to determine the U.S.
and non-U.S. tax consequences of your investment in the Fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you receive
from the Fund, and gains arising from redemptions or exchanges of your Fund
shares will generally be subject to state and local income tax. The holding of
Fund shares may also be subject to state and local intangibles taxes. You may
wish to contact your tax advisor to determine the state and local tax
consequences of your investment in the Fund.
<PAGE>
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BACKUP WITHHOLDING. When you open an account, IRS WHAT IS A BACKUP WITHHOLDING?
regulations require that you provide your taxpayer BACKUP WITHHOLDING OCCURS WHEN THE FUND IS REQUIRED TO
identification number ("TIN"), certify that it is correct, WITHHOLD AND PAY OVER TO THE IRS 31% OF YOUR
and certify that you are not subject to backup withholding DISTRIBUTIONS AND REDEMPTION PROCEEDS. YOU CAN AVOID
under IRS rules. If you fail to provide a correct TIN or BACKUP WITHHOLDING BY PROVIDING THE FUND WITH YOUR TIN,
the proper tax certifications, the Fund is required to AND BY COMPLETING THE TAX CERTIFICATIONS ON YOUR
withhold 31% of all the distributions (including ordinary SHAREHOLDER APPLICATION THAT YOU WERE ASKED TO SIGN
dividends and capital gain distributions), and redemption WHEN YOU OPENED YOUR ACCOUNT. HOWEVER, IF THE IRS
proceeds paid to you. The Fund is also required to begin INSTRUCTS THE FUND TO BEGIN BACKUP WITHHOLDING, IT IS
backup withholding on your account if the IRS instructs REQUIRED TO DO SO EVEN IF YOU PROVIDED THE FUND WITH
the Fund to do so. The Fund reserves the right not to open YOUR TIN AND THESE TAX CERTIFICATIONS, AND BACKUP
your account, or, alternatively, to redeem your shares at WITHHOLDING WILL REMAIN IN PLACE UNTIL THE FUND IS
the current net asset value, less any taxes withheld, if INSTRUCTED BY THE IRS THAT IT IS NO LONGER REQUIRED.
you fail to provide a correct TIN, fail to provide the
proper tax certifications, or the IRS instructs the Fund
to begin backup withholding on your account.
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This tax discussion is for general information only. Prospective investors
should consult their own tax advisors concerning the federal, state, local or
foreign tax consequences of an investment in the Fund. A more complete
discussion of these rules and related matters is contained in the section
entitled "Additional Information on DISTRIBUTIONS, FOREIGN TAXES PAID AND INCOME
TAXES WITHHELD IS ALSO DISCUSSED IN A FREE SHAREHOLDER TAX INFORMATION
HANDBOOK, WHICH YOU MAY REQUEST BY CONTACTING FUND INFORMATION.
HOW IS THE FUND ORGANIZED?
The Fund is a diversified, open-end management investment company, commonly
called a mutual fund. It was organized as a Massachusetts business trust on
August 9, 1991, and is registered with the SEC. As of January 1, 1997, the Fund
began offering a new class of shares designated Templeton Developing Markets
Trust - Advisor Class. All shares outstanding before the offering of Advisor
Class shares have been designated Templeton Developing Markets Trust - Class I
and Templeton Developing Markets Trust - Class II. Additional series and classes
of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters affecting only that class, or expressly required
to be voted on separately by state or federal law. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of the trust for matters that affect the trust as a whole.
The Fund has noncumulative voting rights. This gives holders of more than 50% of
the shares voting the ability to elect all of the members of the Board. If this
happens, holders of the remaining shares voting will not be able to elect anyone
to the Board.
The Fund does not intend to hold annual shareholder meetings. It may hold
special meetings, however, for matters requiring shareholder approval. A meeting
may also be called by the Board in its discretion or for the purpose of
considering the removal of a Board member if requested in writing to do so by
shareholders holding at least 10% of the outstanding shares. In certain
circumstances, we are required to help you communicate with other shareholders
about the removal of a Board member.
<PAGE>
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
Shares of the Fund may be purchased without a sales charge. Currently, shares of
the Fund are only available to:
1. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs, subject to a $250,000 minimum
initial investment requirement or a $100,000 minimum initial investment
requirement for an individual client
2. Qualified registered investment advisors or certified financial planners who
have clients invested in the Franklin Mutual Series Fund Inc. on October 31,
1996, or who buy through a broker-dealer or service agent who has entered into
an agreement with Distributors, subject to a $1,000 minimum initial investment
requirement
3. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group and their immediate family
members, subject to a $100 minimum initial investment requirement
4. Each series of the Franklin Templeton Fund Allocator Series, subject to a
$1,000 minimum initial and subsequent investment requirement
5. Accounts managed by the Franklin Templeton Group. There is no minimum initial
investment requirement.
6. The Franklin Templeton Profit Sharing 401(k) Plan. There is no minimum
initial investment requirement.
To open your account, please follow the steps below. This will help avoid any
delays in processing your request. PLEASE KEEP IN MIND THAT THE FUND DOES NOT
CURRENTLY ALLOW INVESTMENTS BY MARKET TIMERS.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The Fund's minimum investments
are:
To open your account: Varies*
To add to your account: $25*
*We may waive or lower these minimums for certain investors. Please see "Minimum
Investment" below. We also reserve the right to refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application, including
the optional shareholder privileges section. By applying for privileges now, you
can avoid the delay and inconvenience of having to send an additional
application to add privileges later. It is important that we receive a signed
application since we will not be able to process any redemptions from your
account until we receive your signed application.
4. Make your investment using the table below.
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METHOD STEPS TO FOLLOW
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BY MAIL For an initial investment:
Return the application to the Fund
with your check made payable to the
Fund.
For additional investments:
Send a check made payable to the
Fund. Please include your account
number on the check.
BY WIRE 1. Call Shareholder Services or, if that number is busy, call
1-650/312-2000 collect, to receive a wire control number and wire
instructions. You need a new wire control number every time you wire
money into your account. If you do not have a currently effective wire
control number, we will return the money to the bank, and we will not
credit the purchase to your account.
2. For an initial investment you must also return your signed
shareholder application to the Fund.
IMPORTANT DEADLINES: If we receive your call before 4:00 p.m. Eastern time
and the bank receives the wired funds and reports the receipt of wired funds
to the Fund by 6:00 p.m. Eastern time, we will credit the purchase to your
account that day. If we receive your call after 4:00 p.m. or the bank
receives the wire after 6:00 p.m., we will credit the purchase to your
account the following business day.
THROUGH YOUR DEALER Call your investment representative
- -------------------------------------- ------------------------------------------------------------------------------
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PAYMENTS TO SECURITIES DEALERS
Securities Dealers who initiate and are responsible for purchases of Advisor
Class shares may receive up to 0.25% of the amount invested. The payment is
subject to the sole discretion of Distributors, and is paid by Distributors or
one of its affiliates and not by the Fund or its shareholders.
For information on additional compensation payable to Securities Dealers in
connection with the sale of Fund shares, please see "How Do I Buy, Sell and
Exchange Shares? - Other Payments to Securities Dealers" in the SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and some do not offer Advisor
Class shares.
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METHOD STEPS TO FOLLOW
- ------------------------ -----------------------------------------------------
BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates for
the shares you want to exchange
- ------------------------ -----------------------------------------------------
BY PHONE Call Shareholder Services
If you do not want the ability to exchange by
phone to apply to your account, please let us
know.
- ------------------------ -----------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------ -----------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange shares
from a Fund account requiring two or more signatures into an identically
registered money fund account requiring only one signature for all
transactions. PLEASE NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION TO
BE AVAILABLE ON YOUR ACCOUNT. Additional procedures may apply. Please see
"Transaction Procedures and Special Requirements."
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
If you want to exchange into a fund that does not currently offer an Advisor
Class, you may exchange your Advisor Class shares for Class I shares of that
fund at Net Asset Value. If you do so and you later decide you would like to
exchange into a fund that offers an Advisor Class, you may exchange your Class I
shares for Advisor Class shares of that fund. You may also exchange your Advisor
Class shares for Class Z shares of Franklin Mutual Series Fund Inc.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
- ------------------------ ------------------------------------------------------
METHOD STEPS TO FOLLOW
- ------------------------ -----------------------------------------------------
BY MAIL 1. Send us signed written instructions. If you would
like your redemption proceeds wired to a bank account,
your instructions should include:
The name, address and telephone number of the bank
where you want the proceeds sent
Your bank account number
The Federal Reserve ABA routing number
If you are using a savings and loan or credit
union, the name of the corresponding bank and the
account number
2. Include any outstanding share certificates for the
shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need
to send additional documents. Accounts under court
jurisdiction may have other requirements.
- ------------------------ ------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other
than an escrow account, you must first sign up for the
wire feature. To sign up, send us written
instructions, with a signature guarantee. To avoid
any delay in processing, the instructions should
include the items listed in "By Mail" above.
Telephone requests will be accepted:
If the request is $50,000 or less. Institutional
accounts may exceed $50,000 by completing a
separate agreement. Call Institutional Services
to receive a copy.
If there are no share certificates issued for the
shares you want to sell or you have already
returned them to the Fund
Unless the address on your account was changed by
phone within the last 15 days
If you do not want the ability to redeem
by phone to apply to your account, please
let us know.
- ------------------------ ------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------ ------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 4:00 p.m. Eastern time, your wire payment will be
sent the next business day. For requests received in proper form after 4:00 p.m.
Eastern time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund intends to pay a dividend at least annually representing substantially
all of its net investment income and any net realized capital gains.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the same
class of the Fund by reinvesting capital gain distributions, dividend
distributions, or both. This is a convenient way to accumulate additional shares
and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton
Fund. You may also direct your distributions to buy Class I shares of another
Franklin Templeton Fund. Many shareholders find this a convenient way to
diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive capital gain distributions,
dividend distributions, or both in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days before the record date for us
to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
You buy and sell Advisor Class shares at the Net Asset Value per share. The Net
Asset Value we use when you buy or sell shares is the one next calculated after
we receive your transaction request in proper form. If you buy or sell shares
through your Securities Dealer, however, we will use the Net Asset Value next
calculated after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the close of the NYSE, normally 4:00 p.m. Eastern
time. You can find the prior day's closing Net Asset Value in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the
evening if preferred.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of transactions
or account changes. These include transactions or account changes that you could
also make by phone, such as certain redemptions of $50,000 or less, exchanges
between identically registered accounts, and changes to the address of record.
For most other types of transactions or changes, written instructions must be
signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed by
all registered owners on the account.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account by phone. Please
refer to the sections of this prospectus that discuss the transaction you would
like to make or call Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to ask
your investment representative for assistance or send us written instructions,
as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we are
not reasonably satisfied that the instructions are genuine. If this occurs, we
will not be liable for any loss. We also will not be liable for any loss if we
follow instructions by phone that we reasonably believe are genuine or if you
are unable to execute a transaction by phone.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, we cannot accept instructions to change owners on the account unless ALL
owners agree in writing, even if the law in your state says otherwise. If you
would like another person or owner to sign for you, please send us a current
power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
- ----------------------- ------------------------------------------------------
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- ----------------------- ------------------------------------------------------
CORPORATION Corporate Resolution
- ----------------------- ------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
- ----------------------- ------------------------------------------------------
TRUST 1. The pages from the trust document that identify
the trustees, or
2. A certification for trust
- ----------------------- ------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have told us that
you do not want telephone privileges to apply to your account.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
These minimums do not apply if you fall within categories 4, 5, or 6 under "How
Do I Buy Shares? - Opening Your Account."
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the shareholder application included with this
prospectus or contact your investment representative. The market value of the
Fund's shares may fluctuate and a systematic investment plan such as this will
not assure a profit or protect against a loss. You may discontinue the program
at any time by notifying Investor Services by mail or phone.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
obtain information about your account;
obtain price information about any Franklin Templeton Fund; and
request duplicate statemetns and deposit slips for Franklin Templeton
accounts.
You will need the Fund's code number to use TeleFACTS(R). The Fund's code number
is 611.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. PLEASE
VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household
and send only one copy of a report. Call Fund Information if you would like
an additional free copy of the Fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 100 Fountain Parkway, P.O. Box 33030, St. Petersburg, Florida 33733-8030. The
Fund and Distributors are also located at this address. Asset Management Hong
Kong is located at Two Exchange Square, Hong Kong. You may also contact us by
phone at one of the numbers listed below.
<TABLE>
<CAPTION>
HOURS OF OPERATION
(EASTERN TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
<S> <C> <C>
Shareholder Services 1-800/632-2301 8:30 a.m. to 8:00 p.m.
Dealer Services 1-800/524-4040 8:30 a.m. to 8:00 p.m.
Fund Information 1-800/DIAL BEN 8:30 a.m. to 11:00 p.m.
(1-800/342-5236) 9:30 a.m. to 5:30 p.m.
(Saturday)
Retirement Plan Services 1-800/527-2020 8:30 a.m. to 8:00 p.m.
Institutional Services 1-800/321-8563 9:00 a.m. to 8:00 p.m.
TDD (hearing impaired) 1-800/851-0637 8:30 a.m. to 8:00 p.m.
</TABLE>
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
<PAGE>
GLOSSARY
USEFUL TERMS AND DEFINITIONS
ASSET MANAGEMENT HONG KONG - Templeton Asset Management Ltd. - Hong Kong Branch,
the Fund's investment manager
BOARD - The Board of Trustees of the Fund
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DEPOSITARY RECEIPTS - are certificates that give their holders the right to
receive securities (a) of a foreign issuer deposited in a U.S. bank or trust
company (American Depositary Receipts, "ADRs"); or (b) of a foreign or U.S.
issuer deposited in a foreign bank or trust company (Global Depositary Receipts,
"GDRs" or European Depositary Receipts, "EDRs").
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable Products
Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
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.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
<PAGE>
PART B
CLASS I AND CLASS II
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
TEMPLETON DEVELOPING MARKETS TRUST
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
100 FOUNTAIN PARKWAY, P.O. BOX 33030
ST. PETERSBURG, FL 33733-8030 1-800/DIAL BEN
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
How Does the Fund Invest Its Assets?.........................
What Are the Risks of Investing in the Fund?.................
Investment Restrictions......................................
Officers and Trustees........................................
Investment Management
and Other Services..........................................
How Does the Fund Buy
Securities for Its Portfolio?...............................
How Do I Buy, Sell and Exchange Shares?......................
How Are Fund Shares Valued?..................................
Additional Information on
Distributions and Taxes.....................................
The Fund's Underwriter.......................................
How Does the Fund Measure Performance?.......................
Miscellaneous Information....................................
Financial Statements.........................................
Useful Terms and Definitions.................................
Appendices...................................................
Description of Ratings......................................
</TABLE>
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and
Definitions."
Templeton Developing Markets Trust (the "Fund") is a diversified, open-end
management investment company. The investment goal of the Fund is long-term
capital appreciation. The Fund seeks to achieve its goal by investing primarily
in equity securities of issuers in countries having developing markets.
The Prospectus, dated May 1, 1998, 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.
This SAI describes the Fund's Class I and Class II shares. The Fund currently
offers another class of shares with a different sales charge and expense
structure, which affects performance. This class is described in a separate SAI
and prospectus. For more information, contact your investment representative or
call 1-800/DIAL BEN.
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?"
EQUITY SECURITIES. The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner of
an equity security may participate in a company's success through the receipt of
dividends which are distributions of earnings by the company to its owners.
Equity security owners may also participate in a company's success or lack of
success through increases or decreases in the value of the company's shares as
traded in the public trading market for such shares. Equity securities generally
take the form of common stock or preferred stock. Preferred stockholders
typically receive greater dividends but may receive less appreciation than
common stockholders and may have greater voting rights as well. Equity
securities may also include convertible securities, warrants or rights.
Convertible securities typically are debt securities or preferred stocks which
are convertible into common stock after certain time periods or under certain
circumstances. Warrants or rights give the holder the right to purchase a common
stock at a given time for a specified price.
DEBT SECURITIES. A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes,
debentures and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
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.
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. Asset Management Hong Kong 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 Asset Management Hong Kong to present no serious risk of becoming
involved in bankruptcy proceedings within the time frame contemplated by the
repurchase transaction.
LOANS OF PORTFOLIO SECURITIES. The Fund may lend to qualified securities dealers
or other institutional investors portfolio securities with an aggregate market
value of up to one-third of its total assets. Such loans must be secured by
collateral (consisting of any combination of cash, U.S. government securities or
irrevocable letters of credit) in an amount at least equal (on a daily
marked-to-market basis) to the current market value of the securities loaned.
The Fund retains all or a portion of the interest received on investment of the
cash collateral or receives a fee from the borrower. The Fund may terminate the
loans at any time and obtain the return of the securities loaned within five
business days. The Fund will continue to receive any interest or dividends paid
on the loaned securities and will continue to have voting rights with respect to
the securities. However, as with other extensions of credit, there are risks of
delay in recovery or even loss of rights in collateral should the borrower fail.
BORROWING. The Fund may borrow up to one-third of the value of its total assets
from banks to increase its holdings of portfolio securities. Under the 1940 Act,
the Fund is required to maintain continuous asset coverage of 300% with respect
to such borrowings and to sell (within three days) sufficient portfolio holdings
to restore such coverage if it should decline to less than 300% due to market
fluctuations or otherwise, even if such liquidations of the Fund's holdings may
be disadvantageous from an investment standpoint. Leveraging by means of
borrowing may exaggerate the effect of any increase or decrease in the value of
portfolio securities on the Fund's net asset value, and money borrowed will be
subject to interest and other costs (which may include commitment fees and/or
the cost of maintaining minimum average balances), which may or may not exceed
the income or gains received from the securities purchased with borrowed funds.
CLOSED-END INVESTMENT COMPANIES. Shares of certain closed-end investment
companies may at times be acquired only at market prices representing premiums
to their Net Asset Values. If the Fund acquires shares of closed-end investment
companies, shareholders would bear both their proportionate share of expenses of
the Fund (including management and advisory fees) and, indirectly, the expenses
of such closed-end investment companies.
