o 711 P-2
SUPPLEMENT DATED JANUARY 1, 2000
TO THE PROSPECTUS OF
TEMPLETON DEVELOPING MARKETS TRUST
DATED MAY 1, 1999, AS AMENDED AUGUST 19, 1999
The prospectus is amended as follows:
I. The following sentence is added after the minimum investments table on page
19:
Please note that you may only buy shares of a fund eligible for sale in your
state or jurisdiction.
II. In the Selling Shares table on page 25 the section "By Wire" is replaced
with the following:
- --------------------------------------------------------------------------------
[Insert graphic You can call or write to have redemption proceeds sent
of three to a bank account. See the policies above for selling
lightning shares by mail or phone.
bolts]
Before requesting to have redemption proceeds sent to a
BY ELECTRONIC bank account, please make sure we have your bank
FUNDS TRANSFER account information on file. If we do not have this
(ACH) information, you will need to send written instructions
with your bank's name and address, a voided check or
savings account deposit slip, and a signature guarantee
if the ownership of the bank and fund accounts is
different.
If we receive your request in proper form by 1:00 p.m.
Pacific time, proceeds sent by ACH generally will be
available within two to three business days.
- --------------------------------------------------------------------------------
III. The section "Sales charge waivers" on page 19 is replaced with the
following:
SALES CHARGE WAIVERS Class A shares may be purchased without an initial sales
charge or CDSC by various individuals, institutions and retirement plans or by
investors who reinvest certain distributions and proceeds within 365 days.
Certain investors also may buy Class C shares without an initial sales charge.
The CDSC for each class may be waived for certain redemptions and distributions.
If you would like information about available sales charge waivers, call your
investment representative or call Shareholder Services at 1-800/632-2301. For
information about retirement plans, you may call Retirement Plan Services at
1-800/527-2020. A list of available sales charge waivers also may be found in
the Statement of Additional Information (SAI).
IV. The section "Dealer compensation" on page 28 is replaced with the following:
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive sales
commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and service
(12b-1) fees and its other resources.
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
COMMISSION (%) - 4.00 2.00
Investment under $50,000 5.00 - -
$50,000 but under $100,000 3.75 - -
$100,000 but under $250,000 2.80 - -
$250,000 but under $500,000 2.00 - -
$500,000 but under $1 million 1.60 - -
$1 million or more up to 1.00/1/ - -
12B-1 FEE TO DEALER 0.35 0.25/2/ 1.00/3/
A dealer commission of up to 1% may be paid on Class A NAV purchases by certain
retirement plans1 and on Class C NAV purchases. A dealer commission of up to
0.25% may be paid on Class A NAV purchases by certain trust companies and bank
trust departments, eligible governmental authorities, and broker-dealers or
others on behalf of clients participating in comprehensive fee programs. For
certain retirement plans that do not qualify to buy Class A shares at NAV but
that qualify to buy Class A shares with a maximum initial sales charge of 4%, a
dealer commission of 3.2% may be paid.
1. During the first year after purchase, dealers may not be eligible to receive
the 12b-1 fee. 2. Dealers may be eligible to receive up to 0.25% from the date
of purchase. After 8 years, Class B shares convert to Class A shares and dealers
may then receive the 12b-1 fee applicable to Class A. 3. Dealers may be eligible
to receive up to 0.25% during the first year after purchase and may be eligible
to receive the full 12b-1 fee starting in the 13th month.
V. The section "Statements and reports" on page 26 is replaced with the
following:
STATEMENTS AND REPORTS You will receive quarterly account statements that show
all your account transactions during the quarter. You also will receive written
notification after each transaction affecting your account (except for
distributions and transactions made through automatic investment or withdrawal
programs, which will be reported on your quarterly statement). You also will
receive the fund's financial reports every six months. To reduce fund expenses,
we try to identify related shareholders in a household and send only one copy of
the financial reports. If you need additional copies, please call 1-800/DIAL
BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive copies of all notifications and statements
and other information about your account directly from the fund.
Please keep this supplement for future reference.
PAGE
TEMPLETON DEVELOPING
MARKETS TRUST
CLASS A, B & C
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999, AS AMENDED JANUARY 1, 2000
[Insert Franklin Templeton "Butterball" logo]
P.O. BOX 33030
ST. PETERSBURG, FL 33733-3030 1/800/DIAL BEN(R)
- -------------------------------------------------------------------------------
This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the fund's prospectus. The fund's
prospectus, dated May 1, 1999, which we may amend from time to time, contains
the basic information you should know before investing in the fund. You should
read this SAI together with the fund's prospectus.
The audited financial statements and auditor's report in the fund's Annual
Report to Shareholders, for the fiscal year ended December 31, 1998, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goal and Strategies................................ 2
Risks.............................................. 7
Officers and Trustees.............................. 10
Management and Other Services...................... 14
Portfolio Transactions............................. 15
Distributions and Taxes. .......................... 16
Organization, Voting Rights
and Principal Holders............................ 18
Buying and Selling Shares.......................... 19
Pricing Shares..................................... 25
The Underwriter ................................... 26
Performance........................................ 27
Miscellaneous Information.......................... 29
Description of Ratings. ........................... 30
- -------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL;
- -------------------------------------------------------------------------------
711 SAI 01/00
GOAL AND STRATEGIES
- -------------------------------------------------------------------------------
The fund's investment goal is long-term capital appreciation. This goal is
fundamental, which means it may not be changed without shareholder approval.
The fund tries to achieve its goal by investing primarily in the equity
securities of developing market issuers.
GENERAL The fund may invest up to 100% of its total assets in developing or
emerging markets, including up to 5% of its total assets in Russian securities.
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. For hedging purposes only, the
fund may buy and sell financial futures contracts, stock index futures
contracts, foreign currency futures contracts and options on any of those
instruments. 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.
