TEMPLETON GLOBAL INVESTMENT TRUST
TEMPLETON GROWTH AND INCOME FUND
TEMPLETON GLOBAL INFRASTRUCTURE FUND
TEMPLETON GREATER EUROPEAN FUND
TEMPLETON LATIN AMERICA FUND
TEMPLETON AMERICAS GOVERNMENT SECURITIES FUND
STATEMENT OF ADDITIONAL INFORMATION LOGO
AUGUST 1, 1998 FRANKLIN TEMPLETON
100 FOUNTAIN PARKWAY, P.O. BOX 33030
ST. PETERSBURG, FL 33733-8030 1-800/DIAL BEN(R)
TABLE OF CONTENTS
How Do the Funds Invest Their Assets?........................ 2
What Are the Risks of Investing in the Funds?................ 9
Investment Restrictions...................................... 13
Officers and Trustees........................................ 15
Investment Management
and Other Services.......................................... 21
How Do the Funds Buy
Securities for Their Portfolios?............................ 23
How Do I Buy, Sell and Exchange Shares?...................... 24
How Are Fund Shares Valued?.................................. 28
Additional Information on
Distributions and Taxes..................................... 29
The Funds' Underwriter....................................... 34
How Do the Funds Measure Performance?........................ 37
Miscellaneous Information.................................... 40
Financial Statements......................................... 42
Useful Terms and Definitions................................. 42
Appendix..................................................... 43
Description of Ratings...................................... 43
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and
Definitions."
Templeton Global Investment Trust (the "Trust") is an open-end management
investment company with five separate series. There are four diversified series:
Templeton Growth and Income Fund ("Growth and Income Fund"); Templeton Global
Infrastructure Fund ("Infrastructure Fund"); Templeton Greater European Fund
("Greater European Fund"); and Templeton Latin America Fund ("Latin America
Fund"). There is one non-diversified series: Templeton Americas Government
Securities Fund ("Americas Government Securities Fund").
Each fund may, separately or collectively, be referred to as the "fund" or
"funds," or individually by its name.
Each fund's Prospectus, dated August 1, 1998, which we may amend from time to
time, contains the basic information you should know before investing in the
fund. For a free copy, call 1-800/DIAL BEN.
This SAI describes each fund's (except Americas Government Securities Fund)
Class I and Class II shares. Americas Government Securities Fund offers one
class of shares. Greater European Fund and Latin America Fund currently offer
another share class with a different sales charge and expense structure, which
affects performance. To receive more information about the funds' other share
class, contact your investment representative or call 1-800/DIAL BEN.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE
FUNDS, AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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HOW DO THE FUNDS INVEST THEIR ASSETS?
WHAT ARE THE FUNDS' GOALS?
Growth and Income Fund's investment goal is high total return (a combination of
capital growth and income). The fund tries to achieve its investment goal by a
flexible policy of investing primarily in equity and debt securities of U.S. and
foreign companies.
Greater European Fund's investment goal is long-term capital appreciation. The
fund tries to achieve its investment goal by investing, under normal market
conditions, at least 75% of its total assets in equity securities of Greater
European companies as defined in the Prospectus.
Latin America Fund's investment goal is long-term capital appreciation. The fund
tries to achieve its investment goal by investing at least 65% of its total
assets in the equity and debt securities of Latin America issuers.
Americas Government Securities Fund's investment goal is to provide a high level
of current income, with total return as a secondary goal. The fund tries to
achieve its investment goal by investing, under normal market conditions, at
least 65% of its total assets in debt securities, issued or guaranteed by
Government Entities of Western Hemisphere countries (located in North, South and
Central America and the surrounding waters).
Infrastructure Fund's investment goal is long-term capital growth. The fund
tries to achieve its investment goal by a flexible policy of investing at least
65% of its total assets in the equity and debt securities of U.S. and foreign
companies that are principally engaged in or related to the development,
operation or rehabilitation of the physical and social infrastructures of any
nation. For purposes of the fund's investments, a company is "principally
engaged in or related to the development, operation or rehabilitation of
physical and social infrastructures" if at least 50% of its assets, gross income
or net profits are attributable to activities related to the following
industries, among others: communications; building materials; power generation;
public utilities; distribution networks; toll road operation/development;
steel/metals manufacturing; air/sea/land/rail transportation;
rail/aircraft/seacraft manufacturing and rehabilitation; port
ownership/operation; water utilities, including waste water treatment
facilities; industrial fabrication; bridge erection; heating/ventilation/air
conditioning manufacturing and installation; manufacturing/ operation of
pollution control equipment; operation of medical facilities; housing
development/construction; operation of broadcast media; and
manufacturing/operation/installation/maintenance of technology-related
infrastructures such as local/wide-arc network software and other essential
components in the movement of information. The definition would also include
companies providing construction materials/equipment, or
engineering/construction/contracting services, as well as companies providing
funding/expertise necessary for the completion of infrastructure projects.