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. government
securities in a segregated account with its custodian. A put option on a
security written by the Fund is "covered" if the Fund maintains cash or fixed
income securities with a value equal to the exercise price in a segregated
account with its custodian, or else holds a put on the same security and in the
same principal amount as the put written where the exercise price of the put
held is equal to or greater than the exercise price of the put written.
The Fund will cover call options on stock indices that it writes by owning
securities whose price changes, in the opinion of Asset Management Hong Kong,
are expected to be similar to those of the index, or in such other manner as may
be in accordance with the rules of the exchange on which the option is traded
and applicable laws and regulations. Nevertheless, where the Fund covers a call
option on a stock index through ownership of securities, such securities may not
match the composition of the index. In that event, the Fund will not be fully
covered and could be subject to risk of loss in the event of adverse changes in
the value of the index. The Fund will cover put options on stock indices that it
writes by segregating assets equal to the option's exercise price, or in such
other manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised or
is closed out at a profit. If the value of a security or an index on which the
Fund has written a call option falls or remains the same, the Fund will realize
a profit in the form of the premium received (less transaction costs) that could
offset all or a portion of any decline in the value of the portfolio securities
being hedged. If the value of the underlying security or index rises, however,
the Fund will realize a loss in its call option position, which will reduce the
benefit of any unrealized appreciation in the Fund's investments. By writing a
put option, the Fund assumes the risk of a decline in the underlying security or
index. To the extent that the price changes of the portfolio securities being
hedged correlate with changes in the value of the underlying security or index,
writing covered put options on indices or securities will increase the Fund's
losses in the event of a market decline, although such losses will be offset in
part by the premium received for writing the option.
The Fund may also purchase put options to hedge its investments against a
decline in value. By purchasing a put option, the Fund will seek to offset a
decline in the value of the portfolio securities being hedged through
appreciation of the put option. If the value of the Fund's investments does not
decline as anticipated, or if the value of the option does not increase, the
Fund's loss will be limited to the premium paid for the option plus related
transaction costs. The success of this strategy will depend, in part, on the
correlation between the changes in value of the underlying security or index and
the changes in value of the Fund's security holdings being hedged.
The Fund may purchase call options on individual securities to hedge against an
increase in the price of securities that the Fund anticipates purchasing in the
future. Similarly, the Fund may purchase call options on a securities index to
attempt to reduce the risk of missing a broad market advance, or an advance in
an industry or market segment, at a time when the Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options,
the Fund will bear the risk of losing all or a portion of the premium paid if
the value of the underlying security or index does not rise.
There can be no assurance that a liquid market will exist when the Fund seeks to
close out an option position. Trading could be interrupted, for example, because
of supply and demand imbalances arising from a lack of either buyers or sellers,
or the options exchange could suspend trading after the price has risen or
fallen more than the maximum specified by the exchange. Although the Fund may be
able to offset to some extent any adverse effects of being unable to liquidate
an option position, the Fund may experience losses in some cases as a result of
such inability.
FOREIGN CURRENCY HEDGING TRANSACTIONS. In order to hedge against foreign
currency exchange rate risks, the Fund may enter into forward foreign currency
exchange contracts and foreign currency futures contracts, as well as purchase
put or call options on foreign currencies, as described below. The Fund may also
conduct its foreign currency exchange transactions on a spot (I.E., cash) basis
at the spot rate prevailing in the foreign currency exchange market.
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to minimize the risk to the Fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. The Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security. In addition, for example, when the Fund believes
that a foreign currency may suffer or enjoy a substantial movement against
another currency, it may enter into a forward contract to sell an amount of the
former foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. This second
investment practice is generally referred to as "cross-hedging." Because in
connection with the Fund's forward foreign currency transactions an amount of
the Fund's assets equal to the amount of the purchase will be held aside or
segregated to be used to pay for the commitment, the Fund will always have cash,
cash equivalents or high quality debt securities available sufficient to cover
any commitments under these contracts or to limit any potential risk. In
addition, when the Fund sells a forward contract, it will cover its obligation
under the contract by segregating cash, cash equivalents or high quality debt
securities, or by owning securities denominated in the corresponding currency
and with a market value equal to or greater than the Fund's obligation. Assets
used as cover for forward contracts will be marked to market on a daily basis.
While these contracts are not presently regulated by the Commodity Futures
Trading Commission, it 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 Asset Management Hong Kong'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 RISKS OF INVESTING IN THE FUND?
FOREIGN SECURITIES. 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 legal 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 companies 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,
together with Russia's continuing political and economic instability and the
slow-paced development of its market economy, the following: (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, insider trading, 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, a return to the centrally planned economy
that existed prior to the dissolution of the Soviet Union, or the
nationalization of privatized enterprises; (h) the risks of investing in
securities with substantially less liquidity and in issuers having significantly
smaller market capitalizations, when compared to securities and issuers in more
developed markets; (i) the difficulties associated in obtaining accurate market
valuations of many Russian securities, based partly on the limited amount of
publicly available information; (j) the financial condition of Russian
companies, including large amounts of inter-company debt which may create a
payments crisis on a national scale; (k) dependency on exports and the
corresponding importance of international trade; (l) the risk that the Russian
tax system will not be reformed to prevent inconsistent, retroactive and/or
exorbitant taxation or, in the alternative, the risk that a reformed tax system
may result in the inconsistent and unpredictable enforcement of the new tax
laws; (m) possible difficulty in identifying a purchaser of securities held by
the Fund due to the underdeveloped nature of the securities markets; (n) the
possibility that pending legislation could restrict the levels of foreign
investment in certain industries, thereby limiting the number of investment
opportunities in Russia; (o) the risk that pending legislation would confer to
Russian courts the exclusive jurisdiction to resolve disputes between foreign
investors and the Russian government, instead of bringing such disputes before
an internationally-accepted third-country arbitrator; and (p) the difficulty in
obtaining information about the financial condition of Russian issuers, in light
of the different disclosure and accounting standards applicable to Russian
companies.
There is little long-term 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 nor are they licensed with any
governmental entity 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
500 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. In addition, so-called "financial-industrial groups" have emerged in
recent years that seek to deter outside investors from interfering in the
management of companies they control. These practices may prevent the Fund from
investing in the securities of certain Russian companies deemed suitable by
Asset Management Hong Kong. Further, this also could cause a delay in the sale
of Russian company securities by the Fund if a potential purchaser is deemed
unsuitable, which may expose the Fund to potential loss on the investment.
The Fund's management 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. There is the possibility of cessation of trading on
national exchanges, expropriation, nationalization or confiscatory taxation,
withholding and other foreign tax on income or other amounts, 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 may not be internationally traded.
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 Asset Management Hong
Kong, 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.
LOWER-RATED SECURITIES. 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
goal 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.
DERIVATIVE SECURITIES. 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 Asset Management Hong Kong's ability to
predict correctly movements in the direction of the market, as to which no
assurance can be given.
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 Asset Management Hong Kong, 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 purposes, except to secure borrowings and then only to
an extent not greater than 15% of the Fund's total assts. 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 the American Stock Exchange, including no more
than 2% of its total assets which may be invested in warrants that are
not listed on those exchanges. Warrants acquired by the Fund in units or
attached to securities are not included in this restriction.
9. Invest more than 25% of the Fund's total assets in a single industry.
10. Participate on a joint or a joint and several basis in any trading
account in securities. See "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.
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.
The Fund may also be subject to investment limitations imposed by foreign
jurisdictions in which the Fund sells its shares.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the Fund, the Fund may receive stock, real estate, or other
investments that the Fund would not, or could not, buy. In this case, the Fund
intends to dispose of the investment as soon as practicable while maximizing the
return to shareholders.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity 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
NAME, ADDRESS AND AGE WITH THE FUND PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS
-------- --------- ------------- -----
<S> <C> <C>
HARRIS J. ASHTON Trustee Director, RBC Holdings, Inc. (a bank holding company)
Metro Center and Bar-S Foods (a meat packing company); formerly,
1 Station Place President, Chief Executive Officer and Chairman of
Stamford, Connecticut the Board, General Host Corporation (nursery and
Age 65 craft centers); director or trustee, as the case may
be, of 52 of the investment companies in the Franklin
Templeton Group of Funds.
* NICHOLAS F. BRADY Trustee Chairman, Templeton Emerging Markets Investment Trust
The Bullitt House PLC, Templeton Latin America Investment Trust PLC,
102 East Dover Street Darby Overseas Investments, Ltd. and Darby Emerging
Easton, Maryland Markets Investments LDC (investment firms)
Age 68 (1994-present); Chairman and Director, Templeton
Central and Eastern European Investment Company;
Director, Templeton Global Strategy Funds, Amerada
Hess Corporation, Christiana Companies, and th H.J.
Heinz Company; formerly, Secretary of the United
States Department of the Treasury (1988-1993)
and Chairman of the Board, Dillon, Read & Co. Inc.
(investment banking) prior to 1988; and director or
trustee as the case may be, of 23 of the investment
companies in the Franklin Templeton Group of Funds.
FRANK J. CROTHERS Trustee Chairman, Atlantic Equipment & Power Ltd.; Vice
P.O. Box N-3238 Chairman, Caribbean Utilities Co., Ltd.; President,
Nassau, Bahamas Provo Power Corporation; Director of various other
Age 53 business and non-profit organizations; and director
or trustee, as the case may be, of 5 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; formerly, Director, General Host Corporation
Florham Park, New Jersey (nursery and craft centers); and director or trustee,
Age 65 as the case may be, of 54 of the investment companies
in the Franklin Templeton Group of Funds.
JOHN Wm. GALBRAITH Trustee President, Galbraith Properties, Inc. (personal
360 Central Avenue investment company); Director, Gulf West Banks, Inc.
Suite 1300 (bank holding company) (1995-present); formerly,
St. Petersburg, Florida Director, Mercantile Bank (1991-1995), Vice Chairman,
Age 76 Templeton, Galbraith & Hansberger Ltd. (1986-1992)
and Chairman, Templeton Funds Management, Inc.
(1974-1991); and director or trustee, as the case may
be 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 Second Avenue N. Executive-in-Residence of Eckerd College
St. Petersburg, Florida (1991-present); formerly, Director, Checkers Drive-In
Age 75 Restaurant, Inc.; Chairman of the Board and Chief
Executive Officer, Florida Progress Corporation
(1982-1990) and Director of various of its
subsidiaries; and director or trustee, as the case
may be, of 24 of the investment companies in
the Franklin Templeton Group of Funds.
EDITH E. HOLIDAY Trustee Director (1993-present), Amerada Hess Corporation and
3239 38th St., N.W. Hercules Incorporated; Director, Beverly Enterprises,
Washington, D.C. Inc. (1995-present) and H.J. Heinz Company
Age 46 (1994-present; formerly, Chairman (1995-1997) and
Trustee (1993-1997) of National Child Research
Center; Assistant to the President of the United
States and Secretary of the Cabinet (1990-1993),
General Counsel to the United States Treasury
Department (1989-1990) and Counselor to the Secretary
and Assistant Secretary for Public Affairs and
Public Liaison-United States Treasury Department
(1988-1989); and trustee or director, as the case
may be of 24 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 Franklin Resources, Inc.; Chairman of the Board and
San Mateo, California Director, Franklin Advisers, Inc., Franklin Advisory
Age 65 Services, Inc., Franklin Investment Advisory
Services, Inc. and Franklin Templeton Distributors,
Inc.; Director, Franklin/Templeton Investor Services,
Inc., Franklin Templeton Services, Inc.; formerly,
Director, General Host Corporation (nursery and
craft centers); and officer and/or director or
trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin
Templeton Group of Funds.
* CHARLES E. JOHNSON Trustee and Vice Senior Vice President and Director, Franklin
500 East Broward Blvd. President Resources, Inc.; Senior Vice President, Franklin
Fort Lauderdale, Florida Templeton Distributors, Inc.; President and Director,
Age 41 Templeton Worldwide, Inc.; President, Chief Executive
Officer, Chief Investment Officer and Director,
Franklin Institutional Services Corporation;
Chairman and Director, Templeton Investment Counsel,
Inc.; Vice President, Franklin Advisers, Inc.; officer
and/or director of some of the subsidiaries of
Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 37 of
the investment companies in the Franklin Templeton
Group of Funds.
BETTY P. KRAHMER Trustee Director or Trustee of various civic associations;
2201 Kentmere Parkway formerly, Economic Analyst, U.S. government; and
Wilmington, Delaware director or trustee, as the case may be, of 23 of the
Age 68 investment companies in the Franklin Templeton Group
of Funds.
GORDON S. MACKLIN Trustee Chairman, White River Corporation (financial
8212 Burning Tree Road services); Director, Fund American Enterprises
Bethesda, Maryland Holdings, Inc., MCI Communications Corporation, CCC
Age 69 Information Services Group, Inc. (information
services), MedImmune, Inc. (biotechnology), Shoppers
Express (home shopping), and Spacehab, Inc.
(aerospace services); and director or trustee,
as the case may be, of 51 of the investment
companies in the Franklin Templeton Group of Funds;
FORMERLY, Chairman, Hambrecht and Quist Group,
Director, H & Q Healthcare Investors,
and President, National Association of Securities
Dealers, Inc.
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 Executive
Age 69 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 director or trustee,
as the case may be, of 24 of the investment
companies in the Franklin Templeton Group of Funds.
CONSTANTINE DEAN Trustee Physician, Lyford Cay Hospital (1987-present);
TSERETOPOULOS Director of various nonprofit organizations;
Lyford Cay Hospital formerly, Cardiology Fellow, University of Maryland
P.O. Box N-7776 (1985-1987) and Internal Medicine Intern, Greater
Nassau, Bahamas Baltimore Medical Center (1982-1985); and director or
Age 44 trustee, as the case may be, of 5 of the investment
companies in the Franklin Templeton Group of Funds.
J. MARK MOBIUS President Portfolio Manager of various Templeton advisory
Two Exchange Square affiliates; Managing Director of Templeton Asset
Hong Kong Management Ltd.; formerly, President of International
Age 61 Investment Trust Company Limited (investment manager
of Taiwan R.O.C. Fund)(1986-1987) and Director,
Vickers da Costa, Hong Kong (1983-1986); 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, Franklin
777 Mariners Island Blvd. Resources, Inc. and Franklin Templeton Distributors,
San Mateo, California Inc.; President and Director, Franklin Advisers,
Age 57 Inc.; Senior Vice President and Director, Franklin
Advisory Services, Inc. and Franklin Investment
Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director
or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 56 of
the investment companies in the Franklin Templeton
Group of Funds.
HARMON E. BURNS Vice President Executive Vice President, Secretary and Director,
777 Mariners Island Blvd. Franklin Resources, Inc.; Executive Vice President
San Mateo, California and Director, Franklin Templeton Distributors, Inc.
Age 53 and Franklin Templeton Services, Inc.; Executive Vice
President, Franklin Advisers, Inc.; Director,
Franklin/Templeton Investor Services, Inc.; and
officer and/or director or trustee, as the case may
be, and of 56 of the investment companies in
the Franklin Templeton Group of Funds.
DEBORAH R. GATZEK Vice President Senior Vice President and General Counsel, Franklin
777 Mariners Island Blvd. Resources, Inc.; Senior Vice President, Franklin
San Mateo, California Templeton Services, Inc. and Franklin Templeton
Age 49 Distributors, Inc.; Vice President, Franklin
Advisers, Inc. and Franklin Advisory Services, Inc.;
Vice President, Chief Legal Officer and Chief
Operating Officer, Franklin Investment Advisory
Services, Inc.; and officer of 56 of the investment
companies in the Franklin Templeton Group of Funds.
MARK G. HOLOWESKO Vice President President and Chief Investment Officer, Templeton
Lyford Cay Global Advisors Limited; Executive Vice President and
Nassau, Bahamas Director, Templeton Worldwide, Inc.; formerly,
Age 38 Investment Administrator with RoyWest Trust
Corporation (Bahamas) Limited (1984-1985); and officer
of 23 of the investment companies in the Franklin
Templeton Group of Funds.
MARTIN L. FLANAGAN Vice President Senior Vice President and Chief Financial Officer,
777 Mariners Island Blvd. Franklin Resources, Inc.; Executive Vice President
San Mateo, California and Director, Templeton Worldwide, Inc.; Director,
Age 37 Executive Vice President and Chief Operating Officer,
Templeton Investment Counsel, Inc.; Senior Vice
President and Treasurer, Franklin Advisers, Inc.;
Treasurer, Franklin Advisory Services, Inc.;
Treasurer and Chief Financial Officer, Franklin
Investment Advisory Services, Inc.; President,
Franklin Templeton Services, Inc.; Senior Vice
President,Franklin/Templeton Investor Services,
Inc.; and officer and/or director or trustee, as
the case may be, of 56 of the investment
companies in the Franklin Templeton Group of
Funds.
JOHN R.KAY Vice President Vice President and Treasurer, Templeton Worldwide,
500 East Broward Blvd. Inc.; Assistant Vice President, Franklin Templeton
Fort Lauderdale, Florida Distributors, Inc.; formerly, Vice President and
Age 57 Controller, 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, Templeton Investment Counsel, Inc.; Senior
Fort Lauderdale, Florida Vice President, Templeton Global Investors, Inc.;
Age 43 formerly, Vice President and Associate General
Counsel, Kidder Peabody & Co. Inc. (1989-1990),
Assistant General Counsel, Gruntal & Co., Inc.
(1988), Vice President and Associate General Counsel,
Shearson Lehman Hutton Inc. (1988), Vice President
and Assistant General Counsel, E.F. Hutton & Co. Inc.
(1986-1988), and Special Counsel of the Division of
Investment Management of the U.S. Securities and
Exchange Commission (1984-1986); and officer of 23 of
the investment companies in the Franklin Templeton
Group of Funds.