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.
DEPOSITARY RECEIPTS 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").
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.
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 Investors Services, Inc. (Moody's) or Standard & Poor's
Corporation (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).
The fund may, from time to time purchase defaulted debt securities if, in the
opinion of the manager, the issuer may resume interest payments in the near
future. As a fundamental policy, the fund will not invest more than 10% of its
total assets (at the time of purchase) in defaulted debt securities, which may
be illiquid.
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 Investment Company Act of 1940 (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.
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. 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.
REPURCHASE AGREEMENTS The fund generally will 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. Under
a repurchase agreement, the fund agrees to buy securities guaranteed as to
payment of principal and interest by the U.S. government or its agencies from a
qualified bank or broker-dealer and then to sell the securities back to the bank
or broker-dealer 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 market value of at least 102% of the dollar
amount invested by the fund in each repurchase agreement. The manager will
monitor the value of such securities daily to determine that the value equals or
exceeds the repurchase price.
Repurchase agreements may involve risks in the event of default or insolvency of
the bank or broker-dealer, including possible delays or restrictions upon the
fund's ability to sell the underlying securities. the fund will enter into
repurchase agreements only with parties who meet certain creditworthiness
standards, i.e., banks or broker-dealers that the manager has determined present
no serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
LOANS OF PORTFOLIO SECURITIES To generate additional income, 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.
FUTURES CONTRACTS Although the fund has the authority to buy and sell financial
futures contracts, it presently has no intention of entering into such
transactions. 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 also may 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.
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.
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 Although the fund has the authority to 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, it presently has no intention of entering into such
transactions.
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 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.
The fund may write a call or put option to generate income only if the option is
"covered." A call option on a security written by the fund is "covered" if the
fund owns the underlying security covered by the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or for additional cash consideration held in a segregated account by its
custodian) upon conversion or exchange of other securities held in its
portfolio. A call option on a security is also "covered" if the fund holds a
call on the same security and in the same principal amount as the call written
where the exercise price of the call held (1) is equal to or less than the
exercise price of the call written or (2) is greater than the exercise price of
the call written if the difference is maintained by the fund in cash or high
grade U.S. government securities in a segregated account with its custodian. A
put option on a security written by the fund is "covered" if the fund maintains
cash or fixed income securities with a value equal to the exercise price in a
segregated account with its custodian, or else holds a put on the same security
and in the same principal amount as the put written where the exercise price of
the put held is equal to or greater than the exercise price of the put written.
The fund will cover call options on stock indices that it writes by owning
securities whose price changes, in the opinion of the manager, are expected to
be similar to those of the index, or in such other manner as may be in
accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations. Nevertheless, where the fund covers a call
option on a stock index through ownership of securities, such securities may not
match the composition of the index. In that event, the fund will not be fully
covered and could be subject to risk of loss in the event of adverse changes in
the value of the index. The fund will cover put options on stock indices that it
writes by segregating assets equal to the option's exercise price, or in such
other manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations.
The fund will receive a premium from writing a put or call option, which
increases the fund's gross income in the event the option expires unexercised or
is closed out at a profit. If the value of a security or an index on which the
fund has written a call option falls or remains the same, the fund will realize
a profit in the form of the premium received (less transaction costs) that could
offset all or a portion of any decline in the value of the portfolio securities
being hedged. If the value of the underlying security or index rises, however,
the fund will realize a loss in its call option position, which will reduce the
benefit of any unrealized appreciation in the fund's investments. By writing a
put option, the fund assumes the risk of a decline in the underlying security or
index. To the extent that the price changes of the portfolio securities being
hedged correlate with changes in the value of the underlying security or index,
writing covered put options on indices or securities will increase the fund's
losses in the event of a market decline, although such losses will be offset in
part by the premium received for writing the option.
The fund may also purchase put options to hedge its investments against a
decline in value. By purchasing a put option, the fund will seek to offset a
decline in the value of the portfolio securities being hedged through
appreciation of the put option. If the value of the fund's investments does not
decline as anticipated, or if the value of the option does not increase, the
fund's loss will be limited to the premium paid for the option plus related
transaction costs. The success of this strategy will depend, in part, on the
correlation between the changes in value of the underlying security or index and
the changes in value of the fund's security holdings being hedged.
The fund may purchase call options on individual securities to hedge against an
increase in the price of securities that the fund anticipates purchasing in the
future. Similarly, the fund may purchase call options on a securities index to
attempt to reduce the risk of missing a broad market advance, or an advance in
an industry or market segment, at a time when the fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options,
the fund will bear the risk of losing all or a portion of the premium paid if
the value of the underlying security or index does not rise.
There can be no assurance that a liquid market will exist when the fund seeks to
close out an option position. Trading could be interrupted, for example, because
of supply and demand imbalances arising from a lack of either buyers or sellers,
or the options exchange could suspend trading after the price has risen or
fallen more than the maximum specified by the exchange. Although the fund may be
able to offset to some extent any adverse effects of being unable to liquidate
an option position, the fund may experience losses in some cases as a result of
such inability.
FOREIGN CURRENCY HEDGING TRANSACTIONS 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. 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 reduce 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 the manager's ability to forecast
currency exchange rate movements correctly. Should exchange rates move in an
unexpected manner, the fund may not achieve the anticipated benefits of foreign
currency futures or may realize losses.
TEMPORARY INVESTMENTS When the manager 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:
o 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;
o 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;
o bank obligations (including CDs, time deposits and bankers' acceptances),
and
o repurchase agreements with banks and broker-dealers.
INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50% of
the fund's outstanding shares 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 the manager, individually own more than 1/2 of 1% of the
securities of such company or, in the aggregate, own more than 5% of the
securities of such company.