The funds' goals are fundamental, which means that they may not be changed
without shareholder approval.
MORE INFORMATION ABOUT THE KINDS OF SECURITIES THE FUNDS BUY
The following gives more detailed information about the funds' investment
policies and the types of securities that they may buy. Please read this
information together with the section "How Does the Fund Invest Its Assets?" in
the respective fund's Prospectus.
EQUITY SECURITIES. The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner of
an equity security may participate in a company's success through the receipt of
dividends which are distributions of earnings by the company to its owners.
Equity security owners may also participate in a company's success or lack of
success through increases or decreases in the value of the company's shares as
traded in the public trading market for such shares. Equity securities generally
take the form of common stock or preferred stock. Preferred stockholders
typically receive greater dividends but may receive less appreciation than
common stockholders and may have greater voting rights as well. Equity
securities may also include convertible securities, warrants or rights.
Convertible securities typically are debt securities or preferred stocks which
are convertible into common stock after certain time periods or under certain
circumstances. Warrants or rights give the holder the right to purchase a common
stock at a given time for a specified price.
DEBT SECURITIES. A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes,
debentures and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
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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 a fund's Net Asset Value.
BRADY BONDS. U.S. dollar-denominated, collateralized Brady Bonds, which may be
fixed rate par bonds or floating rate discount bonds, are generally
collateralized in full as to principal by U.S. Treasury zero coupon bonds which
have the same maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized on a one-year or longer rolling-forward basis
by cash or securities in an amount that, in the case of fixed rate bonds, is
equal to at least one year of interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter. Certain Brady Bonds are entitled to "value recovery payments" in
certain circumstances, which in effect constitute supplemental interest
payments. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). There can be no
assurance that Brady Bonds in which the funds may invest will not be subject to
restructuring arrangements or to requests for new credit, which may cause a fund
to suffer a loss of interest or principal on any of its holdings.
Most Mexican Brady Bonds issued to date have principal repayments at final
maturity fully collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral denominated in other currencies) and interest coupon payments
collateralized on an 18-month rolling-forward basis by funds held in escrow by
an agent for the bondholders. A significant portion of Venezuelan Brady Bonds
and Argentine Brady Bonds issued to date have principal repayments at final
maturity collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral denominated in other currencies) and/or interest coupon payments
collateralized on a 14-month (for Venezuela) or 12-month (for Argentina)
rolling-forward basis by securities held by the Federal Reserve Bank of New York
as collateral agent.
INDEXED OR CURRENCY-LINKED SECURITIES. In selecting debt securities, Americas
Government Securities Fund may include indexed obligations. The fund will
purchase an indexed obligation using the currency in which it is denominated
and, at maturity, will receive interest and principal payments thereon in that
currency. The amount of principal payable by the issuer at maturity, however,
will vary (i.e., increase or decrease) in response to the change (if any) in the
exchange rate between the two specified currencies during the period from the
date the instrument is issued to its maturity date. The potential for realizing
gains as a result of changes in foreign currency exchange rates may enable the
fund to hedge the currency in which the obligation is denominated (or to effect
cross-hedges against other currencies) against a decline in the U.S. dollar
value of investments denominated in foreign currencies while generating interest
income on the obligation.
The fund may invest in securities denominated in or indexed to the currency of
one country in the Western Hemisphere although issued by a governmental entity,
corporation or financial institution of another such country. For example, the
fund may invest in a Mexican peso denominated obligation issued by a U.S.
corporation. Such investments involve credit risks associated with the issuer
and currency risks associated with the currency in which the obligation is
denominated.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The mortgage-backed securities in
which Americas Government Securities Fund may invest will primarily be
guaranteed by the Government National Mortgage Association ("GNMA") or issued by
the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC"). Certain of the asset-backed securities in which
the fund will invest may be guaranteed by the Small Business Administration
("SBA") or issued in programs originated by the Resolution Trust Corporation
("RTC"). GNMA, FNMA, FHLMC, SBA and RTC are agencies or instrumentalities of the
U.S.
Certain of the mortgage-backed and asset-backed securities in which the fund may
invest will be issued by private issuers. Private issuers include originators of
or investors in mortgage loans and receivables such as savings and loan
associations, mortgage bankers, commercial banks, investment banks, finance
companies and special purpose finance subsidiaries of any of the above.