JAMES R. BAIO Treasurer Certified Public Accountant; Treasurer, Franklin
500 East Broward Blvd. Mutual Advisers, Inc.; Senior Vice President,
Fort Lauderdale, Florida Templeton Worldwide, Inc., Templeton Global
Age 44 Investors, Inc. and Templeton Funds Trust Company;
formerly, Senior Tax Manager for Ernst & Young
(certified public accountants) (1977-1989);
and officer of 24 of the investment companies in
the Franklin Templeton Group of Funds.
BARBARA J. GREEN Secretary Senior Vice President, Templeton Worldwide, Inc;
500 East Broward Blvd. Senior Vice President, Templeton Global Investors,
Fort Lauderdale, Florida Inc.; formerly, Deputy Director of the Division of
Age 50 Investment Management, Executive Assistant and Senior
Advisor to the Chairman, Counselor to the Chairman,
Special Counsel and Attorney Fellow, U.S. Securities
and Exchange Commission (1986-1995), Attorney,
Rogers & Wells, and Judicial Clerk, U.S. District
Court (District of Massachusetts); and officer
of 23 of the investment companies in the Franklin
Templeton Group of Funds.
</TABLE>
*Nicholas F. Brady, Charles B. Johnson and Charles E. Johnson are "interested
persons" as defined by the Investment Company Act of 1940 (the "1940 Act"). The
1940 Act limits the percentage of interested persons that comprise a fund's
board of directors. Charles B. Johnson is an interested person due to his
ownership interest in Resources, and Charles E. Johnson is an interested person
due to his employment affiliation with Resources. Mr. Brady's status as an
interested person results from his business affiliations with Resources and
Templeton Global Advisors Limited. Mr. Brady and Resources are both limited
partners of Darby Overseas Partners, L.P. ("Darby Overseas"). Mr. Brady
established Darby Overseas in February 1994, and is Chairman and shareholder of
Darby Emerging Markets Investments LDC, which is the corporate general partner
of Darby Overseas. In addition, Darby Overseas and Templeton Global Advisors
Limited are limited partners of Darby Emerging Markets Fund, L.P. The remaining
Trustees of the Fund are not interested persons.
The table above shows the officers and Board members who are affiliated with
Distributors and Asset Management Hong Kong. Nonaffiliated members of the Board
and Mr. Brady are currently paid an annual retainer and/or fees for attendance
at Board and committee meetings. Currently, the Fund pays the nonaffiliated
Board members and Mr. Brady an annual retainer of $8,000, a fee of $650 per
Board meeting, 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, the nonaffiliated Board members also serve as directors or trustees of
other investment companies in the Franklin Templeton Group of Funds. They may
receive fees from these funds for their services. The following table provides
the total fees paid to nonaffiliated Board members and Mr. Brady by the Fund and
by other funds in the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
TOTAL FEES RECEIVED NUMBER OF BOARDS IN THE
FROM THE FRANKLIN FRANKLIN TEMPLETON GROUP
TOTAL FEES RECEIVED TEMPLETON GROUP OF OF FUNDS ON WHICH EACH
NAME FROM THE FUND* FUNDS** SERVES***
<S> <C> <C> <C>
Harris J. Ashton $11,250 $344,642 52
Nicholas F. Brady 11,250 119,675 23
Frank J. Crothers 12,890 35,300 5
S. Joseph Fortunato 11,250 361,562 54
John Wm. Galbraith 11,250 117,675 22
Andrew H. Hines, Jr. 11,250 144,175 24
Edith E. Holiday 11,250 72,875 24
Betty P. Krahmer 11,250 119,675 23
Gordon S. Macklin 11,250 337,292 51
Fred R. Millsaps 11,916 144,175 24
Constantine Dean Tseretopoulos 12,070 33,775 5
</TABLE>
*For the fiscal year ended December 31, 1997.
**For the calendar year ended December 31, 1997.
***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 57 registered investment companies, with approximately 170 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, paid pro rata by each fund
in the Franklin Templeton Group of Funds for which they serve as director or
trustee. 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 February 9, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately 25,882
Class I shares and 22,469 Advisor Class shares, or less than 1% of the total
outstanding Class I and Advisor Class shares of the Fund. Many of the Board
members also own shares in other funds in the Franklin Templeton Group of Funds.
Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father and
uncle, respectively, of Charles E. Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is Asset
Management Hong Kong. Asset Management Hong Kong 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. Asset Management Hong Kong renders its
services to the Fund from outside the U.S. Asset Management Hong Kong's
activities are subject to the review and supervision of the Board to whom Asset
Management Hong Kong renders periodic reports of the Fund's investment
activities. Asset Management Hong Kong and its officers, directors and employees
are covered by fidelity insurance for the protection of the Fund.
Asset Management Hong Kong and its affiliates act as investment manager to
numerous other investment companies and accounts. Asset Management Hong Kong 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 Asset Management
Hong Kong on behalf of the Fund. Similarly, with respect to the Fund, Asset
Management Hong Kong is not obligated to recommend, buy or sell, or to refrain
from recommending, buying or selling any security that Asset Management Hong
Kong 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. Asset Management Hong
Kong 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
Asset Management Hong Kong and other access persons will be made in compliance
with the Fund's Code of Ethics. Please see "Miscellaneous Information - Summary
of Code of Ethics."
MANAGEMENT FEES. Under its management agreement, the Fund pays Asset Management
Hong Kong a monthly management fee equal to an annual rate of 1.25% of its
average daily net assets. Each class pays its proportionate share of the
management fee.
For the fiscal years ended December 31, 1997, 1996 and 1995, management fees
totaling $57,060,597, $37,609,530 and $26,314,151, respectively, were paid to
Asset Management Hong Kong.
MANAGEMENT AGREEMENT. The management agreement is in effect until April 30,
1999. It 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
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
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 on 60 days' written notice to Asset Management Hong Kong, or by Asset
Management Hong Kong on 60 days' written notice to the Fund, and will
automatically terminate in the event of its assignment, as defined in the 1940
Act.
ADMINISTRATIVE SERVICES. Since October 1, 1996, FT Services has provided certain
administrative services and facilities for the Fund. Prior to that date,
Templeton Global Investors, Inc. provided the same services to the Fund. These
include preparing and maintaining books, records, and tax and financial reports,
and monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under its administration agreement, the Fund pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
During the fiscal years ended December 31, 1997, 1996 and 1995, the Fund paid
administration fees totaling $3,998,636, $2,831,572 and $2,153,848, respectively
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these services
per benefit plan participant Fund account per year may not exceed the per
account fee payable by the Fund to Investor Services in connection with
maintaining shareholder accounts.
CUSTODIAN. The Chase Manhattan Bank, at its principal office at MetroTech
Center, Brooklyn, New York 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, New York 10017,
are the Fund's independent auditors. During the fiscal year ended December 31,
1997, their auditing services consisted of rendering an opinion on the financial
statements of the Fund included in the Fund's Annual Report to Shareholders for
the fiscal year ended December 31, 1997, and review of the Fund's filings with
the SEC.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
Asset Management Hong Kong selects brokers and dealers to execute the Fund's
portfolio transactions in accordance with criteria set forth in the management
agreement and any directions that the Board may give.
When placing a portfolio transaction, Asset Management Hong Kong seeks to obtain
prompt execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid by the Fund
is negotiated between Asset Management Hong Kong and the broker executing the
transaction. The determination and evaluation of the reasonableness of the
brokerage commissions paid are based to a large degree on the professional
opinions of the persons responsible for 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.
Asset Management Hong Kong 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 Asset Management Hong Kong, 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.
Asset Management Hong Kong may pay certain brokers commissions that are higher
than those another broker may charge, if Asset Management Hong Kong determines
in good faith that the amount paid is reasonable in relation to the value of the
brokerage and research services it receives. This may be viewed in terms of
either the particular transaction or Asset Management Hong Kong's overall
responsibilities to client accounts over which it exercises investment
discretion. The services that brokers may provide to Asset Management Hong Kong
include, among others, supplying information about particular companies,
markets, countries, or local, regional, national or transnational economies,
statistical data, quotations and other securities pricing information, and other
information that provides lawful and appropriate assistance to Asset Management
Hong Kong in carrying out its investment advisory responsibilities. These
services may not always directly benefit the Fund. They must, however, be of
value to Asset Management Hong Kong in carrying out its overall responsibilities
to its clients.
It is not possible to place a dollar value on the special executions or on the
research services Asset Management Hong Kong receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order to
obtain additional research services permits Asset Management Hong Kong to
supplement its own research and analysis activities and to receive the views and
information of individuals and research staffs of other securities firms. As
long as it is lawful and appropriate to do so, Asset Management Hong Kong 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, as well as shares of other
funds in the Franklin Templeton Group of Funds, 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 management
fee payable to Asset Management Hong Kong 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 Asset Management Hong Kong 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 Asset Management Hong Kong, 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.
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.
During the fiscal years ended December 31, 1997, 1996 and 1995, the Fund paid
brokerage commissions totaling $15,736,940, $7,221,351 and $4,305,521,
respectively.
As of December 31, 1997, 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 Securities Act of 1933, as amended.
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:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE
- ------------------------------- ------------
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%
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors may 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 without a front-end
sales charge, 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.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares, however, those who have shown an interest in the Franklin Templeton
Funds are more likely to be considered. To the extent permitted by their firm's
policies and procedures, a registered representative's expenses in attending
these meetings may be covered by Distributors.
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 acquired more than 90 days before the Letter is filed will be counted
towards completion of the Letter, but they 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 before 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 before 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 goal 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. 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. If the 25th falls
on a weekend or holiday, we will process the redemption on the next business
day.
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.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. The Fund is not responsible for tracking down uncashed checks, unless a
check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional 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. 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 as of the close of the NYSE, normally
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, Martin Luther King Jr. 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 Asset Management Hong Kong.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
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 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 close of the NYSE that will not be reflected in the
computation of the Net Asset Value. 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
DISTRIBUTIONS OF NET INVESTMENT INCOME. The Fund receives income generally in
the form of dividends, interest, original issue, market and acquisition
discount, and other income derived from its investments. This income, less
expenses incurred in the operation of the Fund, constitute its net investment
income from which dividends may be paid to you. Any distributions by the Fund
from such income will be taxable to you as ordinary income, whether you take
them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS. The Fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income. Distributions
paid from long-term capital gains realized by the Fund will be taxable to you as
long-term capital gain, regardless of how long you have held your shares in the
Fund. Any net short-term or long-term capital gains realized by the Fund (net of
any capital loss carryovers) generally will be distributed once each year, and
may be distributed more frequently, if necessary, in order to reduce or
eliminate federal excise or income taxes on the Fund.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), the Fund is required to
report the capital gain distributions paid to you from gains realized on the
sale of portfolio securities using the following categories:
"28% RATE GAINS": gains resulting from securities sold by the Fund after July
28, 1997 that were held for more than one year but not more than 18 months, and
securities sold by the Fund before May 7, 1997 that were held for more than one
year. These gains will be taxable to individual investors at a maximum rate of
28%.
"20% RATE GAINS": gains resulting from securities sold by the Fund after July
28, 1997 that were held for more than 18 months, and under a transitional rule,
securities sold by the Fund between May 7 and July 28, 1997 (inclusive) that
were held for more than one year. These gains will be taxable to individual
investors at a maximum rate of 20% for individual investors in the 28% or higher
federal income tax brackets, and at a maximum rate of 10% for investors in the
15% federal income tax bracket.
The 1997 Act also provides for a new maximum rate of tax on capital gains of 18%
for individuals in the 28% or higher federal income tax brackets and 8% for
individuals in the 15% federal income tax bracket for "qualified 5-year gains."
For individuals in the 15% bracket, qualified 5-year gains are net gains on
securities held for more than 5 years which are sold after December 31, 2000.
For individuals who are subject to tax at higher rates, qualified 5-year gains
are net gains on securities which are purchased after December 31, 2000 and are
held for more than 5 years. Taxpayers subject to tax at the higher rates may
also make an election for shares held on January 1, 2001 to recognize gain on
their shares in order to qualify such shares as qualified 5-year property.
The Fund will advise you at the end of each calendar year of the amount of its
capital gain distributions paid during the calendar year that qualify for these
maximum federal tax rates. Additional information on reporting these
distributions on your personal income tax returns is available in a free
Shareholder Tax Information Handbook. This handbook has been revised to include
1997 Act tax law changes. Please call Fund Information to request a copy.
Questions concerning each investor's personal tax reporting should be addressed
to the investor's personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions which are declared in
October, November or December and paid to you in January of the following year,
will be treated for tax purposes as if they had been received by you on December
31 of the year in which they were declared. The Fund will report this income to
you on your Form 1099-DIV for the year in which these distributions were
declared.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS. Most foreign exchange gains
realized on the sale of debt instruments are treated as ordinary income by the
Fund. Similarly, foreign exchange losses realized by the Fund on the sale of
debt instruments are generally treated as ordinary losses by the Fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the Fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the Fund's ordinary
income distributions to you, and may cause some or all of the Fund's previously
distributed income to be classified as a return of capital.
The 1997 Act also simplifies the procedures by which investors in funds that
invest in foreign securities can claim tax credits on their individual income
tax returns for the foreign taxes paid by the Fund. These provisions will allow
investors who claim a credit for foreign taxes paid of $300 or less on a single
return or $600 or less on a joint return during any year (all of which must be
reported on IRS Form 1099-DIV from the Fund to the investor) to bypass the
burdensome and detailed reporting requirements on the supporting foreign tax
credit schedule (Form 1116) and report foreign taxes paid directly on page 2 of
Form 1040. YOU SHOULD NOTE THAT THIS SIMPLIFIED PROCEDURE WILL NOT BE AVAILABLE
UNTIL CALENDAR YEAR 1998.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The Fund will inform you of
the amount and character of your distributions at the time they are paid, and
will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held Fund shares for a full year, you may have designated and distributed to you
as ordinary income or capital gain a percentage of income that is not equal to
the actual amount of such income earned during the period of your investment in
the Fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. The Fund has elected to
be treated as a regulated investment company under Subchapter M of the Code, has
qualified as such for its most recent fiscal year, and intends to so qualify
during the current fiscal year. The Board reserves the right not to maintain the
qualification of the Fund as a regulated investment company if it determines
such course of action to be beneficial to you. In such case, the Fund will be
subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of the Fund's available earnings and profits.
In order to qualify as a regulated investment company for tax purposes, the Fund
must meet certain specific requirements, including:
The Fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. government securities and securities of other
regulated investment companies) can exceed 25% of the Fund's total assets,
and, with respect to 50% of the Fund's total assets, no investment (other
than cash and cash items, U.S. government securities and securities of
other regulated investment companies) can exceed 5% of the Fund's total
assets;
The Fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the
sale or disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies; and
The Fund must distribute to its shareholders at least 90% of its net
investment income and net tax-exempt income for each of its fiscal years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires the Fund to distribute
at least 98% of its taxable ordinary income earned during the calendar year and
98% of its capital gain net income earned during the twelve month period ending
October 31 (in addition to undistributed amounts from the prior year) to you by
December 31 of each year in order to avoid federal excise taxes. The Fund
intends to declare and pay sufficient dividends in December (or in January that
are treated by you as received in December) but does not guarantee and can give
no assurances that its distributions will be sufficient to eliminate all such
taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of Fund shares are taxable
transactions for federal and state income tax purposes. The tax law requires
that you recognize a gain or loss in an amount equal to the difference between
your tax basis and the amount you received in exchange for your shares, subject
to the rules described below. If you hold your shares as a capital asset, the
gain or loss that you realize will be capital gain or loss, and will be
long-term for federal income tax purposes if you have held your shares for more
than one year at the time of redemption or exchange. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated as
a long-term capital loss to the extent of any long-term capital gains
distributed to you by the Fund on those shares. The holding periods and
categories of capital gain that apply under the 1997 Act are described above in
the "Distributions" section.
All or a portion of any loss that you realize upon the redemption of your Fund
shares will be disallowed to the extent that you purchase other shares in the
Fund (through reinvestment of dividends or otherwise) within 30 days before or
after your share redemption. Any loss disallowed under these rules will be added
to your tax basis in the new shares you purchase.
DEFERRAL OF BASIS. All or a portion of the sales charge that you paid for your
shares in the Fund will be excluded from your tax basis in any of the shares
sold within 90 days of their purchase (for the purpose of determining gain or
loss upon the sale of such shares) if you reinvest the sales proceeds in the
Fund or in another of the Franklin Templeton Funds, and the sales charge that
would otherwise apply to your reinvestment is reduced or eliminated. The portion
of the sales charge excluded from your tax basis in the shares sold will equal
the amount that the sales charge is reduced on your reinvestment. Any portion of
the sales charge excluded from your tax basis in the shares sold will be added
to the tax basis of the shares you acquire from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS. Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment requirements that must be met by
the Fund. Investments in GNMA/FNMA securities, bankers' acceptances, commercial
paper and repurchase agreements collateralized by U.S. government securities do
not generally qualify for tax-free treatment. At the end of each calendar year,
the Fund will provide you with the percentage of any dividends paid that may
qualify for tax-free treatment on your personal income tax return. You should
consult with your own tax advisor to determine the application of your state and
local laws to these distributions. Because the rules on exclusion of this income
are different for corporations, corporate shareholders should consult with their
corporate tax advisors about whether any of their distributions may be exempt
from corporate income or franchise taxes.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. Because the Fund's income is
derived primarily from investments in foreign securities rather than
dividend-paying domestic U.S. securities, no portion of its distributions will
generally be eligible for the intercorporate dividends-received deduction. None
of the dividends paid by the Fund for the most recent calendar year qualified
for such deduction, and it is anticipated that none of the current year's
dividends will so qualify.