3. Purchase any security (other than obligations of the U.S. government, its
agencies and instrumentalities) if, as a result, as to 75% of the fund's total
assets (i) more than 5% of the fund's total assets would be invested in
securities of any single issuer, or (ii) the fund would then own more than 10%
of the voting securities of any single issuer.2
4. Act as an underwriter; issue senior securities except as set forth in
investment restriction 6 below; or purchase on margin or sell short (but the
fund may make margin payments in connection with options on securities or
securities indices, foreign currencies, futures contracts and related options,
and forward contracts and related options).
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
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. As a
non-fundamental policy, the fund will not invest in any company for the purpose
of exercising control or management.
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 New York Stock Exchange (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 "Portfolio Transactions" 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 also may 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 the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments 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.
RISKS
- -------------------------------------------------------------------------------
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.
DEVELOPING OR EMERGING MARKETS. 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 that
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 many developing countries,
of a capital market structure or market-oriented economy; and (vii) the
possibility that recent favorable economic developments in some developing
countries 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 developing countries may involve risks of nationalization,
expropriation and confiscatory taxation. For example, 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 certain developing countries. Finally, even though the
currencies of some developing countries, such as certain Eastern European
countries 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.
RUSSIAN SECURITIES. 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 the
manager. Further, this also could cause a delay in the sale of Russian company
securities by the fund if a potential purchaser is deemed unsuitable, which may
expose the fund to potential loss on the investment.
CURRENCY 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 of these 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.
EURO On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of currency
risk among EMU countries may change the economic environment and behavior of
investors, particularly in European markets. While the implementation of the
euro could have a negative effect on the fund, the fund's manager and its
affiliated services providers are taking steps they believe are reasonably
designed to address the euro issue.
INTEREST RATE 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, interest rates have
increased and decreased, sometimes very dramatically, in the past. These changes
are likely to occur again in the future at unpredictable times.
LOW-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.
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 The fund's ability to reduce or eliminate its futures and
related options positions will depend upon the liquidity of the secondary
markets for such futures and options. The fund intends to purchase or sell
futures and related options only on exchanges or boards of trade where there
appears to be an active secondary market, but there is no assurance that a
liquid secondary market will exist for any particular contract or at any
particular time. Use of stock index futures and related options for hedging may
involve risks because of imperfect correlations between movements in the prices
of the futures or related options and movements in the prices of the securities
being hedged. Successful use of futures and related options by the fund for
hedging purposes also depends upon the manager's ability to predict correctly
movements in the direction of the market, as to which no assurance can be given.
OFFICERS AND TRUSTEES
- -------------------------------------------------------------------------------
The fund has a board of trustees. The board is responsible for the overall
management of the fund, including general supervision and review of the fund's
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 board
also monitors the fund to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the fund, and principal occupations during the
past five years are shown below.
Harris J. Ashton (66)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 49 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
*Nicholas F. Brady (69)
16 North Washington Street, Easton, MD 21601
TRUSTEE
Chairman, Templeton Emerging Markets Investment Trust PLC, Templeton Latin
America Investment Trust PLC, Darby Overseas Investments, Ltd. and Darby
Emerging Markets Investments LDC (investment firms) (1994-present); Director,
Templeton Global Strategy Funds, Amerada Hess Corporation (exploration and
refining of natural gas), Christiana Companies, Inc. (operating and investment
companies), and H.J. Heinz Company (processed foods and allied products);
director or trustee, as the case may be, of 21 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Secretary of the United
States Department of the Treasury (1988-1993) and Chairman of the Board, Dillon,
Read & Co., Inc. (investment banking) (until 1988).
Frank J. Crothers (54)
P.O. Box N-3238, Nassau, Bahamas
TRUSTEE
Chairman, Atlantic Equipment & Power Ltd.; Vice Chairman, Caribbean Utilities
Co., Ltd.; President, Provo Power Corporation; director of various other
business and non-profit organizations; and director or trustee, as the case may
be, of seven of the investment companies in the Franklin Templeton Group of
Funds.
S. Joseph Fortunato (66)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee, as
the case may be, of 51 of the investment companies in the Franklin Templeton
Group of Funds
John Wm. Galbraith (77)
360 Central Avenue, Suite 1300
St. Petersburg, FL 33701
TRUSTEE
President, Galbraith Properties, Inc. (personal investment company); Director
Emeritus, Gulf West Banks, Inc. (bank holding company) (1995-present);
director or trustee, as the case may be, of 20 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Director, Mercantile
Bank (1991-1995), Vice Chairman, Templeton, Galbraith & Hansberger Ltd.
(1986-1992), and Chairman, Templeton Funds Management, Inc. (1974-1991).
Andrew H. Hines, Jr. (76)
150 2nd Avenue N., St. Petersburg, FL 33701
TRUSTEE
Consultant, Triangle Consulting Group; Executive-in-Residence, Eckerd College
(1991-present); director or trustee, as the case may be, of 22 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Chairman and
Director, Precise Power Corporation (1990-1997), Director, Checkers Drive(In
Restaurant, Inc. (1994-1997), and Chairman of the Board and Chief Executive
Officer, Florida Progress Corporation (holding company in the energy area)
(1982-1990) and director of various of its subsidiaries.
Edith E. Holiday (47)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and H.J.
Heinz Company (processed foods and allied products) (1994-present); director or
trustee, as the case may be, of 25 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and Trustee
(1993-1997), 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).
*Charles B. Johnson (66)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., , Franklin
Investment Advisory Services, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and Franklin Templeton
Services, Inc.; officer and/or director or trustee, as the case may be, of most
of the other subsidiaries of Franklin Resources, Inc. and of 50 of the
investment companies in the Franklin Templeton Group of Funds.
*Charles E. Johnson (42)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
VICE PRESIDENT AND TRUSTEE
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; Chairman and Director, Templeton Investment Counsel,
Inc.; Vice President, Franklin Advisers, Inc.; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 34 of the investment companies in
the Franklin Templeton Group of Funds.