Securities issued by private issuers may be subject to certain types of credit
enhancements issued in respect of those securities. Such credit enhancements may
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include insurance policies, bank letters of credit, guarantees by third parties
or protections afforded by the structure of a particular transaction (e.g., the
use of reserve funds, over-collateralization or the issuance of subordinated
securities as protection for more senior securities being purchased by the
fund). In purchasing securities for the fund, Investment Counsel will take into
account not only the creditworthiness of the issuer of the securities but also
the creditworthiness of the provider of any external credit enhancement of the
securities.
The fund may invest in pass-through mortgage-backed securities that represent
ownership interests in a pool of mortgages on single-family or multi-family
residences. Such securities represent interests in pools of residential mortgage
loans originated by U.S. governmental or private lenders and guaranteed, to the
extent provided in such securities, by the U.S. government, one of its agencies
or instrumentalities or by private guarantors. Such securities, which are
ownership interests in the underlying mortgage loans, differ from conventional
debt securities, which provide for periodic payment of interest in fixed amounts
(usually semiannually) and principal payments at maturity or on specified call
dates. Mortgage pass-through securities provide for monthly payments that
"pass-through" the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees paid to the guarantor of such securities and the servicer of the
underlying mortgage loans. The fund may also invest in collateralized mortgage
obligations ("CMOs") which are debt obligations collateralized by mortgage loans
or mortgage pass-through securities.
The yield characteristics of mortgage-backed and asset-backed securities differ
from traditional corporate debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other assets generally may be prepaid at any time. As a result, if the fund
purchases such a security at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity.
Conversely, if the fund purchases these securities at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
reduce, yield to maturity.
Prepayments on a pool of mortgage loans are influenced by a variety of economic,
geographic, social and other factors, including changes in mortgagors' housing
needs, job transfers, unemployment, mortgagors' net equity in the mortgaged
properties and servicing decisions. Generally, however, prepayments on fixed
rate mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by the fund are likely to be greater during a period
of declining interest rates and, as a result, likely to be reinvested at lower
interest rates than during a period of rising interest rates. Although
asset-backed securities generally are less likely to experience substantial
prepayments than are mortgage-backed securities, certain of the factors that
affect the rate of prepayments on mortgage-backed securities also affect the
rate of prepayments on asset-backed securities. However, during any particular
period, the predominant factors affecting prepayment rates on mortgage-backed
and asset-backed securities may be different. Mortgage-backed and asset-backed
securities may decrease in value as a result of increases in interest rates and
may benefit less than other fixed income securities from declining interest
rates because of the risk of prepayment.
The fund's yield will also be affected by the yields on instruments in which the
fund is able to reinvest the proceeds of payments and prepayments. Accelerated
prepayments on securities purchased by the fund at a premium also impose a risk
of loss of principal because the premium may not have been fully amortized at
the time the principal is repaid in full.
DERIVATIVE MORTGAGE-BACKED SECURITIES. Americas Government Securities Fund's
investments in derivative mortgage-backed securities will primarily consist of
some form of stripped mortgage-backed securities ("SMBS") that commonly involve
different classes of securities that receive disproportionate amounts of the
interest and principal distributions on a pool of mortgage assets. SMBSs are
typically issued by the same types of issuers as are mortgage- backed
securities. The structure of SMBSs, however, is different. A common variety of
SMBS involves a class (the principal-only or PO class) that receives some of the
interest and most of the principal from the underlying assets, while the other
class (the interest-only or IO class) receives most of the interest and the
remainder of the principal. In the most extreme case, the IO class receives only
interest, while the PO class receives only principal. The yield to maturity on
an IO class is extremely sensitive to the rate of principal payments (including
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prepayments) on the related underlying assets, and a rapid rate of principal
payments in excess of that considered in pricing the securities will have a
material adverse effect on an IO security's yield to maturity. If the underlying
mortgage assets experience greater than anticipated payments of principal, the
fund may fail to recoup fully its initial investment in IOs. In addition, there
are certain types of IOs which represent the interest portion of a particular
class as opposed to the interest portion of the entire pool. The sensitivity of
these types of IOs to interest rate fluctuations may be increased because of the
characteristics of the principal portion to which they relate. The impact of IOs
on the fund's portfolio may be offset to some degree by investments in
mortgage-backed securities and inverse floaters (floating rate securities the
interest rate of which is adjusted up or down inversely to changes in a
specified index). As interest rates fall, presenting a greater risk of
unanticipated prepayments of principal, the negative effect on the fund because
of its holdings of IOs should be diminished somewhat because of the increased
yield on the inverse floating rate CMOs or the increased appreciation on the
fixed rate securities. Under certain interest rate scenarios, the fund may
decide to retain investments in IOs or inverse floaters yielding less than
prevailing interest rates in order to avoid capital losses on the sale of such
investments.