INVESTMENT IN COMPLEX SECURITIES. The Fund's investment in options, futures
contracts and forward contracts, including transactions involving actual or
deemed short sales or foreign exchange gains or losses are subject to many
complex and special tax rules. Over-the-counter options on debt securities and
equity options, including options on stock and on narrow-based stock indexes,
will be subject to tax under section 1234 of the Code, generally producing a
long-term or short-term capital gain or loss upon exercise, lapse, or closing
out of the option or sale of the underlying stock or security. Certain other
options, futures and forward contracts entered into by the Fund are generally
governed by section 1256 of the Code. These "section 1256" positions generally
include listed options on debt securities, options on broad-based stock indexes,
options on securities indexes, options on futures contracts, regulated futures
contracts and certain foreign currency contracts and options thereon.
Absent a tax election to the contrary, each such section 1256 position held by
the Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Fund's fiscal year (and on other
dates as prescribed by the Code), and all gain or loss associated with fiscal
year transactions and mark-to-market positions at fiscal year end (except
certain currency gain or loss covered by section 988 of the Code) will generally
be treated as 60% long-term capital gain or loss and 40% short-term capital gain
or loss. Under legislation pending in technical corrections to the 1997 Act, the
60% long-term capital gain portion will qualify as 20% rate gain and will be
subject to tax to individual investors at a maximum rate of 20% for investors in
the 28% or higher federal income tax brackets, or at a maximum rate of 10% for
investors in the 15% federal income tax bracket. While foreign currency is
marked-to-market at year end, gain or loss realized as a result will always be
ordinary. Even though marked-to-market, gains and losses realized on foreign
currency and foreign security investments will generally be treated as ordinary
income. The effect of section 1256 mark-to-market rules may be to accelerate
income or to convert what otherwise would have been long-term capital gains into
short-term capital gains or short-term capital losses into long-term capital
losses within the Fund. The acceleration of income on section 1256 positions may
require the Fund to accrue taxable income without the corresponding receipt of
cash. In order to generate cash to satisfy the distribution requirements of the
Code, the Fund may be required to dispose of portfolio securities that it
otherwise would have continued to hold or to use cash flows from other sources
such as the sale of Fund shares. In these ways, any or all of these rules may
affect the amount, character and timing of income distributed to you by the
Fund.
When the Fund holds an option or contract which substantially diminishes the
Fund's risk of loss with respect to another position of the Fund (as might occur
in some hedging transactions), this combination of positions could be treated as
a "straddle" for tax purposes, possibly resulting in deferral of losses,
adjustments in the holding periods and conversion of short-term capital losses
into long-term capital losses. The Fund may make certain tax elections for mixed
straddles (i.e., straddles comprised of at least one section 1256 position and
at least one non-section 1256 position) which may reduce or eliminate the
operation of these straddle rules.
The 1997 Act has also added new provisions for dealing with transactions that
are generally called "Constructive Sale Transactions." Under these rules, the
Fund must recognize gain (but not loss) on any constructive sale of an
appreciated financial position in stock, a partnership interest or certain debt
instruments. The Fund will generally be treated as making a constructive sale
when it: 1) enters into a short sale on the same property, 2) enters into an
offsetting notional principal contract, or 3) enters into a futures or forward
contract to deliver the same or substantially similar property. Other
transactions (including certain financial instruments called collars) will be
treated as constructive sales as provided in Treasury regulations to be
published. There are also certain exceptions that apply for transactions that
are closed before the end of the 30th day after the close of the taxable year.
Distributions paid to you by the Fund of ordinary income and short-term capital
gains arising from the Fund's investments, including investments in options,
forwards, and futures contracts, will be taxable to you as ordinary income. The
Fund will monitor its transactions in such options and contracts and may make
certain other tax elections in order to mitigate the effect of the above rules.
INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES. The Fund is authorized
to invest in foreign currency denominated securities. Such investments, if made,
will have the following additional tax consequences:
Under the Code, gains or losses attributable to fluctuations in foreign currency
exchange rates which occur between the time the Fund accrues income (including
dividends), or accrues expenses which are denominated in a foreign currency, and
the time the Fund actually collects such income or pays such expenses generally
are treated as ordinary income or loss. Similarly, on the disposition of debt
securities denominated in a foreign currency and on the disposition of certain
options, futures, forward contracts, gain or loss attributable to fluctuations
in the value of foreign currency between the date of acquisition of the security
or contract and the date of its disposition are also treated as ordinary gain or
loss. These gains or losses, referred to under the Code as "section 988" gains
or losses, may increase or decrease the amount of the Fund's net investment
company taxable income, which, in turn, will affect the amount of income to be
distributed to you by the Fund.
If the Fund's section 988 losses exceed the Fund's other net investment company
taxable income during a taxable year, the Fund generally will not be able to
make ordinary dividend distributions to you for that year, or distributions made
before the losses were realized will be recharacterized as return of capital
distributions for federal income tax purposes, rather than as an ordinary
dividend or capital gain distribution. If a distribution is treated as a return
of capital, your tax basis in your Fund shares will be reduced by a like amount
(to the extent of such basis), and any excess of the distribution over your tax
basis in your Fund shares will be treated as capital gain to you.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANY SECURITIES. 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 an "excess distribution" with respect to PFIC stock, the
Fund itself may be subject to U.S. federal income tax on a portion of the
distribution, whether or not the corresponding income is distributed by the Fund
to you. 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. In this case, you would not be permitted to claim a credit
on your own tax return for the tax paid by the Fund. 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. This may have the effect of increasing
Fund distributions to you that are treated as ordinary dividends rather than
long-term capital gain dividends.
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 during such period. If this election were made, the
special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, the 1997 Act provides for another
election that would involve marking-to-market the Fund's PFIC shares at the end
of each taxable year (and on certain other dates as prescribed in the Code),
with the result that unrealized gains would be treated as though they were
realized. The Fund would also be allowed an ordinary deduction for the excess,
if any, of the adjusted basis of its investment in the PFIC stock over its fair
market value at the end of the taxable year. This deduction would be limited to
the amount of any net mark-to-market gains previously included with respect to
that particular PFIC security. If the Fund were to make this second PFIC
election, tax at the Fund level under the PFIC rules would generally be
eliminated.
The application of the PFIC rules may affect, among other things, the amount of
tax payable by the Fund (if any), the amounts distributable to you by the Fund,
the time at which these distributions must be made, and whether these
distributions will be classified as ordinary income or capital gain
distributions to you.
You should be aware that it is not always possible at the time shares of a
foreign corporation are acquired to ascertain that the foreign corporation is a
PFIC, and that there is always a possibility that a foreign corporation will
become a PFIC after the Fund acquires shares in that corporation. While the Fund
will generally seek to avoid investing in PFIC shares to avoid the tax
consequences detailed above, there are no guarantees that it will do so and it
reserves the right to make such investments as a matter of its fundamental
investment policy.
CONVERSION TRANSACTIONS. Gains realized by a Fund from transactions that are
deemed to be "conversion transactions" under the Code, and that would otherwise
produce capital gain may be recharacterized as ordinary income to the extent
that such gain does not exceed an amount defined as the "applicable imputed
income amount". A conversion transaction is any transaction in which
substantially all of the Fund's expected return is attributable to the time
value of the Fund's net investment in such transaction, and any one of the
following criteria are met:
1) there is an acquisition of property with a substantially
contemporaneous agreement to sell the same or substantially identical
property in the future;
2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the Fund on the basis that
it would have the economic characteristics of a loan but would be
taxed as capital gain; or
4) the transaction is specified in Treasury regulations to be promulgated
in the future.
The applicable imputed income amount, which represents the deemed return on the
conversion transaction based upon the time value of money, is computed using a
yield equal to 120 percent of the applicable federal rate, reduced by any prior
recharacterizations under this provision or the provisions of Section 263(g) of
the Code dealing with capitalized carrying costs.
STRIPPED PREFERRED STOCK. Occasionally, the Fund may purchase "stripped
preferred stock" that is subject to special tax treatment. Stripped preferred
stock is defined as certain preferred stock issues where ownership of the stock
has been separated from the right to receive dividends that have not yet become
payable. The stock must have a fixed redemption price, must not participate
substantially in the growth of the issuer, and must be limited and preferred as
to dividends. The difference between the redemption price and purchase price is
taken into Fund income over the term of the instrument as if it were original
issue discount. The amount that must be included in each period generally
depends on the original yield to maturity, adjusted for any prepayments of
principal.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT (MD) BONDS. The
Fund's investments in zero coupon bonds, bonds issued or acquired at a discount,
delayed interest bonds, or bonds that provide for payment of interest-in-kind
(PIK) may cause the Fund to recognize income and make distributions to you prior
to its receipt of cash payments. Zero coupon and delayed interest bonds are
normally issued at a discount and are therefore generally subject to tax
reporting as OID obligations. The Fund is required to accrue as income a portion
of the discount at which these securities were issued, and to distribute such
income each year (as ordinary dividends) in order to maintain its qualification
as a regulated investment company and to avoid income reporting and excise taxes
at the Fund level. PIK bonds are subject to similar tax rules concerning the
amount, character and timing of income required to be accrued by the Fund. Bonds
acquired in the secondary market for a price less than their stated redemption
price, or revised issue price in the case of a bond having OID, are said to have
been acquired with market discount. For these bonds, the Fund may elect to
accrue market discount on a current basis, in which case the Fund will be
required to distribute any such accrued discount. If the Fund does not elect to
accrue market discount into income currently, gain recognized on sale will be
recharacterized as ordinary income instead of capital gain to the extent of any
accumulated market discount on the obligation.
DEFAULTED OBLIGATIONS. The Fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy these distribution requirements, the Fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering 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, 1997, 1996 and 1995, were
$25,189,600, $18,413,353 and $15,575,347, respectively. After allowances to
dealers, Distributors retained $2,257,338, $1,902,013 and $2,087,056 in net
underwriting discounts and commissions and received $293,215, $17,978 and
$111,388 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, Distributors
received no other compensation from the Fund for acting as underwriter.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 plans" that
were adopted pursuant to Rule 12b-1 of the 1940 Act.
THE CLASS I PLAN. Under the Class I plan, the Fund may pay up to a maximum of
0.35% per year of Class I's average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of Class I shares.
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
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the Fund.
Under the Class II plan, the Fund also pays an additional 0.25% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
THE CLASS I AND CLASS II PLANS. The terms and provisions of each plan relating
to required reports, term, and approval are consistent with Rule 12b-1.
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
management agreement with Asset Management Hong Kong 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, 1997, the total amounts paid by the Fund
pursuant to the Class I and Class II plans were $11,239,348 and $3,953,434,
respectively, which were used for the following purposes:
<TABLE>
<CAPTION>
CLASS I CLASS II
<S> <C> <C>
Advertising $1,048,540 $ 100,461
Printing and mailing of prospectuses
other than to current shareholders $ 391,421 $ 37,502
Payments to underwriters $ 376,782 $1,279,868
Payments to broker-dealers $9,422,605 $2,535,603
Other $ 0 $ 0
</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.
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 follows. Regardless of the method used,
past performance does not guarantee future results, and 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 the periods indicated below 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 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. The
average annual total return for Class I for the one- and five-year periods ended
December 31, 1997, and for the period from inception (October 17, 1991) through
December 31, 1997 was -14.63%, 10.86% and 6.94%, respectively. The average
annual total return for Class II for the one-year period ended December 31, 1997
and for the period from inception (May 1, 1995) through December 31, 1997, was
- -11.81% and 3.66%, respectively.
These figures were calculated according to the SEC formula:
P(1+T)n = ERV
where:
P =a hypothetical initial payment of $1,000
T =average annual total return
n =number of years
ERV =ending redeemable value of a hypothetical $1,000
payment made at the beginning of each period at the
end of each period
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, is based on the
actual return for a specified period rather than on the average return over the
periods indicated above. The cumulative total return for Class I for the one-and
five-year periods ended December 31, 1997, and for the period from inception
(October 17, 1991) through December 31, 1997 was -14.63%, 67.46% and 51.66%,
respectively. The cumulative total return for Class II for the one-year period
ended December 31, 1997 and for the period from inception (May 1, 1995) through
December 31, 1997, was -11.81% and 10.07%, respectively.
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
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising 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 goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Resources is the parent company of the advisors and
underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
(i) unmanaged indices so that you 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 that
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.
From time to time, the Fund and Asset Management Hong Kong may also refer to the
following information:
a) Asset Management Hong Kong's and its affiliates' market share of
international equities managed in mutual funds prepared or published by
Strategic Insight or a similar statistical organization.
b) The performance of U.S. equity and debt markets relative to foreign
markets prepared or published by Morgan Stanley Capital
International(R) or a similar financial organization.
c) The capitalization of U.S. and foreign stock markets as prepared or
published by the International Finance Corporation, Morgan Stanley
Capital International(R) or a similar financial organization.
d) The geographic and industry distribution of the Fund's portfolio and
the Fund's top ten holdings.
e) 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.
f) 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).
g) The major industries located in various jurisdictions as published by
the Morgan Stanley Index.
h) Rankings by DALBAR Surveys, Inc. with respect to mutual fund
shareholder services.
i) Allegorical stories illustrating the importance of persistent
long-term investing.
j) The Fund's portfolio turnover rate and its ranking relative to
industry standards as published by Lipper Analytical Services, Inc.
or Morningstar, Inc.
k) 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.
l) The number of shareholders in the Fund or the aggregate number of
shareholders of the open-end investment companies in the Franklin
Templeton Group of Funds or the dollar amount of fund and private
account assets under management.
m) Comparison of the characteristics of various emerging markets,
including population, financial and economic conditions.
n) Quotations from the Templeton organization's founder, Sir John
Templeton,* advocating the virtues of diversification and long-term
investing, including the following:
"Never follow the crowd. Superior performance is possible only if
you invest differently from the crowd."
"Diversify by company, by industry and by country."
"Always maintain a long-term perspective."
"Invest for maximum total real return."
"Invest - don't trade or speculate."
"Remain flexible and open-minded about types of investment."
"Buy low."
"When buying stocks, search for bargains among quality stocks."
"Buy value, not market trends or the economic outlook."
"Diversify. In stocks and bonds, as in much else, there is safety
in numbers."
"Do your homework or hire wise experts to help you."
"Aggressively monitor your investments."
"Don't panic."
"Learn from your mistakes."
"Outperforming the market is a difficult task."
"An investor who has all the answers doesn't even understand all
the questions."
"There's no free lunch."
"And now the last principle: Do not be fearful or negative too
often."
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the Fund's 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.
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 50 years and
now services more than 2.9 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, a pioneer in international
investing. The Mutual Series team, known for its value-driven approach to
domestic equity investing, became part of the organization four years later.
Together, the Franklin Templeton Group has over $221 billion in assets under
management for more than 6 million U.S. based mutual fund shareholder and other
accounts. The Franklin Templeton Group of Funds offers 120 U.S. based open-end
investment companies to the public. The Fund may identify itself by its NASDAQ
symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the NYSE.
While many of them have similar investment objectives, no two are exactly alike.
As noted in the Prospectus, shares of the Fund are generally sold through
Securities Dealers. Investment representatives of such Securities Dealers are
experienced professionals who can offer advice on the type of investment
suitable to your unique goals and needs, as well as the types of risks
associated with such investment.
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. To the
best knowledge of the Fund, no other person holds beneficially or of record more
than 5% of the outstanding shares of any class.
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, before 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 the Franklin Templeton Group 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 by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations and statement must be sent
to a compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) 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, 1997, including the
auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ASSET MANAGEMENT HONG KONG - Templeton Asset Management Ltd. - Hong Kong Branch,
the Fund's investment manager
BOARD - The Board of Trustees of the Fund
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable Products
Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
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
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's Class I and Class II shares dated May
1, 1998, 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 that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
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 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 that 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 that 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. These
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.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings 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.
- --------
* Sir John Templeton sold the Templeton organization to Resources in October
1992 and resigned from the Board on April 16, 1995. He is no longer involved
with the investment management process.
<PAGE>
PART B
ADVISOR CLASS
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
TEMPLETON DEVELOPING MARKETS TRUST - ADVISOR CLASS
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
100 FOUNTAIN PARKWAY, P.O. BOX 33030
ST. PETERSBURG, FL 33733-8030 1-800/DIAL BEN
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
How Does the Fund Invest Its Assets?.........................
What Are the Risks of Investing in the Fund?.................
Investment Restrictions......................................
Officers and Trustees........................................
Investment Management
and Other Services..........................................
How Does the Fund Buy
Securities for Its Portfolio?...............................
How Do I Buy, Sell and Exchange Shares?......................
How Are Fund Shares Valued?..................................
Additional Information on
Distributions and Taxes.....................................
The Fund's Underwriter.......................................
How Does the Fund Measure Performance?.......................
Miscellaneous Information....................................
Financial Statements.........................................
Useful Terms and Definitions.................................
Appendices...................................................
Description of Ratings.....................................
</TABLE>
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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 investment goal of the Fund is long-term
capital appreciation. The Fund seeks to achieve its goal by investing primarily
in equity securities of issuers in countries having developing markets.
This SAI describes the Fund's Advisor Class shares. The Prospectus, dated May 1,
1998, 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.
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?"
EQUITY SECURITIES. The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner of
an equity security may participate in a company's success through the receipt of
dividends which are distributions of earnings by the company to its owners.
Equity security owners may also participate in a company's success or lack of
success through increases or decreases in the value of the company's shares as
traded in the public trading market for such shares. Equity securities generally
take the form of common stock or preferred stock. Preferred stockholders
typically receive greater dividends but may receive less appreciation than
common stockholders and may have greater voting rights as well. Equity
securities may also include convertible securities, warrants or rights.
Convertible securities typically are debt securities or preferred stocks which
are convertible into common stock after certain time periods or under certain
circumstances. Warrants or rights give the holder the right to purchase a common
stock at a given time for a specified price.
DEBT SECURITIES. A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes,
debentures and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
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.
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. Asset Management Hong Kong 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 Asset Management Hong Kong to present no serious risk of becoming
involved in bankruptcy proceedings within the time frame contemplated by the
repurchase transaction.