Betty P. Krahmer (69)
2201 Kentmere Parkway, Wilmington, DE 19806
TRUSTEE
Director or trustee of various civic associations; director or trustee, as the
case may be, of 21 of the investment companies in the Franklin Templeton Group
of Funds; and FORMERLY, Economic Analyst, U.S. government.
Gordon S. Macklin (70)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 49 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, White River
Corporation (financial services) and Hambrecht and Quist Group (investment
banking), and President, National Association of Securities Dealers, Inc.
Fred R. Millsaps (70)
2665 NE 37th Drive, Fort Lauderdale, FL 33308
TRUSTEE
Manager of personal investments (1978-present); director of various business and
nonprofit organizations; director or trustee, as the case may be, of 22 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Chairman and Chief Executive Officer, Landmark Banking Corporation (1969-1978),
Financial Vice President, Florida Power and Light (1965-1969), and Vice
President, Federal Reserve Bank of Atlanta (1958-1965).
Constantine Dean Tseretopoulos (45)
Lyford Cay Hospital, P.O. Box N-7776
Nassau Bahamas
TRUSTEE
Physician, Lyford Cay Hospital (1987-present); director of various nonprofit
organizations; director or trustee, as the case may be, of seven of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine
Intern, Greater Baltimore Medical Center (1982-1985).
James R. Baio (45)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
TREASURER
Certified Public Accountant; Senior Vice President, Templeton Worldwide, Inc.,
Templeton Global Investors, Inc. and Templeton Funds Trust Company; officer of
22 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Senior Tax Manager, Ernst & Young (certified public accountants)
(1977-1989).
Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory
Services, Inc. and 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 53 of the investment companies in
the Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President, Chief Financial Officer and Director, Templeton
Worldwide, Inc.; Executive Vice President, Chief Operating Officer and Director,
Templeton Investment Counsel, Inc.; Executive Vice President and Chief Financial
Officer, Franklin Advisers, Inc.;Chief Financial Officer, Franklin Advisory
Services, LLC and Franklin Investment Advisory Services, Inc.; President and
Director, Franklin Templeton Services, Inc.; officer and/or director of some of
the other subsidiaries of Franklin Resources, Inc.; and officer and/or director
or trustee, as the case may be, of 53 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 54 of the investment
companies in the Franklin Templeton Group of Funds.
Barbara J. Green (51)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
SECRETARY
Senior Vice President, Templeton Worldwide, Inc. and Templeton Global
Investors, Inc.; officer of 21 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Deputy Director, Division of
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).
Mark G. Holowesko (39)
Lyford Cay, Nassau, Bahamas
VICE PRESIDENT
President, Templeton Global Advisors Limited; Chief Investment Officer, Global
Equity Group; Executive Vice President and Director, Templeton Worldwide, Inc.;
officer of 21 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Investment Administrator, RoyWest Trust Corporation
(Bahamas) Limited (1984-1985).
Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.
and Franklin Investment Advisory Services, Inc.; Senior Vice President, Franklin
Advisory Services, LLC; 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 53 of the investment companies
in the Franklin Templeton Group of Funds.
John R. Kay (58)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
VICE PRESIDENT
Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin
Templeton Distributors, Inc.; officer of 26 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Vice President and Controller,
Keystone Group, Inc.
Elizabeth M. Knoblock (44)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
VICE PRESIDENT - COMPLIANCE
General Counsel, Secretary and Senior Vice President, Templeton Investment
Counsel, Inc.; Senior Vice President, Templeton Global Investors, Inc.;
officer of 21 of the investment companies in the Franklin Templeton Group of
Funds; and 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, Division of Investment
Management, U.S. Securities and Exchange Commission (1984-1986).
J. Mark Mobius (62)
Two Exchange Square, 39th Floor, Suite 3905-08
Hong Kong
PRESIDENT
Portfolio Manager of various Templeton advisory affiliates; Managing Director,
Templeton Asset Management Ltd.; officer of eight of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, President, International
Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund)
(1986-1987) and Director, Vickers da Costa, Hong Kong (1983-1986).
*This board member is considered an "interested person" under federal
securities laws. Mr. Brady's status as an interested person results from his
business affiliations with Franklin Resources, Inc. and Templeton Global
Advisors Limited. Mr. Brady and Franklin Resources, Inc. are both limited
partners of Darby Overseas Partners, L.P. (Darby Overseas). In addition,
Darby Overseas and Templeton Global Advisors Limited are limited partners of
Darby Emerging Markets Fund, L.P.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Charles E. Johnson.
The fund pays noninterested board members and Mr. Brady an annual retainer of
$12,000 and a fee of $900 per board meeting attended. Board members who serve on
the audit committee of the fund and other funds in the Franklin Templeton Group
of Funds receive a flat fee of $2,000 per committee meeting attended, a portion
of which is allocated to the fund. Members of a committee are not compensated
for any committee meeting held on the day of a board meeting. Noninterested
board members also may serve as directors or trustees of other funds in the
Franklin Templeton Group of Funds and may receive fees from these funds for
their services. The following table provides the total fees paid to
noninterested board members and Mr. Brady by the fund and by the Franklin
Templeton Group of Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM THE GROUP ON WHICH
NAME FUND/1/ OF FUNDS/2/ EACH SERVES/3/
- ----------------------------------------------------------------------
Harris J. Ashton $15,850 $361,157 49
Nicholas F. Brady $15,850 $140,975 21
Frank J. Crothers $16,322 $ 47,700 7
S. Joseph Fortunato $15,850 $367,835 51
John Wm. Galbraith $15,200 $134,425 20
Andrew H. Hines, Jr. $15,850 $208,075 22
Edith E. Holiday $15,850 $211,400 25
Betty P. Krahmer $15,850 $141,075 21
Gordon S. Macklin $15,850 $361,157 49
Fred R. Millsaps $16,422 $210,075 22
Constantine Dean
Tseretopoulos $17,222 $ 51,500 7
1. For the fiscal year ended December 31, 1998. During the period from January
1, 1998, through February 27, 1998, an annual retainer of $8,000 and fees at the
rate of $650 per board meeting attended were in effect.