The fund may also combine IOs and IO-related derivative mortgage products with
LIBOR-based inverse floaters (LIBOR being the London interbank offered rate). A
LIBOR-based inverse floater is a floating rate security the interest rate of
which is adjusted up or down inversely to changes in LIBOR; as LIBOR decreases,
the interest rate paid by the inverse floater would increase, and vice versa.
Depending on the amount of leverage built into the inverse floater, the yield
could vary in excess of the change in LIBOR because of the leverage built into
the inverse floater formula. The yield on an inverse floater varies inversely
with interest rates because as LIBOR decreases, the interest payable on the
inverse floater increases. The converse is true, of course, when LIBOR
increases. When an inverse floater is combined with an IO or IO-type derivative
product, the result is a synthetic security that tends to provide a somewhat
less volatile yield over a wide range of interest rate and prepayment rate
scenarios.
New types of mortgage-backed and asset-backed securities, derivative securities
and hedging instruments are developed and marketed from time to time. Consistent
with its investment objectives, policies and restrictions, the fund may, upon
disclosure to shareholders, invest in such new types of securities and
instruments that Investment Counsel believe may assist the fund in achieving its
investment objectives.
The staff of the SEC has taken the position (which has been adopted as an
investment policy of the fund) that the determination of whether a particular
U.S. government issued IO or PO that is backed by fixed-rate mortgages is liquid
may be made by Investment Counsel under guidelines and standards established by
the Board. Such a security may be deemed liquid if it can be disposed of
promptly in the ordinary course of business at a value reasonably close to that
used in the calculation of the fund's Net Asset Value per share. The SEC's staff
also has taken the position that all other IOs and POs are illiquid securities
which are subject to the fund's limitation on investments in illiquid
securities, as set forth under "Investment Restrictions."
REPURCHASE AGREEMENTS. Repurchase agreements are contracts under which the buyer
of a security simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Under a repurchase agreement, the seller is required
to maintain the value of the securities subject to the repurchase agreement at
not less than their repurchase price. The Investment Manager of each fund will
monitor the value of such securities daily to determine that the value equals or
exceeds the repurchase price. Repurchase agreements may involve risks in the
event of default or insolvency of the seller, including possible delays or
restrictions upon a fund's ability to dispose of the underlying securities. A
fund will enter into repurchase agreements only with parties who meet
creditworthiness standards approved by the Board, I.E., banks or broker-dealers
which have been determined by the fund's Investment Manager to present no
serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
ILLIQUID AND RESTRICTED SECURITIES. Each fund may invest up to 15% of its total
assets in illiquid securities, for which there is a limited trading market and
for which a low trading volume of a particular security may result in abrupt and
erratic price movements. A fund may be unable to dispose of its holdings in
illiquid securities at then-current market prices and may have to dispose of
such securities over extended periods of time. A fund may also invest in
securities that are sold (i) in private placement transactions between their
issuers and their purchasers and that are neither listed on an exchange nor
traded over-the-counter, or (ii) in transactions between qualified institutional
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buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. Such
restricted securities are subject to contractual or legal restrictions on
subsequent transfer. As a result of the absence of a public trading market, such
restricted securities may in turn be less liquid and more difficult to value
than publicly traded securities. Although these securities may be resold in
privately negotiated transactions, the prices realized from the sales could, due
to illiquidity, be less than those originally paid by a fund or less than their
fair value. In addition, issuers whose securities are not publicly traded may
not be subject to the disclosure and other investor protection requirements that
may be applicable if their securities were publicly traded. If any privately
placed or Rule 144A securities held by a fund are required to be registered
under the securities laws of one or more jurisdictions before being resold, a
fund may be required to bear the expenses of registration. Each fund will limit
its investment in restricted securities other than Rule 144A securities to 10%
of its total assets, and will limit its investment in all restricted securities,
including Rule 144A securities, to 15% of its total assets. Restricted
securities, other than Rule 144A securities determined by the Board to be
liquid, are considered to be illiquid and are subject to a fund's limitation on
investment in illiquid securities.
STRUCTURED INVESTMENTS. Included among the issuers of debt securities in which
each 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 flow 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 flow on
the underlying instruments. Because structured investments of the type in which
each fund anticipates investing typically involve no credit enhancement, their
credit risk will generally be equivalent to that of the underlying instruments.
Each 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 each 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 such fund's assets that may be used for borrowing activities.