LOANS OF PORTFOLIO SECURITIES. The Fund may lend to qualified securities dealers
or other institutional investors portfolio securities with an aggregate market
value of up to one-third of its total assets. Such loans must be secured by
collateral (consisting of any combination of cash, U.S. government securities or
irrevocable letters of credit) in an amount at least equal (on a daily
marked-to-market basis) to the current market value of the securities loaned.
The Fund retains all or a portion of the interest received on investment of the
cash collateral or receives a fee from the borrower. The Fund may terminate the
loans at any time and obtain the return of the securities loaned within five
business days. The Fund will continue to receive any interest or dividends paid
on the loaned securities and will continue to have voting rights with respect to
the securities. However, as with other extensions of credit, there are risks of
delay in recovery or even loss of rights in collateral should the borrower fail.
BORROWING. The Fund may borrow up to one-third of the value of its total assets
from banks to increase its holdings of portfolio securities. Under the 1940 Act,
the Fund is required to maintain continuous asset coverage of 300% with respect
to such borrowings and to sell (within three days) sufficient portfolio holdings
to restore such coverage if it should decline to less than 300% due to market
fluctuations or otherwise, even if such liquidations of the Fund's holdings may
be disadvantageous from an investment standpoint. Leveraging by means of
borrowing may exaggerate the effect of any increase or decrease in the value of
portfolio securities on the Fund's net asset value, and money borrowed will be
subject to interest and other costs (which may include commitment fees and/or
the cost of maintaining minimum average balances), which may or may not exceed
the income or gains received from the securities purchased with borrowed funds.
CLOSED-END INVESTMENT COMPANIES. Shares of certain closed-end investment
companies may at times be acquired only at market prices representing premiums
to their Net Asset Values. If the Fund acquires shares of closed-end investment
companies, shareholders would bear both their proportionate share of expenses of
the Fund (including management and advisory fees) and, indirectly, the expenses
of such closed-end investment companies.
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. government
securities in a segregated account with its custodian. A put option on a
security written by the Fund is "covered" if the Fund maintains cash or fixed
income securities with a value equal to the exercise price in a segregated
account with its custodian, or else holds a put on the same security and in the
same principal amount as the put written where the exercise price of the put
held is equal to or greater than the exercise price of the put written.
The Fund will cover call options on stock indices that it writes by owning
securities whose price changes, in the opinion of Asset Management Hong Kong,
are expected to be similar to those of the index, or in such other manner as may
be in accordance with the rules of the exchange on which the option is traded
and applicable laws and regulations. Nevertheless, where the Fund covers a call
option on a stock index through ownership of securities, such securities may not
match the composition of the index. In that event, the Fund will not be fully
covered and could be subject to risk of loss in the event of adverse changes in
the value of the index. The Fund will cover put options on stock indices that it
writes by segregating assets equal to the option's exercise price, or in such
other manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised or
is closed out at a profit. If the value of a security or an index on which the
Fund has written a call option falls or remains the same, the Fund will realize
a profit in the form of the premium received (less transaction costs) that could
offset all or a portion of any decline in the value of the portfolio securities
being hedged. If the value of the underlying security or index rises, however,
the Fund will realize a loss in its call option position, which will reduce the
benefit of any unrealized appreciation in the Fund's investments. By writing a
put option, the Fund assumes the risk of a decline in the underlying security or
index. To the extent that the price changes of the portfolio securities being
hedged correlate with changes in the value of the underlying security or index,
writing covered put options on indices or securities will increase the Fund's
losses in the event of a market decline, although such losses will be offset in
part by the premium received for writing the option.
The Fund may also purchase put options to hedge its investments against a
decline in value. By purchasing a put option, the Fund will seek to offset a
decline in the value of the portfolio securities being hedged through
appreciation of the put option. If the value of the Fund's investments does not
decline as anticipated, or if the value of the option does not increase, the
Fund's loss will be limited to the premium paid for the option plus related
transaction costs. The success of this strategy will depend, in part, on the
correlation between the changes in value of the underlying security or index and
the changes in value of the Fund's security holdings being hedged.
The Fund may purchase call options on individual securities to hedge against an
increase in the price of securities that the Fund anticipates purchasing in the
future. Similarly, the Fund may purchase call options on a securities index to
attempt to reduce the risk of missing a broad market advance, or an advance in
an industry or market segment, at a time when the Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options,
the Fund will bear the risk of losing all or a portion of the premium paid if
the value of the underlying security or index does not rise.
There can be no assurance that a liquid market will exist when the Fund seeks to
close out an option position. Trading could be interrupted, for example, because
of supply and demand imbalances arising from a lack of either buyers or sellers,
or the options exchange could suspend trading after the price has risen or
fallen more than the maximum specified by the exchange. Although the Fund may be
able to offset to some extent any adverse effects of being unable to liquidate
an option position, the Fund may experience losses in some cases as a result of
such inability.
FOREIGN CURRENCY HEDGING TRANSACTIONS. In order to hedge against foreign
currency exchange rate risks, the Fund may enter into forward foreign currency
exchange contracts and foreign currency futures contracts, as well as purchase
put or call options on foreign currencies, as described below. The Fund may also
conduct its foreign currency exchange transactions on a spot (I.E., cash) basis
at the spot rate prevailing in the foreign currency exchange market.
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to minimize the risk to the Fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. The Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security. In addition, for example, when the Fund believes
that a foreign currency may suffer or enjoy a substantial movement against
another currency, it may enter into a forward contract to sell an amount of the
former foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. This second
investment practice is generally referred to as "cross-hedging." Because in
connection with the Fund's forward foreign currency transactions an amount of
the Fund's assets equal to the amount of the purchase will be held aside or
segregated to be used to pay for the commitment, the Fund will always have cash,
cash equivalents or high quality debt securities available sufficient to cover
any commitments under these contracts or to limit any potential risk. In
addition, when the Fund sells a forward contract, it will cover its obligation
under the contract by segregating cash, cash equivalents or high quality debt
securities, or by owning securities denominated in the corresponding currency
and with a market value equal to or greater than the Fund's obligation. Assets
used as cover for forward contracts will be marked to market on a daily basis.
While these contracts are not presently regulated by the Commodity Futures
Trading Commission, it 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 Asset Management Hong Kong'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 RISKS OF INVESTING IN THE FUND?
FOREIGN SECURITIES. 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 legal 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 companies 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,
together with Russia's continuing political and economic instability and the
slow-paced development of its market economy, the following: (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, insider trading, 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, a return to the centrally planned economy
that existed prior to the dissolution of the Soviet Union, or the
nationalization of privatized enterprises; (h) the risks of investing in
securities with substantially less liquidity and in issuers having significantly
smaller market capitalizations, when compared to securities and issuers in more
developed markets; (i) the difficulties associated in obtaining accurate market
valuations of many Russian securities, based partly on the limited amount of
publicly available information; (j) the financial condition of Russian
companies, including large amounts of inter-company debt which may create a
payments crisis on a national scale; (k) dependency on exports and the
corresponding importance of international trade; (l) the risk that the Russian
tax system will not be reformed to prevent inconsistent, retroactive and/or
exorbitant taxation or, in the alternative, the risk that a reformed tax system
may result in the inconsistent and unpredictable enforcement of the new tax
laws; (m) possible difficulty in identifying a purchaser of securities held by
the Fund due to the underdeveloped nature of the securities markets; (n) the
possibility that pending legislation could restrict the levels of foreign
investment in certain industries, thereby limiting the number of investment
opportunities in Russia; (o) the risk that pending legislation would confer to
Russian courts the exclusive jurisdiction to resolve disputes between foreign
investors and the Russian government, instead of bringing such disputes before
an internationally-accepted third-country arbitrator; and (p) the difficulty in
obtaining information about the financial condition of Russian issuers, in light
of the different disclosure and accounting standards applicable to Russian
companies.
There is little long-term 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 nor are they licensed with any
governmental entity 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
500 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. In addition, so-called "financial-industrial groups" have emerged in
recent years that seek to deter outside investors from interfering in the
management of companies they control. These practices may prevent the Fund from
investing in the securities of certain Russian companies deemed suitable by
Asset Management Hong Kong. Further, this also could cause a delay in the sale
of Russian company securities by the Fund if a potential purchaser is deemed
unsuitable, which may expose the Fund to potential loss on the investment.
The Fund's management 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. There is the possibility of cessation of trading on
national exchanges, expropriation, nationalization or confiscatory taxation,
withholding and other foreign tax on income or other amounts, 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 may not be internationally traded.
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 Asset Management Hong
Kong, 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.
LOWER-RATED SECURITIES. 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
goal 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.
DERIVATIVE SECURITIES. 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 Asset Management Hong Kong's ability to
predict correctly movements in the direction of the market, as to which no
assurance can be given.
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 Asset Management Hong Kong, 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 purposes, except to secure borrowings and then only to
an extent not greater than 15% of the Fund's total assts. 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 the American Stock Exchange, including no more
than 2% of its total assets which may be invested in warrants that are
not listed on those exchanges. Warrants acquired by the Fund in units or
attached to securities are not included in this restriction.
9. Invest more than 25% of the Fund's total assets in a single industry.
10. Participate on a joint or a joint and several basis in any trading
account in securities. See "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.
The Fund may also be subject to investment limitations imposed by foreign
jurisdictions in which the Fund sells its shares.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the Fund, the Fund may receive stock, real estate, or other
investments that the Fund would not, or could not, buy. In this case, the Fund
intends to dispose of the investment as soon as practicable while maximizing the
return to shareholders.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity 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.
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.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME, ADDRESS AND AGE WITH THE FUND PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS
-------- --------- ------------- -----
<S> <C> <C>
HARRIS J. ASHTON Trustee Director, RBC Holdings, Inc. (a bank holding company)
Metro Center and Bar-S Foods (a meat packing company); formerly,
1 Station Place President, Chief Executive Officer and Chairman of
Stamford, Connecticut the Board, General Host Corporation (nursery and
Age 65 craft centers); director or trustee, as the case may
be, of 52 of the investment companies in the Franklin
Templeton Group of Funds.
* NICHOLAS F. BRADY Trustee Chairman, Templeton Emerging Markets Investment Trust
The Bullitt House PLC, Templeton Latin America Investment Trust PLC,
102 East Dover Street Darby Overseas Investments, Ltd. and Darby Emerging
Easton, Maryland Markets Investments LDC (investment firms)
Age 68 (1994-present); Chairman and Director, Templeton
Central and Eastern European Investment Company;
Director, Templeton Global Strategy Funds, Amerada
Hess Corporation, Christiana Companies, and th H.J.
Heinz Company; formerly, Secretary of the United
States Department of the Treasury (1988-1993)
and Chairman of the Board, Dillon, Read & Co. Inc.
(investment banking) prior to 1988; and director or
trustee as the case may be, of 23 of the investment
companies in the Franklin Templeton Group of Funds.
FRANK J. CROTHERS Trustee Chairman, Atlantic Equipment & Power Ltd.; Vice
P.O. Box N-3238 Chairman, Caribbean Utilities Co., Ltd.; President,
Nassau, Bahamas Provo Power Corporation; Director of various other
Age 53 business and non-profit organizations; and director
or trustee, as the case may be, of 5 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; formerly, Director, General Host Corporation
Florham Park, New Jersey (nursery and craft centers); and director or trustee,
Age 65 as the case may be, of 54 of the investment companies
in the Franklin Templeton Group of Funds.
JOHN Wm. GALBRAITH Trustee President, Galbraith Properties, Inc. (personal
360 Central Avenue investment company); Director, Gulf West Banks, Inc.
Suite 1300 (bank holding company) (1995-present); formerly,
St. Petersburg, Florida Director, Mercantile Bank (1991-1995), Vice Chairman,
Age 76 Templeton, Galbraith & Hansberger Ltd. (1986-1992)
and Chairman, Templeton Funds Management, Inc.
(1974-1991); and director or trustee, as the case may
be 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 Second Avenue N. Executive-in-Residence of Eckerd College
St. Petersburg, Florida (1991-present); formerly, Director, Checkers Drive-In
Age 75 Restaurant, Inc.; Chairman of the Board and Chief
Executive Officer, Florida Progress Corporation
(1982-1990) and Director of various of its
subsidiaries; and director or trustee, as the case
may be, of 24 of the investment companies in
the Franklin Templeton Group of Funds.
EDITH E. HOLIDAY Trustee Director (1993-present), Amerada Hess Corporation and
3239 38th St., N.W. Hercules Incorporated; Director, Beverly Enterprises,
Washington, D.C. Inc. (1995-present) and H.J. Heinz Company
Age 46 (1994-present; formerly, Chairman (1995-1997) and
Trustee (1993-1997) of National Child Research
Center; Assistant to the President of the United
States and Secretary of the Cabinet (1990-1993),
General Counsel to the United States Treasury
Department (1989-1990) and Counselor to the Secretary
and Assistant Secretary for Public Affairs and
Public Liaison-United States Treasury Department
(1988-1989); and trustee or director, as the case
may be of 24 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 Franklin Resources, Inc.; Chairman of the Board and
San Mateo, California Director, Franklin Advisers, Inc., Franklin Advisory
Age 65 Services, Inc., Franklin Investment Advisory
Services, Inc. and Franklin Templeton Distributors,
Inc.; Director, Franklin/Templeton Investor Services,
Inc., Franklin Templeton Services, Inc.; formerly,
Director, General Host Corporation (nursery and
craft centers); and officer and/or director or
trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin
Templeton Group of Funds.
* CHARLES E. JOHNSON Trustee and Vice Senior Vice President and Director, Franklin
500 East Broward Blvd. President Resources, Inc.; Senior Vice President, Franklin
Fort Lauderdale, Florida Templeton Distributors, Inc.; President and Director,
Age 41 Templeton Worldwide, Inc.; President, Chief Executive
Officer, Chief Investment Officer and Director,
Franklin Institutional Services Corporation;
Chairman and Director, Templeton Investment Counsel,
Inc.; Vice President, Franklin Advisers, Inc.; officer
and/or director of some of the subsidiaries of
Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 37 of
the investment companies in the Franklin Templeton
Group of Funds.
BETTY P. KRAHMER Trustee Director or Trustee of various civic associations;
2201 Kentmere Parkway formerly, Economic Analyst, U.S. government; and
Wilmington, Delaware director or trustee, as the case may be, of 23 of the
Age 68 investment companies in the Franklin Templeton Group
of Funds.
GORDON S. MACKLIN Trustee Chairman, White River Corporation (financial
8212 Burning Tree Road services); Director, Fund American Enterprises
Bethesda, Maryland Holdings, Inc., MCI Communications Corporation, CCC
Age 69 Information Services Group, Inc. (information
services), MedImmune, Inc. (biotechnology), Shoppers
Express (home shopping), and Spacehab, Inc.
(aerospace services); and director or trustee,
as the case may be, of 51 of the investment
companies in the Franklin Templeton Group of Funds;
FORMERLY, Chairman, Hambrecht and Quist Group,
Director, H & Q Healthcare Investors,
and President, National Association of Securities
Dealers, Inc.
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 Executive
Age 69 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 director or trustee,
as the case may be, of 24 of the investment
companies in the Franklin Templeton Group of Funds.
CONSTANTINE DEAN Trustee Physician, Lyford Cay Hospital (1987-present);
TSERETOPOULOS Director of various nonprofit organizations;
Lyford Cay Hospital formerly, Cardiology Fellow, University of Maryland
P.O. Box N-7776 (1985-1987) and Internal Medicine Intern, Greater
Nassau, Bahamas Baltimore Medical Center (1982-1985); and director or
Age 44 trustee, as the case may be, of 5 of the investment
companies in the Franklin Templeton Group of Funds.
J. MARK MOBIUS President Portfolio Manager of various Templeton advisory
Two Exchange Square affiliates; Managing Director of Templeton Asset
Hong Kong Management Ltd.; formerly, President of International
Age 61 Investment Trust Company Limited (investment manager
of Taiwan R.O.C. Fund)(1986-1987) and Director,
Vickers da Costa, Hong Kong (1983-1986); 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, Franklin
777 Mariners Island Blvd. Resources, Inc. and Franklin Templeton Distributors,
San Mateo, California Inc.; President and Director, Franklin Advisers,
Age 57 Inc.; Senior Vice President and Director, Franklin
Advisory Services, Inc. and Franklin Investment
Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director
or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 56 of
the investment companies in the Franklin Templeton
Group of Funds.
HARMON E. BURNS Vice President Executive Vice President, Secretary and Director,
777 Mariners Island Blvd. Franklin Resources, Inc.; Executive Vice President
San Mateo, California and Director, Franklin Templeton Distributors, Inc.
Age 53 and Franklin Templeton Services, Inc.; Executive Vice
President, Franklin Advisers, Inc.; Director,
Franklin/Templeton Investor Services, Inc.; and
officer and/or director or trustee, as the case may
be, and of 56 of the investment companies in
the Franklin Templeton Group of Funds.
DEBORAH R. GATZEK Vice President Senior Vice President and General Counsel, Franklin
777 Mariners Island Blvd. Resources, Inc.; Senior Vice President, Franklin
San Mateo, California Templeton Services, Inc. and Franklin Templeton
Age 49 Distributors, Inc.; Vice President, Franklin
Advisers, Inc. and Franklin Advisory Services, Inc.;
Vice President, Chief Legal Officer and Chief
Operating Officer, Franklin Investment Advisory
Services, Inc.; and officer of 56 of the investment
companies in the Franklin Templeton Group of Funds.
MARK G. HOLOWESKO Vice President President and Chief Investment Officer, Templeton
Lyford Cay Global Advisors Limited; Executive Vice President and
Nassau, Bahamas Director, Templeton Worldwide, Inc.; formerly,
Age 38 Investment Administrator with RoyWest Trust
Corporation (Bahamas) Limited (1984-1985); and officer
of 23 of the investment companies in the Franklin
Templeton Group of Funds.