2. For the calendar year ended December 31, 1998.
3. 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 54 registered investment companies, with approximately 163 U.S. based
funds or series.
Noninterested board members 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 Franklin Resources, Inc. may be deemed to receive indirect
remuneration by virtue of their participation, if any, in the fees paid to its
subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
- -------------------------------------------------------------------------------
MANAGER AND SERVICES PROVIDED The fund's manager is Templeton Asset
Management Ltd. - Hong Kong branch. The manager is a wholly owned subsidiary
of Franklin Resources, Inc. (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.
The manager provides investment research and portfolio management services, and
selects the securities for the fund to buy, hold or sell. The manager also
selects the brokers who execute the fund's portfolio transactions. The manager
provides periodic reports to the board, which reviews and supervises the
manager's investment activities. To protect the fund, the manager and its
officers, directors and employees are covered by fidelity insurance.
The Templeton organization has been investing globally since 1940. The manager
and its affiliates have offices in Argentina, Australia, Bahamas, Brazil, the
British Virgin Islands, Canada, China, Cyprus, France, Germany, Hong Kong,
India, Italy, Japan, Korea, Luxembourg, Mauritius, the Netherlands, Poland,
Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Turkey,
United Kingdom, and the U.S.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager 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 the manager on behalf of the fund. Similarly, with respect to the fund,
the manager is not obligated to recommend, buy or sell, or to refrain from
recommending, buying or selling any security that the manager and access
persons, as defined by applicable federal securities laws, may buy or sell for
its or their own account or for the accounts of any other fund. The manager is
not obligated to refrain from investing in securities held by the fund or other
funds it manages. Of course, any transactions for the accounts of the manager
and other access persons will be made in compliance with the fund's code of
ethics.
Under the fund's code of ethics, employees of the Franklin Templeton Group who
are access persons may 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.
MANAGEMENT FEES The fund pays the manager a monthly management fee equal to an
annual rate of 1.25% of its average daily net assets. The fee is computed
according to the terms of the management agreement. Each class of the fund's
shares pays its proportionate share of the fee.
For the last three fiscal years ended December 31, the fund paid the following
management fees:
MANAGEMENT
FEES PAID ($)
- ----------------------------------------------------------
1998 40,577,627
1997 57,060,597
1996 37,609,530
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the fund to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by Resources
and is an affiliate of the fund's manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The fund pays FT Services a monthly fee equal to an annual
rate of:
o 0.15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion; and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended December 31, the fund paid FT Services
the following administration fees:
ADMINISTRATION
FEES PAID ($)
- ----------------------------------------------------------
1998 3,009,659
1997 3,998,636
1996 2,831,572
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is the fund's shareholder servicing agent
and acts as the fund's transfer agent and dividend-paying agent. Investor
Services is located at 100 Fountain Parkway, St. Petersburg FL 33733-8030.
Please send all correspondence to Investor Services to P.O. Box 33030, St.
Petersburg, FL 33733-8030.
For its services, Investor Services receives a fixed fee per account. The fund
also will 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 will 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, NY 11245, and at the offices of its branches and agencies throughout
the world, acts as custodian of the fund's assets. As foreign custody manager,
the bank selects and monitors foreign sub-custodian banks, selects and evaluates
non-compulsory foreign depositories, and furnishes information relevant to the
selection of compulsory depositories.
AUDITOR McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, NY 10017, is the
fund's independent auditor. The auditor gives an opinion on the financial
statements included in the fund's Annual Report to Shareholders and reviews the
fund's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).
PORTFOLIO TRANSACTIONS
- -------------------------------------------------------------------------------
The manager 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, the manager 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 is negotiated between
the manager 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. The manager 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 the
manager, a better price and execution can otherwise be obtained. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager 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 the manager's overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to the manager 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 the manager in carrying out its investment advisory
responsibilities. These services may not always directly benefit the fund. They
must, however, be of value to the manager 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 the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services allows the manager 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, the manager 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, also may be considered a factor in the selection of broker-dealers to
execute the fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture 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 the manager 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 the manager 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 the
manager, 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 may improve execution and reduce transaction costs to the
fund.
During the last three fiscal years ended December 31, the fund paid the
following brokerage commissions:
BROKERAGE
COMMISSIONS ($)
- ----------------------------------------------------------------
1998 7,249,891
1997 15,736,940
1996 7,221,351
As of December 31, 1998, the fund did not own securities of its regular
broker-dealers.
DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
The fund calculates dividends and capital gains the same way for each class. The
amount of any income dividends per share will differ, however, generally due to
the difference in the distribution and service (Rule 12b-1) fees of each class.
The fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in the
form of dividends and interest on its investments. This income, less expenses
incurred in the operation of the fund, constitutes the fund's 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 from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in the fund. Any net capital gains realized by the fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate excise or income taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities 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 fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of the fund's total assets at the end
of the fiscal year are invested in securities of foreign corporations, the fund
may elect to pass-through to you your pro rata share of foreign taxes paid by
the fund. If this election is made, the year-end statement you receive from the
fund will show more taxable income than was actually distributed to you.
However, you will be entitled to either deduct your share of such taxes in
computing your taxable income or (subject to limitations) claim a foreign tax
credit for such taxes against your U.S. federal income tax. The fund will
provide you with the information necessary to complete your individual income
tax return if it makes this election.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held fund shares for a full year, the fund may designate and distribute 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.