Certain issuers of structured investments may be deemed to be "investment
companies" as defined in the 1940 Act. A fund's investment in these structured
investments may be limited by its investment restrictions. See "Investment
Restrictions" below. 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 a fund's restrictions on investments in illiquid securities.
CLOSED-END INVESTMENT COMPANIES. Greater European Fund and Latin America Fund
may invest in closed-end investment companies, except those for which its
Investment Manager serves as investment advisor or sponsor, which invest
principally in securities in which the fund is authorized to invest. Under the
1940 Act, each fund may invest a maximum of 10% of its total assets in the
securities of other investment companies and not more than 5% of the fund's
total assets in the securities of any one investment company, provided the
investment does not represent more than 3% of the voting stock of the acquired
investment company at the time such shares are purchased. To the extent a fund
invests in other investment companies, a fund's shareholders will incur certain
duplicative fees and expenses, including investment advisory fees. A fund's
investment in certain investment companies will result in special U.S. federal
income tax consequences described under "Additional Information on Distributions
and Taxes."
CONVERTIBLE SECURITIES. The funds may invest in convertible securities,
including convertible debt and convertible preferred stock. Convertible
securities are fixed-income securities which may be converted at a stated price
within a specific amount of time into a specified number of shares of common
stock. These securities are usually senior to common stock in a corporation's
capital structure, but usually are subordinated to non-convertible debt
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securities. In general, the value of a convertible security is the higher of its
investment value (its value as a fixed-income security) and its conversion value
(the value of the underlying shares of common stock if the security is
converted). The investment value of a convertible security generally increases
when interest rates decline and generally decreases when interest rates rise.
The conversion value of a convertible security is influenced by the value of the
underlying common stock.
FUTURES CONTRACTS. The funds may purchase and sell financial futures contracts.
Although some financial futures contracts call for making or taking delivery of
the underlying securities, in most cases these obligations are closed out before
the settlement date. The closing of a contractual obligation is accomplished by
purchasing or selling an identical offsetting futures contract. Other financial
futures contracts by their terms call for cash settlements.
Each fund may also buy and sell index futures contracts with respect to any
stock or bond 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
index futures contract specifies that no delivery of the actual securities
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 index at the expiration
of the contract.
At the time a 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 contract will be deposited in a segregated account with the
fund's custodian. When writing a futures contract, a 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, a fund may "cover" its
position by owning the instruments underlying the contract or, in the case of an
index futures contract, owning 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, INDICES AND FUTURES. The funds may write covered put and
call options and purchase put and call options on securities, securities indices
and futures contracts that are traded on U.S. and foreign exchanges and
over-the-counter.
An option on a security or a futures contract is a contract that gives the
purchaser of the option, in return for the premium paid, the right to buy a
specified security or futures contract (in the case of a call option) or to sell
a specified security or futures contract (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.
Each fund may write a call or put option only if the option is "covered." A call
option on a security or futures contract written by a fund is "covered" if the
fund owns the underlying security or futures contract 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 or futures contract is also covered if a
fund holds a call on the same security or futures contract and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) 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 or futures
contract written by a 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 or futures
contract 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.
A fund will cover call options on securities indices that it writes by owning
securities whose price changes, in the opinion of the Investment Manager, are
expected to be similar to those of the index, or in such other manner as may be
in accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations. Nevertheless, where a fund covers a call option
on a securities index through ownership of securities, such securities may not
match the composition of the index. In that event, a fund will not be fully
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covered and could be subject to risk of loss in the event of adverse changes in
the value of the index. A fund will cover put options on securities 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.
A fund will receive a premium from writing a put or call option, which increases
its gross income in the event the option expires unexercised or is closed out at
a profit. If the value of a security, index or futures contract on which a 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, index or futures contract
rises, however, a fund will realize a loss in its call option position, which
will reduce the benefit of any unrealized appreciation in its investments. By
writing a put option, a fund assumes the risk of a decline in the underlying
security, index or futures contract. To the extent that the price changes of the
portfolio securities being hedged correlate with changes in the value of the
underlying security, index or futures contract, writing covered put options will
increase a 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.
Each fund may also purchase put options to hedge its investments against a
decline in value. By purchasing a put option, a 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 a 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
accuracy of the correlation between the changes in value of the underlying
security, index or futures contract and the changes in value of a fund's
security holdings being hedged.
A fund may purchase call options on individual securities or futures contracts
to hedge against an increase in the price of securities or futures contracts
that it anticipates purchasing in the future. Similarly, a 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, a fund will bear the risk of losing
all or a portion of the premium paid if the value of the underlying security,
index or futures contract does not rise.