MARTIN L. FLANAGAN Vice President Senior Vice President and Chief Financial Officer,
777 Mariners Island Blvd. Franklin Resources, Inc.; Executive Vice President
San Mateo, California and Director, Templeton Worldwide, Inc.; Director,
Age 37 Executive Vice President and Chief Operating Officer,
Templeton Investment Counsel, Inc.; Senior Vice
President and Treasurer, Franklin Advisers, Inc.;
Treasurer, Franklin Advisory Services, Inc.;
Treasurer and Chief Financial Officer, Franklin
Investment Advisory Services, Inc.; President,
Franklin Templeton Services, Inc.; Senior Vice
President,Franklin/Templeton Investor Services,
Inc.; and officer and/or director or trustee, as
the case may be, of 56 of the investment
companies in the Franklin Templeton Group of
Funds.
JOHN R.KAY Vice President Vice President and Treasurer, Templeton Worldwide,
500 East Broward Blvd. Inc.; Assistant Vice President, Franklin Templeton
Fort Lauderdale, Florida Distributors, Inc.; formerly, Vice President and
Age 57 Controller, 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, Templeton Investment Counsel, Inc.; Senior
Fort Lauderdale, Florida Vice President, Templeton Global Investors, Inc.;
Age 43 formerly, Vice President and Associate General
Counsel, Kidder Peabody & Co. Inc. (1989-1990),
Assistant General Counsel, Gruntal & Co., Inc.
(1988), Vice President and Associate General Counsel,
Shearson Lehman Hutton Inc. (1988), Vice President
and Assistant General Counsel, E.F. Hutton & Co. Inc.
(1986-1988), and Special Counsel of the Division of
Investment Management of the U.S. Securities and
Exchange Commission (1984-1986); and officer of 23 of
the investment companies in the Franklin Templeton
Group of Funds.
JAMES R. BAIO Treasurer Certified Public Accountant; Treasurer, Franklin
500 East Broward Blvd. Mutual Advisers, Inc.; Senior Vice President,
Fort Lauderdale, Florida Templeton Worldwide, Inc., Templeton Global
Age 44 Investors, Inc. and Templeton Funds Trust Company;
formerly, Senior Tax Manager for Ernst & Young
(certified public accountants) (1977-1989);
and officer of 24 of the investment companies in
the Franklin Templeton Group of Funds.
BARBARA J. GREEN Secretary Senior Vice President, Templeton Worldwide, Inc;
500 East Broward Blvd. Senior Vice President, Templeton Global Investors,
Fort Lauderdale, Florida Inc.; formerly, Deputy Director of the Division of
Age 50 Investment Management, Executive Assistant and Senior
Advisor to the Chairman, Counselor to the Chairman,
Special Counsel and Attorney Fellow, U.S. Securities
and Exchange Commission (1986-1995), Attorney,
Rogers & Wells, and Judicial Clerk, U.S. District
Court (District of Massachusetts); and officer
of 23 of the investment companies in the Franklin
Templeton Group of Funds.
</TABLE>
* Nicholas F. Brady, Charles B. Johnson and Charles E. Johnson are "interested
persons" as defined by the Investment Company Act of 1940 (the "1940 Act"). The
1940 Act limits the percentage of interested persons that comprise a fund's
board of directors. Charles B. Johnson is an interested person due to his
ownership interest in Resources, and Charles E. Johnson is an interested person
due to his employment affiliation with Resources. Mr. Brady's status as an
interested person results from his business affiliations with Resources and
Templeton Global Advisors Limited. Mr. Brady and Resources are both limited
partners of Darby Overseas Partners, L.P. ("Darby Overseas"). Mr. Brady
established Darby Overseas in February 1994, and is Chairman and shareholder of
Darby Emerging Markets Investments LDC, which is the corporate general partner
of Darby Overseas. In addition, Darby Overseas and Templeton Global Advisors
Limited are limited partners of Darby Emerging Markets Fund, L.P. The remaining
Trustees of the Fund are not interested persons.
The table above shows the officers and Board members who are affiliated with
Distributors and Asset Management Hong Kong. Nonaffiliated members of the Board
and Mr. Brady are currently paid an annual retainer and/or fees for attendance
at Board and committee meetings. Currently, the Fund pays the nonaffiliated
Board members and Mr. Brady an annual retainer of $8,000, a fee of $650 per
Board meeting, 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, the nonaffiliated Board members also serve as directors or trustees of
other investment companies in the Franklin Templeton Group of Funds. They may
receive fees from these funds for their services. The following table provides
the total fees paid to nonaffiliated Board members and Mr. Brady by the Fund and
by other funds in the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
TOTAL FEES RECEIVED NUMBER OF BOARDS IN THE
FROM THE FRANKLIN FRANKLIN TEMPLETON GROUP
TOTAL FEES RECEIVED TEMPLETON GROUP OF OF FUNDS ON WHICH EACH
NAME FROM THE FUND* FUNDS** SERVES**
<S> <C> <C> <C>
Harris J. Ashton $11,250 $344,642 52
Nicholas F. Brady 11,250 119,675 23
Frank J. Crothers 12,890 35,300 5
S. Joseph Fortunato 11,250 361,562 54
John Wm. Galbraith 11,250 117,675 22
Andrew H. Hines, Jr. 11,250 144,175 24
Edith E. Holiday 11,250 72,875 24
Betty P. Krahmer 11,250 119,675 23
Gordon S. Macklin 11,250 337,292 51
Fred R. Millsaps 11,916 144,175 24
Constantine Dean Tseretopoulos 12,070 33,775 5
</TABLE>
*For the fiscal year ended December 31, 1997.
**For the calendar year ended December 31, 1997.
***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 57 registered investment companies, with approximately 170 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, paid pro rata by each fund
in the Franklin Templeton Group of Funds for which they serve as director or
trustee. 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 February 9, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately 25,882
Class I shares and 22,469 Advisor Class shares, or less than 1% of the total
outstanding Class I and Advisor Class shares of the Fund. Many of the Board
members also own shares in other funds in the Franklin Templeton Group of Funds.
Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father and
uncle, respectively, of Charles E. Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is Asset
Management Hong Kong. Asset Management Hong Kong 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. Asset Management Hong Kong renders its
services to the Fund from outside the U.S. Asset Management Hong Kong's
activities are subject to the review and supervision of the Board to whom Asset
Management Hong Kong renders periodic reports of the Fund's investment
activities. Asset Management Hong Kong and its officers, directors and employees
are covered by fidelity insurance for the protection of the Fund.
Asset Management Hong Kong and its affiliates act as investment manager to
numerous other investment companies and accounts. Asset Management Hong Kong 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 Asset Management
Hong Kong on behalf of the Fund. Similarly, with respect to the Fund, Asset
Management Hong Kong is not obligated to recommend, buy or sell, or to refrain
from recommending, buying or selling any security that Asset Management Hong
Kong 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. Asset Management Hong
Kong 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
Asset Management Hong Kong and other access persons will be made in compliance
with the Fund's Code of Ethics. Please see "Miscellaneous Information - Summary
of Code of Ethics."
MANAGEMENT FEES. Under its management agreement, the Fund pays Asset Management
Hong Kong a monthly management fee equal to an annual rate of 1.25% of its
average daily net assets. Each class of the Fund's shares pays its proportionate
share of the management fee.
For the fiscal years ended December 31, 1997, 1996 and 1995, management fees
totaling $57,060,597, $37,609,530 and $26,314,151, respectively, were paid to
Asset Management Hong Kong.
MANAGEMENT AGREEMENT. The management agreement is in effect until April 30,
1999. It 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
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
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 on 60 days' written notice to Asset Management Hong Kong, or by Asset
Management Hong Kong on 60 days' written notice to the Fund, and will
automatically terminate in the event of its assignment, as defined in the 1940
Act.
ADMINISTRATIVE SERVICES. Since October 1, 1996, FT Services has provided certain
administrative services and facilities for the Fund. Prior to that date,
Templeton Global Investors, Inc. provided the same services to the Fund. These
include preparing and maintaining books, records, and tax and financial reports,
and monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under its administration agreement, the Fund pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
During the fiscal years ended December 31, 1997, 1996 and 1995, the Fund paid
administration fees totaling $3,998,636, $2,831,572 and $2,153,848,
respectively.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these services
per benefit plan participant Fund account per year may not exceed the per
account fee payable by the Fund to Investor Services in connection with
maintaining shareholder accounts.
CUSTODIAN. The Chase Manhattan Bank, at its principal office at MetroTech
Center, Brooklyn, New York 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, New York 10017,
are the Fund's independent auditors. During the fiscal year ended December 31,
1997, their auditing services consisted of rendering an opinion on the financial
statements of the Fund included in the Fund's Annual Report to Shareholders for
the fiscal year ended December 31, 1997, and review of the Fund's filings with
the SEC.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
Asset Management Hong Kong selects brokers and dealers to execute the Fund's
portfolio transactions in accordance with criteria set forth in the management
agreement and any directions that the Board may give.
When placing a portfolio transaction, Asset Management Hong Kong seeks to obtain
prompt execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid by the Fund
is negotiated between Asset Management Hong Kong and the broker executing the
transaction. The determination and evaluation of the reasonableness of the
brokerage commissions paid are based to a large degree on the professional
opinions of the persons responsible for 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.
Asset Management Hong Kong 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 Asset Management Hong Kong, 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.
Asset Management Hong Kong may pay certain brokers commissions that are higher
than those another broker may charge, if Asset Management Hong Kong determines
in good faith that the amount paid is reasonable in relation to the value of the
brokerage and research services it receives. This may be viewed in terms of
either the particular transaction or Asset Management Hong Kong's overall
responsibilities to client accounts over which it exercises investment
discretion. The services that brokers may provide to Asset Management Hong Kong
include, among others, supplying information about particular companies,
markets, countries, or local, regional, national or transnational economies,
statistical data, quotations and other securities pricing information, and other
information that provides lawful and appropriate assistance to Asset Management
Hong Kong in carrying out its investment advisory responsibilities. These
services may not always directly benefit the Fund. They must, however, be of
value to Asset Management Hong Kong in carrying out its overall responsibilities
to its clients.
It is not possible to place a dollar value on the special executions or on the
research services Asset Management Hong Kong receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order to
obtain additional research services permits Asset Management Hong Kong to
supplement its own research and analysis activities and to receive the views and
information of individuals and research staffs of other securities firms. As
long as it is lawful and appropriate to do so, Asset Management Hong Kong 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, as well as shares of other
funds in the Franklin Templeton Group of Funds, 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 management
fee payable to Asset Management Hong Kong 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 Asset Management Hong Kong 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 Asset Management Hong Kong, 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.
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.
During the fiscal years ended December 31, 1997, 1996 and 1995, the Fund paid
brokerage commissions totaling $15,736,940, $7,221,351 and $4,305,521,
respectively.
As of December 31, 1997, 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 laws of states where the Fund offers its
shares may differ from federal law. Banks and financial institutions that sell
shares of the Fund may be required by state law to register as Securities
Dealers.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors and/or its affiliates provide
financial support to various Securities Dealers that sell shares of the Franklin
Templeton Group of Funds. This support is based primarily on the amount of sales
of fund shares. The amount of support may be affected by: total sales; net
sales; levels of redemptions; the proportion of a Securities Dealer's sales and
marketing efforts in the Franklin Templeton Group of Funds; a Securities
Dealer's support of, and participation in, Distributors' marketing programs; a
Securities Dealer's compensation programs for its registered representatives;
and the extent of a Securities Dealer's marketing programs relating to the
Franklin Templeton Group of Funds. Financial support to Securities Dealers may
be made by payments from Distributors' resources, from Distributors' retention
of underwriting concessions and, in the case of funds that have Rule 12b-1
plans, from payments to Distributors under such plans. In addition, certain
Securities Dealers may receive brokerage commissions generated by fund portfolio
transactions in accordance with the NASD's rules.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares, however, those who have shown an interest in the Franklin Templeton
Funds are more likely to be considered. To the extent permitted by their firm's
policies and procedures, a registered representative's expenses in attending
these meetings may be covered by Distributors.
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 goal 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. 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. If the 25th falls
on a weekend or holiday, we will process the redemption on the next business
day.
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.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. The Fund is not responsible for tracking down uncashed checks, unless a
check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional 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. 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 as of the close of the NYSE, normally
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, Martin Luther King Jr. 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 Asset Management Hong Kong.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
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 is not calculated. Thus, the calculation of the Net
Asset Value 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 close of the NYSE. The value of these securities used in computing the Net
Asset Value 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 close of the NYSE that will not be reflected in the
computation of the Net Asset Value. 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
DISTRIBUTIONS OF NET INVESTMENT INCOME. The Fund receives income generally in
the form of dividends, interest, original issue, market and acquisition
discount, and other income derived from its investments. This income, less
expenses incurred in the operation of the Fund, constitute its net investment
income from which dividends may be paid to you. Any distributions by the Fund
from such income will be taxable to you as ordinary income, whether you take
them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS. The Fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income. Distributions
paid from long-term capital gains realized by the Fund will be taxable to you as
long-term capital gain, regardless of how long you have held your shares in the
Fund. Any net short-term or long-term capital gains realized by the Fund (net of
any capital loss carryovers) generally will be distributed once each year, and
may be distributed more frequently, if necessary, in order to reduce or
eliminate federal excise or income taxes on the Fund.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), the Fund is required to
report the capital gain distributions paid to you from gains realized on the
sale of portfolio securities using the following categories:
"28% RATE GAINS": gains resulting from securities sold by the Fund after July
28, 1997 that were held for more than one year but not more than 18 months, and
securities sold by the Fund before May 7, 1997 that were held for more than one
year. These gains will be taxable to individual investors at a maximum rate of
28%.
"20% RATE GAINS": gains resulting from securities sold by the Fund after July
28, 1997 that were held for more than 18 months, and under a transitional rule,
securities sold by the Fund between May 7 and July 28, 1997 (inclusive) that
were held for more than one year. These gains will be taxable to individual
investors at a maximum rate of 20% for individual investors in the 28% or higher
federal income tax brackets, and at a maximum rate of 10% for investors in the
15% federal income tax bracket.
The 1997 Act also provides for a new maximum rate of tax on capital gains of 18%
for individuals in the 28% or higher federal income tax brackets and 8% for
individuals in the 15% federal income tax bracket for "qualified 5-year gains."
For individuals in the 15% bracket, qualified 5-year gains are net gains on
securities held for more than 5 years which are sold after December 31, 2000.
For individuals who are subject to tax at higher rates, qualified 5-year gains
are net gains on securities which are purchased after December 31, 2000 and are
held for more than 5 years. Taxpayers subject to tax at the higher rates may
also make an election for shares held on January 1, 2001 to recognize gain on
their shares in order to qualify such shares as qualified 5-year property.
The Fund will advise you at the end of each calendar year of the amount of its
capital gain distributions paid during the calendar year that qualify for these
maximum federal tax rates. Additional information on reporting these
distributions on your personal income tax returns is available in a free
Shareholder Tax Information Handbook. This handbook has been revised to include
1997 Act tax law changes. Please call Fund Information to request a copy.
Questions concerning each investor's personal tax reporting should be addressed
to the investor's personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions which are declared in
October, November or December and paid to you in January of the following year,
will be treated for tax purposes as if they had been received by you on December
31 of the year in which they were declared. The Fund will report this income to
you on your Form 1099-DIV for the year in which these distributions were
declared.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS. Most foreign exchange gains
realized on the sale of debt instruments are treated as ordinary income by the
Fund. Similarly, foreign exchange losses realized by the Fund on the sale of
debt instruments are generally treated as ordinary losses by the Fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the Fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the Fund's ordinary
income distributions to you, and may cause some or all of the Fund's previously
distributed income to be classified as a return of capital.
The 1997 Act also simplifies the procedures by which investors in funds that
invest in foreign securities can claim tax credits on their individual income
tax returns for the foreign taxes paid by the Fund. These provisions will allow
investors who claim a credit for foreign taxes paid of $300 or less on a single
return or $600 or less on a joint return during any year (all of which must be
reported on IRS Form 1099-DIV from the Fund to the investor) to bypass the
burdensome and detailed reporting requirements on the supporting foreign tax
credit schedule (Form 1116) and report foreign taxes paid directly on page 2 of
Form 1040. YOU SHOULD NOTE THAT THIS SIMPLIFIED PROCEDURE WILL NOT BE AVAILABLE
UNTIL CALENDAR YEAR 1998.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The Fund will inform you of
the amount and character of your distributions at the time they are paid, and
will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held Fund shares for a full year, you may have designated and distributed to you
as ordinary income or capital gain a percentage of income that is not equal to
the actual amount of such income earned during the period of your investment in
the Fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. The Fund has elected to
be treated as a regulated investment company under Subchapter M of the Code, has
qualified as such for its most recent fiscal year, and intends to so qualify
during the current fiscal year. The Board reserves the right not to maintain the
qualification of the Fund as a regulated investment company if it determines
such course of action to be beneficial to you. In such case, the Fund will be
subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of the Fund's available earnings and profits.
In order to qualify as a regulated investment company for tax purposes, the Fund
must meet certain specific requirements, including:
The Fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. government securities and securities of other
regulated investment companies) can exceed 25% of the Fund's total assets,
and, with respect to 50% of the Fund's total assets, no investment (other
than cash and cash items, U.S. government securities and securities of
other regulated investment companies) can exceed 5% of the Fund's total
assets;
The Fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the
sale or disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies; and
The Fund must distribute to its shareholders at least 90% of its net
investment income and net tax-exempt income for each of its fiscal years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires the Fund to distribute
at least 98% of its taxable ordinary income earned during the calendar year and
98% of its capital gain net income earned during the twelve month period ending
October 31 (in addition to undistributed amounts from the prior year) to you by
December 31 of each year in order to avoid federal excise taxes. The Fund
intends to declare and pay sufficient dividends in December (or in January that
are treated by you as received in December) but does not guarantee and can give
no assurances that its distributions will be sufficient to eliminate all such
taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of Fund shares are taxable
transactions for federal and state income tax purposes. The tax law requires
that you recognize a gain or loss in an amount equal to the difference between
your tax basis and the amount you received in exchange for your shares, subject
to the rules described below. If you hold your shares as a capital asset, the
gain or loss that you realize will be capital gain or loss, and will be
long-term for federal income tax purposes if you have held your shares for more
than one year at the time of redemption or exchange. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated as
a long-term capital loss to the extent of any long-term capital gains
distributed to you by the Fund on those shares. The holding periods and
categories of capital gain that apply under the 1997 Act are described above in
the "Distributions" section.