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 Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As a regulated investment company,
the fund generally pays no federal income tax on the income and gains it
distributes to you. 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 shareholders. 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 earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires the fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year. The fund intends to declare and pay these amounts in
December (or in January that are treated by you as received in December) to
avoid these excise taxes, but can give no assurances that its distributions will
be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. If you redeem your fund
shares, or exchange your fund shares for shares of a different Franklin
Templeton Fund, the IRS will require that you report a gain or loss on your
redemption or exchange. 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 or
short-term, generally depending on how long you hold your shares. 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.
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 buy 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 buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in the fund, and then
reinvest the sales proceeds in the fund or in another Franklin Templeton Fund
within 90 days of buying the original shares, the sales charge that would
otherwise apply to your reinvestment may be reduced or eliminated. The IRS will
require you to report gain or loss on the redemption of your original shares in
the fund. In doing so, all or a portion of the sales charge that you paid for
your original shares in the fund will be excluded from your tax basis in the
shares sold (for the purpose of determining gain or loss upon the sale of such
shares). The portion of the sales charge excluded 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 Government National Mortgage Association or Federal
National Mortgage Association securities, bankers' acceptances, commercial paper
and repurchase agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. The rules on exclusion of this income
are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because the fund's income is
derived primarily from investments in foreign rather than domestic U.S.
securities, no portion of its distributions generally will be eligible for the
corporate dividends-received deduction. None of the dividends paid by the fund
for the most recent fiscal 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 may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the fund are
treated as ordinary income or capital gain, accelerate the recognition of income
to the fund and/or defer the fund's ability to recognize losses, and, in limited
cases, subject the fund to U.S. federal income tax on income from certain of its
foreign securities. In turn, these rules may affect the amount, timing or
character of the income distributed to you by the fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- -------------------------------------------------------------------------------
The fund is a diversified series of Templeton Developing Markets Trust, an
open-end management investment company, commonly called a mutual fund. The fund
was organized as a Massachusetts business trust on August 9, 1991, and is
registered with the SEC.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations. The
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 that you would incur financial loss on
account of shareholder liability is limited to the unlikely circumstance in
which both inadequate insurance exists and the fund itself is unable to meet its
obligations.
The fund currently offers four classes of shares, Class A, Class B, Class C and
Advisor Class. Before January 1, 1999, Class A shares were designated Class I
and Class C shares were designated Class II. The fund began offering Class B
shares on January 1, 1999. The fund may offer additional classes of shares in
the future. The full title of each class is:
o Templeton Developing Markets Trust - Class A
o Templeton Developing Markets Trust - Class B
o Templeton Developing Markets Trust - Class C
o Templeton Developing Markets Trust - Advisor Class
Shares of each class represent proportionate interests in the fund's assets. On
matters that affect the fund as a whole, each class has the same voting and
other rights and preferences as any other class. On matters that affect only one
class, only shareholders of that class may vote. Each class votes separately on
matters affecting only that class, or expressly required to be voted on
separately by state or federal law.
The fund has noncumulative voting rights. For board member elections, 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. The fund may hold
special meetings, however, for matters requiring shareholder approval. A meeting
may be called by the board to consider the removal of a board member if
requested in writing 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. A special meeting also
may be called by the board in its discretion.
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 of December 31, 1998, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each class.
The board members may own shares in other funds in the Franklin Templeton Group
of Funds.
BUYING AND SELLING SHARES
- -------------------------------------------------------------------------------
The fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial institutions that
sell shares of the fund may be required by state law to register as securities
dealers.
For investors outside the U.S., 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.
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.
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.
If you buy shares through the reinvestment of dividends, the shares 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.
INITIAL SALES CHARGES The maximum initial sales charge is 5.25% for Class A and
1% for Class C. There is no initial sales charge for Class B.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of the
lower sales charges for large purchases. The Franklin Templeton Funds include
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.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You also may combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you also may 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 (LOI). You may buy Class A shares at a reduced sales charge by
completing the letter of intent section of your account 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. By completing the letter of intent section of the application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
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 LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy Class A shares at the sales
charge applicable to the amount specified in your LOI. 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. Any Class A purchases you made within 90 days before you filed your
LOI also may qualify for a retroactive reduction in the sales charge. If you
file your LOI with the fund before a change in the fund's sales charge, you may
complete the LOI at the lower of the new sales charge or the sales charge in
effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days before
you filed your LOI will be counted towards the completion of the LOI, but they
will not be entitled to a retroactive reduction 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 LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of your
total purchases, less redemptions, is more than the amount specified in your LOI
and is an amount that would qualify for a further sales charge reduction, a
retroactive price adjustment will be made by Distributors and the securities
dealer through whom purchases were made. The price adjustment will be made on
purchases made within 90 days before and on those made after you filed your LOI
and will be applied towards the purchase of additional shares at the offering
price applicable to a single purchase or the dollar amount of the total
purchases.
If the amount of your total purchases, less redemptions, is less than the amount
specified in your LOI, the sales charge will be adjusted upward, depending on
the actual amount purchased (less redemptions) during the period. You will need
to send Distributors an amount equal to the difference in the actual dollar
amount of sales charge paid and the amount of sales charge that would have
applied to the total purchases if the total of the purchases had been made at
one time. Upon payment of this amount, 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, we will redeem an appropriate number of reserved shares to realize
the difference. If you redeem the total amount in your account before you
fulfill your LOI, we will deduct the additional sales charge due from the sale
proceeds and forward the balance to you.
For LOIs filed 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 LOI. These plans are not subject to the requirement to reserve 5% of
the total intended purchase or to the policy on upward adjustments in sales
charges described above, 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 LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class A
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, although any such plan that purchased the fund's Class A
shares at a reduced sales charge under the group purchase privilege before
February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be purchased
without an initial sales charge or contingent deferred sales charge (CDSC) by
investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same share class.