There can be no assurance that a liquid market will exist when a 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 a fund may be
able to offset to some extent any adverse effects of being unable to liquidate
an option position, it may experience losses in some cases as a result of such
inability. The value of over-the-counter options purchased by a fund, as well as
the cover for options written by a fund, are considered not readily marketable
and are subject to each fund's limitation on investments in securities that are
not readily marketable. See "Investment Restrictions."
FOREIGN CURRENCY HEDGING TRANSACTIONS. In order to hedge against foreign
currency exchange rate risks, the funds may enter into forward foreign currency
exchange contracts and foreign currency futures contracts, as well as purchase
put or call options on foreign currencies, as described below. Each 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.
A fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to minimize the risk to the fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. A 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 a 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 its portfolio
securities denominated in such foreign currency. This second investment practice
is generally referred to as "cross-hedging." Because in connection with a fund's
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forward foreign currency transactions, an amount of its assets equal to the
amount of the purchase will be held aside or segregated to be used to pay for
the commitment, a fund will always have cash, cash equivalents or high quality
debt securities available in an amount sufficient to cover any commitments under
these contracts or to limit any potential risk. The segregated account 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 funds'
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 a fund
than if it had not engaged in such contracts.
A 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 a 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 its position, a fund may forfeit the entire amount of the premium
plus related transaction costs. Options on foreign currencies to be written or
purchased by a fund will be traded on U.S. and foreign exchanges or
over-the-counter.
A 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 a
fund's portfolio securities or adversely affect the prices of securities that a
fund intends to purchase at a later date. The successful use of foreign currency
futures will usually depend on the ability of the Investment Manager to forecast
currency exchange rate movements correctly. Should exchange rates move in an
unexpected manner, a fund may not achieve the anticipated benefits of foreign
currency futures or may realize losses.
WHAT ARE THE RISKS OF INVESTING IN THE FUNDS?
FOREIGN SECURITIES. Each fund has the right to purchase securities in any
foreign country, developed or developing. 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. Most
foreign companies are not generally subject to uniform accounting and financial
reporting standards, and auditing practices and requirements may not be
comparable to those applicable to U.S. companies. Each fund, therefore, may
encounter difficulty in obtaining market quotations for purposes of valuing its
portfolio and calculating its Net Asset Value. Foreign markets have
substantially less volume than the NYSE and securities of some foreign companies
are less liquid and more volatile than securities of comparable U.S. companies.
Commission rates in foreign countries, which are generally fixed rather than
subject to negotiation as in the U.S., are likely to be higher. In many foreign
countries there is less government supervision and regulation of stock
exchanges, brokers and listed companies than in the U.S.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict a
fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the absence,
until recently in certain Eastern European countries, of a capital market
structure or market-oriented economy; and (vii) the possibility that recent
favorable economic developments in Eastern Europe may be slowed or reversed by
unanticipated political or social events in such countries.
Investments in Eastern European countries may involve risks of nationalization,
expropriation and confiscatory taxation. The communist governments of a number
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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, a fund could lose a substantial portion of any investments
it has made in the affected countries.
Certain Eastern European countries, which do not have market economies, are
characterized by an absence of developed legal structures governing private and
foreign investments and private property. Certain countries require governmental
approval prior to investments by foreign persons, or limit the amount of
investment by foreign persons in a particular company, or limit the investment
of foreign persons to only a specific class of securities of a company that may
have less advantageous terms than securities of the company available for
purchase by nationals. Although in most Eastern European countries the local
currencies have been allowed to fluctuate according to their market value,
various foreign exchange restrictions remain in effect, limiting the ability of
foreign investors to repatriate their profits. The conversion rates for certain
Eastern European currencies may be artificial to the actual market values of the
currencies and may be adverse to fund shareholders. Further, accounting
standards which exist in Eastern European countries may differ from U.S.
standards.
Governments in certain Eastern European countries may require that a
governmental or quasi-governmental authority act as custodian of a fund's assets
invested in such country. To the extent such governmental or quasi-governmental
authorities do not satisfy the requirements of the 1940 Act to act as foreign
custodians of a fund's cash and securities, the fund's investment in such
countries may be limited or may be required to be effected through
intermediaries. The risk of loss through governmental confiscation may be
increased in such countries.
Investing in Russian companies involves a high degree of risk and special
considerations not typically associated with investing in the U.S. securities
markets, and should be considered highly speculative. Such risks include,
together with Russia's continuing political and economic instability and the
slow-paced development of its market economy, the following: (a) delays in
settling portfolio transactions and risk of loss arising out of Russia's system
of share registration and custody; (b) the risk that it may be impossible or
more difficult than in other countries to obtain and/or enforce a judgment; (c)
pervasiveness of corruption, insider trading, and crime in the Russian economic
system; (d) currency exchange rate volatility and the lack of available currency
hedging instruments; (e) higher rates of inflation (including the risk of social
unrest associated with periods of hyper-inflation); (f) controls on foreign
investment and local practices disfavoring foreign investors and limitations on
repatriation of invested capital, profits and dividends, and on a 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 a 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.