All or a portion of any loss that you realize upon the redemption of your Fund
shares will be disallowed to the extent that you purchase other shares in the
Fund (through reinvestment of dividends or otherwise) within 30 days before or
after your share redemption. Any loss disallowed under these rules will be added
to your tax basis in the new shares you purchase.
DEFERRAL OF BASIS. All or a portion of the sales charge that you paid for your
shares in the Fund will be excluded from your tax basis in any of the shares
sold within 90 days of their purchase (for the purpose of determining gain or
loss upon the sale of such shares) if you reinvest the sales proceeds in the
Fund or in another of the Franklin Templeton Funds, and the sales charge that
would otherwise apply to your reinvestment is reduced or eliminated. The portion
of the sales charge excluded from your tax basis in the shares sold will equal
the amount that the sales charge is reduced on your reinvestment. Any portion of
the sales charge excluded from your tax basis in the shares sold will be added
to the tax basis of the shares you acquire from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS. Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment requirements that must be met by
the Fund. Investments in GNMA/FNMA securities, bankers' acceptances, commercial
paper and repurchase agreements collateralized by U.S. government securities do
not generally qualify for tax-free treatment. At the end of each calendar year,
the Fund will provide you with the percentage of any dividends paid that may
qualify for tax-free treatment on your personal income tax return. You should
consult with your own tax advisor to determine the application of your state and
local laws to these distributions. Because the rules on exclusion of this income
are different for corporations, corporate shareholders should consult with their
corporate tax advisors about whether any of their distributions may be exempt
from corporate income or franchise taxes.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. Because the Fund's income is
derived primarily from investments in foreign securities rather than
dividend-paying domestic U.S. securities, no portion of its distributions will
generally be eligible for the intercorporate dividends-received deduction. None
of the dividends paid by the Fund for the most recent calendar year qualified
for such deduction, and it is anticipated that none of the current year's
dividends will so qualify.
INVESTMENT IN COMPLEX SECURITIES. The Fund's investment in options, futures
contracts and forward contracts, including transactions involving actual or
deemed short sales or foreign exchange gains or losses are subject to many
complex and special tax rules. Over-the-counter options on debt securities and
equity options, including options on stock and on narrow-based stock indexes,
will be subject to tax under section 1234 of the Code, generally producing a
long-term or short-term capital gain or loss upon exercise, lapse, or closing
out of the option or sale of the underlying stock or security. Certain other
options, futures and forward contracts entered into by the Fund are generally
governed by section 1256 of the Code. These "section 1256" positions generally
include listed options on debt securities, options on broad-based stock indexes,
options on securities indexes, options on futures contracts, regulated futures
contracts and certain foreign currency contracts and options thereon.
Absent a tax election to the contrary, each such section 1256 position held by
the Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Fund's fiscal year (and on other
dates as prescribed by the Code), and all gain or loss associated with fiscal
year transactions and mark-to-market positions at fiscal year end (except
certain currency gain or loss covered by section 988 of the Code) will generally
be treated as 60% long-term capital gain or loss and 40% short-term capital gain
or loss. Under legislation pending in technical corrections to the 1997 Act, the
60% long-term capital gain portion will qualify as 20% rate gain and will be
subject to tax to individual investors at a maximum rate of 20% for investors in
the 28% or higher federal income tax brackets, or at a maximum rate of 10% for
investors in the 15% federal income tax bracket. While foreign currency is
marked-to-market at year end, gain or loss realized as a result will always be
ordinary. Even though marked-to-market, gains and losses realized on foreign
currency and foreign security investments will generally be treated as ordinary
income. The effect of section 1256 mark-to-market rules may be to accelerate
income or to convert what otherwise would have been long-term capital gains into
short-term capital gains or short-term capital losses into long-term capital
losses within the Fund. The acceleration of income on section 1256 positions may
require the Fund to accrue taxable income without the corresponding receipt of
cash. In order to generate cash to satisfy the distribution requirements of the
Code, the Fund may be required to dispose of portfolio securities that it
otherwise would have continued to hold or to use cash flows from other sources
such as the sale of Fund shares. In these ways, any or all of these rules may
affect the amount, character and timing of income distributed to you by the
Fund.
When the Fund holds an option or contract which substantially diminishes the
Fund's risk of loss with respect to another position of the Fund (as might occur
in some hedging transactions), this combination of positions could be treated as
a "straddle" for tax purposes, possibly resulting in deferral of losses,
adjustments in the holding periods and conversion of short-term capital losses
into long-term capital losses. The Fund may make certain tax elections for mixed
straddles (i.e., straddles comprised of at least one section 1256 position and
at least one non-section 1256 position) which may reduce or eliminate the
operation of these straddle rules.
The 1997 Act has also added new provisions for dealing with transactions that
are generally called "Constructive Sale Transactions." Under these rules, the
Fund must recognize gain (but not loss) on any constructive sale of an
appreciated financial position in stock, a partnership interest or certain debt
instruments. The Fund will generally be treated as making a constructive sale
when it: 1) enters into a short sale on the same property, 2) enters into an
offsetting notional principal contract, or 3) enters into a futures or forward
contract to deliver the same or substantially similar property. Other
transactions (including certain financial instruments called collars) will be
treated as constructive sales as provided in Treasury regulations to be
published. There are also certain exceptions that apply for transactions that
are closed before the end of the 30th day after the close of the taxable year.
Distributions paid to you by the Fund of ordinary income and short-term capital
gains arising from the Fund's investments, including investments in options,
forwards, and futures contracts, will be taxable to you as ordinary income. The
Fund will monitor its transactions in such options and contracts and may make
certain other tax elections in order to mitigate the effect of the above rules.
INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES. The Fund is authorized
to invest in foreign currency denominated securities. Such investments, if made,
will have the following additional tax consequences:
Under the Code, gains or losses attributable to fluctuations in foreign currency
exchange rates which occur between the time the Fund accrues income (including
dividends), or accrues expenses which are denominated in a foreign currency, and
the time the Fund actually collects such income or pays such expenses generally
are treated as ordinary income or loss. Similarly, on the disposition of debt
securities denominated in a foreign currency and on the disposition of certain
options, futures, forward contracts, gain or loss attributable to fluctuations
in the value of foreign currency between the date of acquisition of the security
or contract and the date of its disposition are also treated as ordinary gain or
loss. These gains or losses, referred to under the Code as "section 988" gains
or losses, may increase or decrease the amount of the Fund's net investment
company taxable income, which, in turn, will affect the amount of income to be
distributed to you by the Fund.
If the Fund's section 988 losses exceed the Fund's other net investment company
taxable income during a taxable year, the Fund generally will not be able to
make ordinary dividend distributions to you for that year, or distributions made
before the losses were realized will be recharacterized as return of capital
distributions for federal income tax purposes, rather than as an ordinary
dividend or capital gain distribution. If a distribution is treated as a return
of capital, your tax basis in your Fund shares will be reduced by a like amount
(to the extent of such basis), and any excess of the distribution over your tax
basis in your Fund shares will be treated as capital gain to you.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANY SECURITIES. 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 an "excess distribution" with respect to PFIC stock, the
Fund itself may be subject to U.S. federal income tax on a portion of the
distribution, whether or not the corresponding income is distributed by the Fund
to you. 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. In this case, you would not be permitted to claim a credit
on your own tax return for the tax paid by the Fund. 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. This may have the effect of increasing
Fund distributions to you that are treated as ordinary dividends rather than
long-term capital gain dividends.
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 during such period. If this election were made, the
special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, the 1997 Act provides for another
election that would involve marking-to-market the Fund's PFIC shares at the end
of each taxable year (and on certain other dates as prescribed in the Code),
with the result that unrealized gains would be treated as though they were
realized. The Fund would also be allowed an ordinary deduction for the excess,
if any, of the adjusted basis of its investment in the PFIC stock over its fair
market value at the end of the taxable year. This deduction would be limited to
the amount of any net mark-to-market gains previously included with respect to
that particular PFIC security. If the Fund were to make this second PFIC
election, tax at the Fund level under the PFIC rules would generally be
eliminated.
The application of the PFIC rules may affect, among other things, the amount of
tax payable by the Fund (if any), the amounts distributable to you by the Fund,
the time at which these distributions must be made, and whether these
distributions will be classified as ordinary income or capital gain
distributions to you.
You should be aware that it is not always possible at the time shares of a
foreign corporation are acquired to ascertain that the foreign corporation is a
PFIC, and that there is always a possibility that a foreign corporation will
become a PFIC after the Fund acquires shares in that corporation. While the Fund
will generally seek to avoid investing in PFIC shares to avoid the tax
consequences detailed above, there are no guarantees that it will do so and it
reserves the right to make such investments as a matter of its fundamental
investment policy.
CONVERSION TRANSACTIONS. Gains realized by a Fund from transactions that are
deemed to be "conversion transactions" under the Code, and that would otherwise
produce capital gain may be recharacterized as ordinary income to the extent
that such gain does not exceed an amount defined as the "applicable imputed
income amount". A conversion transaction is any transaction in which
substantially all of the Fund's expected return is attributable to the time
value of the Fund's net investment in such transaction, and any one of the
following criteria are met:
1) there is an acquisition of property with a substantially
contemporaneous agreement to sell the same or substantially identical
property in the future;
2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the Fund on the basis that
it would have the economic characteristics of a loan but would be
taxed as capital gain; or
4) the transaction is specified in Treasury regulations to be promulgated
in the future.
The applicable imputed income amount, which represents the deemed return on the
conversion transaction based upon the time value of money, is computed using a
yield equal to 120 percent of the applicable federal rate, reduced by any prior
recharacterizations under this provision or the provisions of Section 263(g) of
the Code dealing with capitalized carrying costs.
STRIPPED PREFERRED STOCK. Occasionally, the Fund may purchase "stripped
preferred stock" that is subject to special tax treatment. Stripped preferred
stock is defined as certain preferred stock issues where ownership of the stock
has been separated from the right to receive dividends that have not yet become
payable. The stock must have a fixed redemption price, must not participate
substantially in the growth of the issuer, and must be limited and preferred as
to dividends. The difference between the redemption price and purchase price is
taken into Fund income over the term of the instrument as if it were original
issue discount. The amount that must be included in each period generally
depends on the original yield to maturity, adjusted for any prepayments of
principal.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT (MD) BONDS. The
Fund's investments in zero coupon bonds, bonds issued or acquired at a discount,
delayed interest bonds, or bonds that provide for payment of interest-in-kind
(PIK) may cause the Fund to recognize income and make distributions to you prior
to its receipt of cash payments. Zero coupon and delayed interest bonds are
normally issued at a discount and are therefore generally subject to tax
reporting as OID obligations. The Fund is required to accrue as income a portion
of the discount at which these securities were issued, and to distribute such
income each year (as ordinary dividends) in order to maintain its qualification
as a regulated investment company and to avoid income reporting and excise taxes
at the Fund level. PIK bonds are subject to similar tax rules concerning the
amount, character and timing of income required to be accrued by the Fund. Bonds
acquired in the secondary market for a price less than their stated redemption
price, or revised issue price in the case of a bond having OID, are said to have
been acquired with market discount. For these bonds, the Fund may elect to
accrue market discount on a current basis, in which case the Fund will be
required to distribute any such accrued discount. If the Fund does not elect to
accrue market discount into income currently, gain recognized on sale will be
recharacterized as ordinary income instead of capital gain to the extent of any
accumulated market discount on the obligation.
DEFAULTED OBLIGATIONS. The Fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy these distribution requirements, the Fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering 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.
Distributors does not receive compensation from the Fund for acting as
underwriter of the Fund's Advisor Class shares.
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.
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.
For periods before January 1, 1997, standardized performance quotations for
Advisor Class are calculated by substituting Class I performance for the
relevant time period, excluding the effect of Class I's maximum initial sales
charge, and including the effect of the Rule 12b-1 fees applicable to Class I
shares of the Fund. For periods after January 1, 1997, standardized performance
quotations for Advisor Class are calculated as described below.
An explanation of these and other methods used by the Fund to compute or express
performance follows. Regardless of the method used, past performance does not
guarantee future results, and 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 the periods indicated below that
would equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes income dividends and capital gain distributions
are reinvested at Net Asset Value. The quotation assumes the account was
completely redeemed at the end of each 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.
The average annual total return for Advisor Class for the one- and five-year
periods ended December 31, 1997, and for the period from inception (October 17,
1991) through December 31, 1997 was -9.18%, 12.24% and 8.01%, respectively.
These figures were calculated according to the SEC formula:
P(1+T)n = ERV
where:
P =a hypothetical initial payment of $1,000
T =average annual total return
n =number of years
ERV =ending redeemable value of a hypothetical $1,000
payment made at the beginning of each period at the
end of each period
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes income dividends and capital gain distributions are reinvested at
Net Asset Value. Cumulative total return, however, is based on the actual return
for a specified period rather than on the average return over the periods
indicated above. The cumulative total return for Advisor Class for the one- and
five-year periods ended December 31, 1997, and for the period from inception
(October 17, 1991) through December 31, 1997, was -9.18%, 78.12% and 61.33%,
respectively.
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
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
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
(i) unmanaged indices so that you 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 that
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.
From time to time, the Fund and Asset Management Hong Kong may also refer to the
following information:
a) Asset Management Hong Kong's and its affiliates' market share of
international equities managed in mutual funds prepared or published by
Strategic Insight or a similar statistical organization.
b) The performance of U.S. equity and debt markets relative to foreign
markets prepared or published by Morgan Stanley Capital
International(R) or a similar financial organization.
c) The capitalization of U.S. and foreign stock markets as prepared or
published by the International Finance Corporation, Morgan Stanley
Capital International(R) or a similar financial organization.
d) The geographic and industry distribution of the Fund's portfolio and
the Fund's top ten holdings.
e) 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.
f) 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).
g) The major industries located in various jurisdictions as published by
the Morgan Stanley Index.
h) Rankings by DALBAR Surveys, Inc. with respect to mutual fund
shareholder services.
i) Allegorical stories illustrating the importance of persistent
long-term investing.
j) The Fund's portfolio turnover rate and its ranking relative to industry
standards as published by Lipper Analytical Services, Inc. or
Morningstar, Inc.
k) 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.
l) The number of shareholders in the Fund or the aggregate number of
shareholders of the open-end investment companies in the Franklin
Templeton Group of Funds or the dollar amount of fund and private
account assets under management.
m) Comparison of the characteristics of various emerging markets,
including population, financial and economic conditions.
n) Quotations from the Templeton organization's founder, Sir John
Templeton,* advocating the virtues of diversification and long-term
investing, including the following:
"Never follow the crowd. Superior performance is possible only if
you invest differently from the crowd."
"Diversify by company, by industry and by country."
"Always maintain a long-term perspective."
"Invest for maximum total real return."
"Invest - don't trade or speculate."
"Remain flexible and open-minded about types of investment."
"Buy low."
"When buying stocks, search for bargains among quality stocks."
"Buy value, not market trends or the economic outlook."
"Diversify. In stocks and bonds, as in much else, there is safety
in numbers."
"Do your homework or hire wise experts to help you."
"Aggressively monitor your investments."
"Don't panic."
"Learn from your mistakes."
"Outperforming the market is a difficult task."
"An investor who has all the answers doesn't even understand all
the questions."
"There's no free lunch."
"And now the last principle: Do not be fearful or negative too
often."
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the Fund's 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.
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 50 years and
now services more than 2.9 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, a pioneer in international
investing. The Mutual Series team, known for its value-driven approach to
domestic equity investing, became part of the organization four years later.
Together, the Franklin Templeton Group has over $221 billion in assets under
management for more than 6 million U.S. based mutual fund shareholder and other
accounts. The Franklin Templeton Group of Funds offers 120 U.S. based open-end
investment companies to the public. The Fund may identify itself by its NASDAQ
symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the NYSE.
While many of them have similar investment objectives, no two are exactly alike.
As noted in the Prospectus, shares of the Fund are generally sold through
Securities Dealers. Investment representatives of such Securities Dealers are
experienced professionals who can offer advice on the type of investment
suitable to your unique goals and needs, as well as the types of risks
associated with such investment.
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. To the
best knowledge of the Fund, no other person holds beneficially or of record more
than 5% of the outstanding shares of any class.
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, before 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 the Franklin Templeton Group 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 by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations and statements must be sent
to a compliance officer;(iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) 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, 1997, including the
auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ASSET MANAGEMENT HONG KONG - Templeton Asset Management Ltd. - Hong Kong branch,
the Fund's investment manager
BOARD - The Board of Trustees of the Fund
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
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
PROSPECTUS - The prospectus for Advisor Class shares of the Fund dated May 1,
1998, 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 that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
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 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 that 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 that 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. These
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.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings 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.
- --------
* Sir John Templeton sold the Templeton organization to Resources in
October 1992 and resigned from the Board on April 16, 1995. He is no longer
involved with the investment management process.