Certain exceptions apply, however, to Class C shareholders who chose to
reinvest their distributions in Class A 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 the fund's Class A
shares. This waiver category also applies to Class B and C shares.
o Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, 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.
o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or a
Franklin Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date the CD matures,
including any rollover, or the date you redeem your money fund shares.
o 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 CDSC when you redeemed your Class A shares from a Templeton Global
Strategy Fund, a new CDSC will apply to your purchase of fund shares and the
CDSC holding period will begin again. We will, however, credit your fund account
with additional shares based on the CDSC you previously 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.
o Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without an
initial sales charge or CDSC by various individuals and institutions due to
anticipated economies in sales efforts and expenses, including:
o 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.
o 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 fund shares without paying sales charges.
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.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer or
service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o 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
o Any investor who is currently a Class Z shareholder of Franklin Mutual
Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31,
1996, or who sold his or her shares of Mutual Series Class Z within the
past 365 days
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting distributions
from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under
"Retirement plans" below
In addition, Class C shares may be purchased without an initial sales charge by
any investor who buys Class C shares through an omnibus account with Merrill
Lynch Pierce Fenner & Smith, Inc. A CDSC may apply, however, if the shares are
sold within 18 months of purchase.
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without an initial sales charge.
Retirement plans that are not qualified retirement plans (employer sponsored
pension or profit-sharing plans that qualify under section 401 of the Internal
Revenue Code, including 401(k), money purchase pension, profit sharing and
defined benefit plans), SIMPLEs (savings incentive match plans for employees) or
SEPs (employer sponsored simplified employee pension plans established under
section 408(k) of the Internal Revenue Code) must also meet the group purchase
requirements described above to be able to buy Class A shares without an initial
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 CDSC 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.
Any retirement plan that does not meet the requirements to buy Class A shares
without an initial 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 initial
sales charge of 4% of the offering price, 3.2% of which will be retained by
securities dealers.
SALES IN TAIWAN. 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.
The fund's Class A shares 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 A
shares may be offered with the following schedule of sales charges:
SALES
SIZE OF PURCHASE - U.S. DOLLARS 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
DEALER COMPENSATION 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. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the dealer compensation table in the fund's
prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
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 A shares by certain retirement plans without an initial sales
charge: 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 rules of the National Association of Securities Dealers,
Inc.
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. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity discount
or letter of intent programs, a CDSC may apply on any shares you sell within 12
months of purchase. For Class C shares, a CDSC may apply if you sell your shares
within 18 months of purchase. The CDSC 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 A shares without an initial sales charge also may be
subject to a CDSC 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.
For Class B shares, there is a CDSC if you sell your shares within six years, as
described in the table below. The charge is based on the value of the shares
sold or the net asset value at the time of purchase, whichever is less.
IF YOU SELL YOUR CLASS B SHARES THIS % IS DEDUCTED
WITHIN THIS MANY YEARS AFTER FROM YOUR PROCEEDS
BUYING THEM AS A CDSC
- --------------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Account fees
o Sales of Class A shares purchased without an initial sales charge by
certain retirement plan accounts if (i) the account was opened before May1,
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
o Redemptions of Class A shares by investors who purchased $1 million or more
without an initial sales charge if the securities dealer of record waived
its commission in connection with the purchase
o Redemptions by the fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or
12%annually of your account's net asset value depending on the frequency of
your plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans or
employee benefit plans serviced by ValuSelect(R) (not applicable to Class
B)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy (for
Class B, this applies to all retirement plan accounts, not only IRAs)
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans (not applicable to Class B)
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares 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,
interest-bearing 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 seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh 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.
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. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by the fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day. 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 also may be
subject to a CDSC.
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.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. 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.
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 U.S. Securities and Exchange
Commission (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.
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.
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.
The wiring of redemption proceeds is a special service that we make available
whenever possible. 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
the prospectus.
Franklin Templeton Investor Services, Inc. (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 also may
charge a fee for their services directly to their clients.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. 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. 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. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
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.
PRICING SHARES
- -------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the net
asset value (NAV) per share plus any applicable sales charge, calculated to two
decimal places using standard rounding criteria. When you sell shares, you
receive the NAV minus any applicable CDSC.
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.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The fund does not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The fund values over-the-counter portfolio securities within
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the fund
values them according to the broadest and most representative market as
determined by the manager.
The fund values portfolio securities underlying actively traded call options at
their market price as determined above. The current market value of any option
the fund holds is its last sale price on the relevant exchange before the fund
values its assets. If there are no sales that day or if the last sale price is
outside the bid and ask prices, the fund values options within the range of the
current closing bid and ask prices if the fund believes the valuation fairly
reflects 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 fund's NAV is not calculated. Thus, the calculation of the fund's NAV
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 NAV
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 NAV.
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 use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
- -------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares. Distributors
is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
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.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the fund's shares, the net
underwriting discounts and commissions Distributors retained after allowances to
dealers, and the amounts Distributors received in connection with redemptions or
repurchases of shares for the last three fiscal years ended December 31:
AMOUNT
RECEIVED IN
TOTAL AMOUNT CONNECTION WITH
COMMISSIONS RETAINED BY REDEMPTIONS AND
RECEIVED ($) DISTRIBUTORS ($) REPURCHASES ($)
- ----------------------------------------------------------------------
1998 10,228,075 834,223 491,803
1997 25,189,600 2,257,338 293,215
1996 18,413,353 1,902,013 17,978
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Each class has a separate distribution or
"Rule 12b-1" plan. Under each plan, the fund shall pay or may 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.
The distribution and service (12b-1) fees charged to each class are based only
on the fees attributable to that particular class.
THE CLASS A PLAN. Payments by the fund under the Class A plan may not exceed
0.35% per year of Class A's average daily net assets, payable quarterly.
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.