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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 a fund to lose its registration
through fraud, negligence or even mere oversight. While each 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 a 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 a fund from
investing in the securities of certain Russian companies deemed suitable by its
Investment Manager. Further, this also could cause a delay in the sale of
Russian company securities by a fund if a potential purchaser is deemed
unsuitable, which may expose the fund to potential loss on the investment.
Each fund's management endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread in currency exchange (to
cover service charges) will be incurred, particularly when a 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 a fund from
transferring cash out of the country or 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 taxes 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, economic
or social instability, or diplomatic developments which could affect investments
in securities of issuers in foreign nations.
Investing in Latin American issuers involves a high degree of risk and special
considerations not typically associated with investing in the U.S. and other
more developed securities markets, and should be considered highly speculative.
Such risks include: (i) restrictions or controls on foreign investment and
limitations on repatriation of invested capital and Latin America Fund's ability
to exchange local currencies for U.S. dollars; (ii) higher and sometimes
volatile rates of inflation (including the risk of social unrest associated with
periods of hyper-inflation); (iii) the risk that certain Latin American
countries, which are among the largest debtors to commercial banks and foreign
governments and which have experienced difficulty in servicing sovereign debt
obligations in the past, may negotiate to restructure sovereign debt
obligations; (iv) the risk that it may be impossible or more difficult than in
other countries to obtain and/or enforce a judgment; (v) currency exchange rate
fluctuations and the lack of available currency hedging instruments; (vi) more
substantial government involvement in and control over the local economies; and
(vii) dependency on exports and the corresponding importance of international
trade.
Latin American countries may be subject to a greater degree of economic,
political, and social instability than is the case in the U.S., Japan, or
Western European countries. Such instability may result from, among other
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things, the following: (i) authoritarian governments or military involvement in
political and economic decision-making, including changes in governmental
control through extra-constitutional means; (ii) popular unrest associated with
demands for improved political, economic, and social conditions; (iii) internal
insurgencies and terrorist activities; (iv) hostile relations with neighboring
countries; (v) ethnic, religious and racial disaffection; and (vi) drug
trafficking.
The funds 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 funds 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 funds' portfolio securities are
denominated may have a detrimental impact on the funds. Through the flexible
policy of the funds, the Investment Managers endeavor to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where from time to time they place the funds' investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove profitable
and others may not. No assurance can be given that profits, if any, will exceed
losses.
The Board considers at least annually the likelihood of the imposition by any
foreign government of exchange control restrictions which would affect the
liquidity of the funds' assets maintained with custodians in foreign countries,
as well as the degree of risk from political acts of foreign governments to
which such assets may be exposed. The Board also considers the degree of risk
involved through the holding of portfolio securities in domestic and foreign
securities depositories (see "Investment Management and Other Services").
However, in the absence of willful misfeasance, bad faith or gross negligence on
the part of an Investment Manager, any losses resulting from the holding of
portfolio securities in foreign countries and/or with securities depositories
will be at the risk of the shareholders. No assurance can be given that the
Board's appraisal of the risks will always be correct or that such exchange
control restrictions or political acts of foreign governments will not occur.
LOW-RATED SECURITIES. Bonds which are rated Baa by Moody's are considered as
medium grade obligations, I.E., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well. 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 BBB by S&P are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories. Bonds rated D by S&P are
the lowest rated class of bonds, and generally are in payment default. The D
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
Although they may offer higher yields than do higher rated securities,
high-risk, low rated debt securities (commonly referred to as "junk bonds") 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 a 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 a 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,
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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 a 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, a fund may incur additional expenses seeking
recovery.
A fund may accrue and report interest income on high yield bonds, such as zero
coupon bonds or pay-in-kind securities, even though it receives no cash interest
until the security's maturity or payment date. In order to qualify for
beneficial tax treatment afforded regulated investment companies, and to
generally be relieved of federal tax liabilities, a fund must distribute all of
its net income and gains to shareholders (see "Additional Information on
Distributions and Taxes") generally on an annual basis. A fund may have to
dispose of portfolio securities under disadvantageous circumstances to generate
cash or leverage itself by borrowing cash in order to satisfy the distribution
requirement.