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS: Incorporated by reference from
Registrant's 1997 Annual Report:
Independent Auditor's Report
Investment Portfolio as of December 31, 1997
Statement of Assets and Liabilities as of
December 31, 1997
Statement of Operations for the year ended
December 31, 1997
Statement of Changes in Net Assets for the years
ended December 31, 1997 and 1996
Notes to Financial Statements
(b) EXHIBITS
(1) (a) Amended and Restated Declaration of Trust 4
(c) Establishment and Designation of Classes of Shares
of Beneficial Interest 4
(d) Establishment and Designation of Classes
of Shares of Beneficial Interest 2
(2) By-Laws 3
(3) Not Applicable
(4) Specimen Security 5
(5) Amended and Restated Investment Management Agreement 3
(6) Distribution Agreement 3
(7) Not Applicable
(8) Custody Agreement 3
(9) (a) Amended and Restated Transfer Agent Agreement 1
(b) Fund Administration Agreement 2
(c) Shareholder Sub-Accounting Services Agreement 3
(d) Sub-Transfer Agent Services Agreement 3
(10) Opinion and Consent of Counsel
(11) Consent of Independent Public Accountants
(12) Not Applicable
<PAGE>
(13) (a) Letter concerning initial capital 5
(b) Investment Letter 4
(14) Not Applicable
(15) (a) Distribution Plan -- Class I Shares 4
(b) Distribution Plan -- Class II Shares 4
(16) Schedule showing computation of performance quotations
provided in response to Item 22 (unaudited) 4
(18) Form of Multiclass Plan 1
(27) Financial Data Schedule
- ---------------
1 Previously filed with Post-Effective Amendment No. 8 to the Registration
Statement on April 30, 1997.
2 Previously filed with Post-Effective Amendment No. 7 to the Registration
Statement on December 31, 1996.
3 Previously filed with Post-Effective Amendment No. 5 to the Registration
Statement on April 29, 1996.
4 Previously filed with Post-Effective Amendment No. 4 to the Registration
Statement on April 28, 1995.
5 Previously filed with Pre-Effective Amendment No. 1 to the Registration
Statement on September 19, 1991.
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 26. NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest, par value $0.01 per share -
Class I: 284,440 Shareholders as of January 31, 1998
Shares of Beneficial Interest, par value $0.01 per share -
Class II: 47,749 Shareholders as of January 31, 1998
Shares of Beneficial Interest, par value $0.01 per share -
Advisor Class: 1,119 Shareholders as of January 31, 1998
ITEM 27. INDEMNIFICATION.
Reference is made to Article IV of the Registrant's Declaration
of Trust, which is filed herewith.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers
and controlling persons of the Registrant by the Registrant
pursuant to the Declaration of Trust or otherwise, the
Registrant is aware that in the opinion of the Securities and
Exchange Commission, such indemnification is against public
policy as expressed in the Act and, therefore, is
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by trustees, officers
or controlling persons of the Registrant in connection with
the successful defense of any act, suit or proceeding) is
asserted by such trustees, officers or controlling persons in
connection with the shares being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issues.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER AND ITS OFFICERS
AND DIRECTORS
The business and other connections of Registrant's Investment
Manager are described in Part B of this Registration
Statement.
For information relating to the directors and officers of the
Investment Manager, reference is made to the Form ADV filed
with the Commission under the Investment Advisers Act of 1940
by Templeton Asset Management Ltd., which is incorporated
herein by reference.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Franklin Templeton Distributors, Inc. also acts as
principal underwriter of shares of:
Franklin Templeton Japan Fund
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
Franklin Asset Allocation Fund
Franklin California Tax Free Income Fund, Inc.
Franklin California Tax Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Frankin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund, Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund
Trust Franklin Value Investors Trust
Institutional Fiduciary Trust
<PAGE>
(b) The directors and officers of FTD, located at 777 Mariners Island
Blvd., San Mateo, California 94404, are as follows:
<TABLE>
<CAPTION>
NAME POSITION WITH UNDERWRITER POSITION WITH THE REGISTRANT
<S> <C> <C>
Charles B. Johnson Chairman of the Board and Director Chairman, Vice President
and Trustee
Gregory E. Johnson President None
Harmon E. Burns Executive Vice President and Director Vice President
Rupert H. Johnson, Jr. Executive Vice President and Director Vice President
Peter Jones Executive Vice President None
100 Fountain Parkway
St. Petersburg, Fl
Daniel T. O'Lear Executive Vice President None
Deborah R. Gatzek Senior Vice President and Assistant Vice President
Secretary
Richard O. Conboy Senior Vice President None
Charles E. Johnson Senior Vice President Vice President and
500 E. Broward Blvd. Trustee
Ft. Lauderdale, FL
Edward V. McVey Senior Vice President None
Harry G. (Toby)
Mumford, Jr. Senior Vice President None
Richard C. Stoker Senior Vice President None
Kent P. Strazza Senior Vice President None
Jimmy A. Escobedo Vice President None
Bert W. Feuss Vice President None
Loretta Fry Vice President None
Robert N. Geppner Vice President None
Mike Hackett Vice President None
Philip J. Kearns Vice President None
Laura Komar Vice President None
Ken Leder Vice President None
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME POSITION WITH UNDERWRITER Position with the REGISTRANT
<S> <C> <C>
Jack Lemein Vice President None
John R. McGee Vice President None
Vivian J. Palmieri Vice President None
Sarah Stypa Vice President None
Francie Arnone Assistant Vice President None
Alison Hawksley Assistant Vice President None
Bernadette Marino Howard Assistant Vice President None
John R. Kay Assistant Vice President Vice President
500 E. Broward Blvd.
Ft. Lauderdale, FL
Virginia Marans Assistant Vice President None
Susan Thompson Assistant Vice President None
Kenneth A. Lewis Treasurer None
Karen P. DeBellis Assistant Treasurer Assistant Treasurer
130 Fountain Parkway
St. Petersburg, FL
Philip A. Scatena Assistant Treasurer None
Leslie M. Kratter Secretary None
</TABLE>
c) Not Applicable (Information on unaffiliated underwriters).
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Certain accounts, books, and other documents required to be
maintained by Registrant pursuant to Section 31(a) of the
Investment Company Act of 1940 and rules thereunder are locataed
500 East Broward Blvd., Fort Lauderdale, Florida 33394. Other
records are maintained at the offices of Franklin Templeton Investor
Services, Inc., 100 Fountain Parkway, St. Petersburg, Florida
33716 and Franklin Resources, Inc., 777 Mariners Island Blvd.,
San Mateo, California 94404.
<PAGE>
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS.
(a) Not Applicable.
(b) Not Applicable.
(c) Registrant undertakes to call a meeting of Shareholders for
the purpose of voting upon the question of removal of a
Trustee or Trustee when requested to do so by the holders
of at least 10% of the Registrant's outstanding shares of
beneficial interest and in connection with such meeting to
comply with the shareholder communications provisions of
Section 16(c) of the Investment Company Act of 1940.
(d) Registrant undertakes to furnish to each person to whom its
Prospectus is provided a copy of its latest Annual Report,
upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Fort Lauderdale, Florida,
on the 27th day of February, 1998.
TEMPLETON DEVELOPING MARKETS TRUST
By:
J. Mark Mobius, President*
*By: /s/BARBARA J. GREEN
Barbara J. Green
as attorney-in-fact**
Pursuant to the requirements of the Securities Act of 1933, this amendment to
the Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
____________________ President (Chief February 27, 1998
J. Mark Mobius* Executive Officer)
____________________ Treasurer (Chief February 27, 1998
James R. Baio* Financial and
Accounting Officer)
____________________ Trustee February 27, 1998
Charles B. Johnson*
____________________ Trustee February 27, 1998
Charles E. Johnson*
____________________ Trustee February 27, 1998
Nicholas F. Brady*
____________________ Trustee February 27, 1998
Fred R. Millsaps*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
_____________________ Trustee February 27, 1998
Betty P. Krahmer*
____________________ Trustee February 27, 1998
Constantine Dean
Tseretopoulos*
____________________ Trustee February 27, 1998
Frank J. Crothers*
____________________ Trustee February 27, 1998
Harris J. Ashton*
____________________ Trustee February 27, 1998
S. Joseph Fortunato*
____________________ Trustee February 27, 1998
Andrew H. Hines, Jr.*
____________________ Trustee February 27, 1998
John Wm. Galbraith*
_____________ Trustee February 27, 1998
Edith E. Holiday*
____________________ Trustee February 27, 1998
Gordon S. Macklin*
</TABLE>
*By: /s/BARBARA J. GREEN
Barbara J. Green**
as attorney-in-fact
- -------------------
** Powers of Attorney were previously filed with Post-Effective Amendment No. 8
to the Registration Statement on Form N-1A of Templeton Developing Markets Trust
(file No. 33-42163) filed on April 30, 1997.
<PAGE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
FILED WITH
POST-EFFECTIVE AMENDMENT NO. 9 TO
REGISTRATION STATEMENT
ON
FORM N-1A
TEMPLETON DEVELOPING MARKETS TRUST
<PAGE>
EXHIBIT LIST
Exhibit Number Name of Exhibit
(10) Opinion and Consent of Counsel
(11) Consent of Independent Public Accountant
(27) Financial Data Schedules
<TABLE>
<CAPTION>
LAW OFFICES OF
<S> <C> <C>
30 ROCKEFELLER PLAZA DECHERT PRICE & RHOADS TEN POST OFFICE SQUARE SOUTH
NEW YORK, NY 10112 BOSTON, MA 02109-4603
(212) 698-3500 1775 EYE STREET, N.W. (617) 728-7100
4000 BELL ATLANTIC TOWER WASHINGTON, DC 20006-2401 90 STATE HOUSE SQUARE
1717 ARCH STREET HARTFORD, CT 06103-3702
PHILADELPHIA, PA 19103-2793 (860) 524-3999
(215) 994-4000 TELEPHONE: (202) 261-3300
65 AVENUE LOUISE
THIRTY NORTH THIRD STREET FAX: (202) 261-3333 1050 BRUSSELS, BELGIUM
HARRISBURG, PA 17101-1603 (32-2) 535-5411
(717) 237-2000
TITMUSS SAINER DECHERT
PRINCETON PIKE CORPORATE CENTER 2 SERJEANTSINN
P.O. BOX 5218 LONDON EC4Y 1LT, ENGLAND
PRINCETON, NJ 08543-5218 (44-171) 583-5353
(609) 520-3200
151, BOULEVARD HAUSSMANN
75008 PARIS, FRANCE
(33-1) 53 83 84 70
</TABLE>
February 26, 1998
Templeton Developing Markets Trust
500 E. Broward Boulevard
Suite 2100
Ft. Lauderdale, FL 33394
Dear Sirs:
As counsel for Templeton Developing Markets Trust (the "Trust"), a buisness
trust organized under the laws of Massachusetts, we are familar with the Trust's
registration under the Investment Company Act of 1940 and with the registration
statement relating to its shares of beneficial interest (the "Shares") under the
Securities Act of 1933 (File No. 33-42163) (the "Registration Statement"). We
have obtained a Certificate of Good Standing for the Trust issued by the
Secretary of the Commonwealth of Massachusetts and have also examined the
Trust's Declaration of trust and by-laws, as well as such other organizational
records, agreements, documents and instruments as we have deemed appropriate.
Based upon the foregoing, it is our opinion that the Shares registered
pursuant to the Trust's Registration Statement, when sold at the public
offering price and delivered by the Trust against receipt of the net asset value
of the Shares in accordance with the terms of the Registration Statement and
the requirements of applicable law, will have been duly and validly authorized,
legally and validly issued, and fully paid and non-assessable.
We consent to the filing of this opinion in connection with Post-Effective
Amendment No. 9 which is filed under the Investment Company Act of 1933 on
behalf of the Trust with the Securities and Exchange Commission.
Very truly yours,
/s/DECHERT PRICE & RHOADS
Dechert Price & Rhoads
MCGLADREY & PULLEN, LLP
Certified Public Accountants and Consultants
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our report dated January 30, 1998 on the
financial statements of Templeton Developing Markets Trust referred to
therein, which appears in the 1997 Annual Report to Shareholders, and which
is incorporated herein by reference, in Post-Effective Amendment No.9 to
the Registration Statement on Form N-1A, File No. 33-42163 as filed with
the Securities and Exchange Commission.
We also consent to the reference to our firm in the Prospectus under the
caption "Financial Highlights" and in the Statement of Additional
Information under the caption "Independent Accountants".
/s/McGladrey & Pullen, LLP
New York, New York
February 27, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE TEMPLETON
DEVELOPING MARKETS TRUST DECEMBER 31, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000878087
<NAME> TEMPLETON DEVELOPING MARKETS TRUST
<SERIES>
<NUMBER> 001
<NAME> TEMPLETON DEVELOPING MARKETS TRUST - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 4244776950
<INVESTMENTS-AT-VALUE> 3930875068
<RECEIVABLES> 58717936
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 4848753
<TOTAL-ASSETS> 3994441757
<PAYABLE-FOR-SECURITIES> 105169
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 49664519
<TOTAL-LIABILITIES> 49769688
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4346728592
<SHARES-COMMON-STOCK> 266131599
<SHARES-COMMON-PRIOR> 214864523
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (1526529)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (86628112)
<ACCUM-APPREC-OR-DEPREC> (313901882)
<NET-ASSETS> 3944672069
<DIVIDEND-INCOME> 109662416
<INTEREST-INCOME> 24868738
<OTHER-INCOME> 0
<EXPENSES-NET> 92282673
<NET-INVESTMENT-INCOME> 42248481
<REALIZED-GAINS-CURRENT> 135718049
<APPREC-INCREASE-CURRENT> (743217777)
<NET-CHANGE-FROM-OPS> (565251247)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (39274553)
<DISTRIBUTIONS-OF-GAINS> (211470260)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 101497736
<NUMBER-OF-SHARES-REDEEMED> (67019990)
<SHARES-REINVESTED> 16789330
<NET-CHANGE-IN-ASSETS> 409290407
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 17459582
<OVERDISTRIB-NII-PRIOR> (1516948)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 57060597
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 92282673
<AVERAGE-NET-ASSETS> 4126012245
<PER-SHARE-NAV-BEGIN> 15.40
<PER-SHARE-NII> 0.16
<PER-SHARE-GAIN-APPREC> (1.62)
<PER-SHARE-DIVIDEND> (0.16)
<PER-SHARE-DISTRIBUTIONS> (0.84)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.94
<EXPENSE-RATIO> 1.96
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE TEMPLETON
DEVELOPING MARKETS TRUST DECEMBER 31, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000878087
<NAME> TEMPLETON DEVELOPING MARKETS TRUST
<SERIES>
<NUMBER> 002
<NAME> TEMPLETON DEVELOPING MARKETS TRUST - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 4244776950
<INVESTMENTS-AT-VALUE> 3930875068
<RECEIVABLES> 58717936
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 4848753
<TOTAL-ASSETS> 3994441757
<PAYABLE-FOR-SECURITIES> 105169
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 49664519
<TOTAL-LIABILITIES> 49769688
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4346728592
<SHARES-COMMON-STOCK> 31420494
<SHARES-COMMON-PRIOR> 14845210
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (1526529)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (86628112)
<ACCUM-APPREC-OR-DEPREC> (313901882)
<NET-ASSETS> 3944672069
<DIVIDEND-INCOME> 109662416
<INTEREST-INCOME> 24868738
<OTHER-INCOME> 0
<EXPENSES-NET> 92282673
<NET-INVESTMENT-INCOME> 42248481
<REALIZED-GAINS-CURRENT> 135718049
<APPREC-INCREASE-CURRENT> (743217777)
<NET-CHANGE-FROM-OPS> (565251247)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1913743)
<DISTRIBUTIONS-OF-GAINS> (24074615)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 19937056
<NUMBER-OF-SHARES-REDEEMED> (5035752)
<SHARES-REINVESTED> 1673980
<NET-CHANGE-IN-ASSETS> 409290407
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 17459582
<OVERDISTRIB-NII-PRIOR> (1516948)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 57060597
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 92282673
<AVERAGE-NET-ASSETS> 395312578
<PER-SHARE-NAV-BEGIN> 15.27
<PER-SHARE-NII> 0.09
<PER-SHARE-GAIN-APPREC> (1.64)
<PER-SHARE-DIVIDEND> (0.07)
<PER-SHARE-DISTRIBUTIONS> (0.84)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.81
<EXPENSE-RATIO> 2.69
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE TEMPLETON
DEVELOPING MARKETS TRUST DECEMBER 31, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000878087
<NAME> TEMPLETON DEVELOPING MARKETS TRUST
<SERIES>
<NUMBER> 003
<NAME> TEMPLETON DEVELOPING MARKETS TRUST - ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-02-1997<F1>
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 4244776950
<INVESTMENTS-AT-VALUE> 3930875068
<RECEIVABLES> 58717936
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 4848753
<TOTAL-ASSETS> 3994441757
<PAYABLE-FOR-SECURITIES> 105169
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 49664519
<TOTAL-LIABILITIES> 49769688
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4346728592
<SHARES-COMMON-STOCK> 7588510
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (1526529)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (86628112)
<ACCUM-APPREC-OR-DEPREC> (313901882)
<NET-ASSETS> 3944672069
<DIVIDEND-INCOME> 109662416
<INTEREST-INCOME> 24868738
<OTHER-INCOME> 0
<EXPENSES-NET> 92282673
<NET-INVESTMENT-INCOME> 42248481
<REALIZED-GAINS-CURRENT> 135718049
<APPREC-INCREASE-CURRENT> (743217777)
<NET-CHANGE-FROM-OPS> (565251247)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1069766)
<DISTRIBUTIONS-OF-GAINS> (4260868)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10481151
<NUMBER-OF-SHARES-REDEEMED> (3280887)
<SHARES-REINVESTED> 388246
<NET-CHANGE-IN-ASSETS> 409290407
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 17459582
<OVERDISTRIB-NII-PRIOR> (1516948)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 57060597
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 92282673
<AVERAGE-NET-ASSETS> 43762752
<PER-SHARE-NAV-BEGIN> 15.43
<PER-SHARE-NII> 0.17
<PER-SHARE-GAIN-APPREC> (1.63)
<PER-SHARE-DIVIDEND> (0.20)
<PER-SHARE-DISTRIBUTIONS> (0.84)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.93
<EXPENSE-RATIO> 1.69
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>COMMENCEMENT OF OFFERING OF SALES JANUARY 2, 1997.
</FN>
</TABLE>