THE CLASS B AND C PLANS. Under the Class B and C plans, the fund pays
Distributors up to 0.75% per year of the class's average daily net assets,
payable quarterly, to pay Distributors or others for providing distribution and
related services and bearing certain expenses. All distribution expenses over
this amount will be borne by those who have incurred them. The fund also may pay
a servicing fee of up to 0.25% per year of the class's average daily net assets,
payable quarterly. 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 expenses relating to each of the Class B and C plans also are used to pay
Distributors for advancing the commission costs to securities dealers with
respect to the initial sale of Class B and C shares. Further, the expenses
relating to the Class B plan may be used by Distributors to pay third party
financing entities that have provided financing to Distributors in connection
with advancing commission costs to securities dealers.
In addition to the payments that Distributors or others are entitled to under
each plan, each plan also provides that to the extent the fund, the manager or
Distributors or other parties on behalf of the fund, the manager or Distributors
make payments that are deemed to be for the financing of any activity primarily
intended to result in the sale of fund shares within the context of Rule 12b-1
under the Investment Company Act of 1940, as amended, then such payments shall
be deemed to have been made pursuant to the plan.
THE CLASS A, B AND C 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 National Association of Securities Dealers, Inc.
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 noninterested
members of the fund's board. The plans and any related agreement may be
terminated at any time, without penalty, by vote of a majority of the
noninterested 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 the manager or by
vote of a majority of the outstanding shares of the class. Distributors or any
dealer or other firm also may 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 noninterested board
members, 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, 1998, Distributors' eligible expenditures
for advertising, printing, and payments to underwriters and broker-dealers
pursuant to the plans and the amounts the fund paid Distributors under the plans
were:
DISTRIBUTOR'S
ELIGIBLE AMOUNT PAID
EXPENSES ($) BY THE FUND ($)
- --------------------------------------------------------------------
Class A 10,947,307 9,279,496
Class C 4,643,821 3,539,975
PERFORMANCE
- -------------------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
nonstandardized 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. Performance
figures reflect Rule 12b-1 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.
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 initial 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 initial sales
charge currently in effect.
When considering the average annual total return quotations, you should keep in
mind that the maximum initial 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 returns for the indicated periods ended December 31, 1998, were:
SINCE INCEPTION
1 YEAR 5 YEARS (10/17/91)
- ---------------------------------------------------------------------
Class A -23.39% -4.85% 2.95%
SINCE INCEPTION
1 YEAR (5/01/95)
- --------------------------------------------------------
Class C -20.80% -3.14%
The following SEC formula was used to calculate these figures:
n
P(1+T) = 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 initial 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 returns for the indicated periods
ended December 31, 1998, were:
SINCE
INCEPTION
1 YEAR 5 YEARS (10/17/91)
- ---------------------------------------------------------------------
Class A -23.39% -21.99% 23.28%
SINCE INCEPTION
1 YEAR (5/01/95)
- --------------------------------------------------------
Class C -20.80% -11.06%
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 also may quote the performance of shares
without a sales charge. Sales literature and advertising may quote a cumulative
total return, average annual total return and other measures of performance 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
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. Franklin Resources, Inc. 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 goal, advertisements and other materials about the fund
may discuss certain measures of fund performance as reported by various
financial publications. Materials also may 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 goals 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 the manager also may refer to the following
information:
o The manager's and its affiliates' market share of international equities
managed in mutual funds prepared or published by Strategic Insight or a
similar statistical organization.
o The performance of U.S. equity and debt markets relative to foreign markets
prepared or published by Morgan Stanley Capital International/registered
trademark/ or a similar financial organization.
o The capitalization of U.S. and foreign stock markets as prepared or
published by the International Finance Corporation, Morgan Stanley Capital
International/registered trademark/ or a similar financial organization.
o The geographic and industry distribution of the fund's portfolio and he
fund's top ten holdings.
o 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.
o 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).
o The major industries located in various jurisdictions as published by the
Morgan Stanley Index.
o Rankings by DALBAR Surveys, Inc. with respect to mutual fund shareholder
services.
o Allegorical stories illustrating the importance of persistent long-term
investing.
o The fund's portfolio turnover rate and its ranking relative to industry
standards as published by Lipper Analytical Services, Inc. or Morningstar,
Inc.
o 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.
o Comparison of the characteristics of various emerging markets, including
population, financial and economic conditions.
o Quotations from the Templeton organization's founder, Sir John Templeton,*
advocating the virtues of diversification and long-term investing.
*Sir John Templeton sold the Templeton organization to Franklin Resources, Inc.
in October 1992 and resigned from the board on April 16, 1995. He is no longer
involved with the investment management process.
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 also may compare the fund's performance to the
return on certificates of deposit (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 is one of the
oldest mutual fund organizations and now services more than 4 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 $216 billion in assets under management for approximately 7 million U.S.
based mutual fund shareholder and other accounts. The Franklin Templeton Group
of Funds offers 114 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 New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the fund are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has already
begun making necessary software changes to help the computer systems that
service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues to
seek reasonable assurances from all major hardware, software or data-services
suppliers that they will be Year 2000 compliant on a timely basis. Resources is
also beginning to develop a contingency plan, including identification of those
mission critical systems for which it is practical to develop a contingency
plan. However, in an operation as complex and geographically distributed as
Resources' business, the alternatives to use of normal systems, especially
mission critical systems, or supplies of electricity or long distance voice and
data lines are limited.
You will receive the fund's financial reports every six months. If you would
like to receive an interim report of the fund's portfolio holdings, please call
1-800/DIAL BEN(R).
DESCRIPTION OF RATINGS
- -------------------------------------------------------------------------------
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (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. These 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 that are speculative to a high
degree. These 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.
STANDARD & POOR'S CORPORATION (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 a 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 these bonds will likely have some quality and protective
characteristics, they 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 also may 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. The
relative degree of safety, however, 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.