DERIVATIVE SECURITIES. A 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 funds intend 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 futures and options for hedging may involve risks
because of imperfect correlations between movements in the prices of the futures
or options and movements in the prices of the securities being hedged.
Successful use of futures and related options by a fund for hedging purposes
also depends upon an Investment Manager's ability to predict correctly movements
in the direction of the market, as to which no assurance can be given.
There are several risks associated with transactions in options on securities
indices. For example, there are significant differences between the securities
and options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. A decision
as to whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events. There can be no
assurance that a liquid market will exist when a fund seeks to close out an
option position. If a fund were unable to close out an option that it had
purchased on a securities index, it would have to exercise the option in order
to realize any profit or the option may expire worthless. If trading were
suspended in an option purchased by the fund, it would not be able to close out
the option. If restrictions on exercise were imposed, a fund might be unable to
exercise an option it has purchased. Except to the extent that a call option on
an index written by a fund is covered by an option on the same index purchased
by the fund, movements in the index may result in a loss to the fund; however,
such losses may be mitigated by changes in the value of the fund's securities
during the period the option was outstanding.
INVESTMENT RESTRICTIONS
The funds have adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of a fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the fund or (ii) 67%
or more of the shares of the fund present at a shareholder meeting if more than
50% of the outstanding shares of the fund are represented at the meeting in
person or by proxy, whichever is less. Each fund MAY NOT:
1. Invest in real estate or mortgages on real estate (although the funds may
invest in marketable securities secured by real estate or interests
therein); invest in other open-end investment companies (except in
connection with a merger, consolidation, acquisition or reorganization);
invest in interests (other than publicly issued debentures or equity
stock interests) in oil, gas or other mineral exploration or development
13
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programs; or purchase or sell commodity contracts (except futures
contracts as described in each fund's Prospectus).
2. Purchase any security (other than obligations of the U.S. government, its
agencies or instrumentalities) if, as a result, as to 75% of a fund's
total assets (a) more than 5% of the fund's total assets would then be
invested in securities of any single issuer, or (b) the fund would then
own more than 10% of the voting securities of any single issuer;
provided, however, that this restriction does not apply to Americas
Government Securities Fund.
3. Act as an underwriter; issue senior securities except as set forth in
investment restriction 6 below; or purchase on margin or sell short,
except that each fund may make margin payments in connection with
futures, options and currency transactions.
4. Loan money, except that a fund may (a) purchase a portion of an issue of
publicly distributed bonds, debentures, notes and other evidences of
indebtedness, (b) enter into repurchase agreements and (c) lend its
portfolio securities.
5. Borrow money, except that a fund may borrow money from banks in an amount
not exceeding 33 1/3% of the value of its total assets (including the
amount borrowed).
6. Mortgage, pledge or hypothecate its assets (except as may be necessary in
connection with permitted borrowings); provided, however, this does not
prohibit escrow, collateral or margin arrangements in connection with its
use of options, futures contracts and options on future contracts.
7. Invest more than 25% of its total assets in a single industry.
8. Participate on a joint or a joint and several basis in any trading
account in securities. (See "How Do the Funds Buy Securities for Their
Portfolios?" as to transactions in the same securities for the funds,
other clients and/or other mutual funds within the Franklin Templeton
Group of Funds.)
If a 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 2 or 7 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.
ADDITIONAL RESTRICTIONS. The funds have adopted the following additional
restrictions which are not fundamental and which may be changed without
shareholder approval, to the extent permitted by applicable law, regulation or
regulatory policy. Under these restrictions, each fund MAY NOT:
1. Purchase or retain securities of any company in which Trustees or
officers of the Trust or of a fund's Investment Manager, individually
owning more than 1/2 of 1% of the securities of such company, in the
aggregate own more than 5% of the securities of such company.
2. Invest more than 5% of the value of its total assets in securities of
issuers which have been in continuous operation less than three years.
3. Invest more than 5% of its net assets in warrants whether or not listed
on the NYSE or the American Stock Exchange, and more than 2% of its net
assets in warrants that are not listed on those exchanges. Warrants
acquired in units or attached to securities are not included in this
restriction.
4. Purchase or sell real estate limited partnership interests.
5. Purchase or sell interests in oil, gas and mineral leases (other than
securities of companies that invest in or sponsor such programs).
6. Invest for the purpose of exercising control over management of any
company.
7. Purchase more than 10% of a company's outstanding voting securities.
8. Invest more than 15% of the fund's total assets in securities that are
not readily marketable (including repurchase agreements maturing in more
than seven days and over-the-counter options purchased by the fund),
including no more than 10% of its total assets in restricted securities.
Rule 144A securities are not subject to the 10% limitation on restricted
securities, although each fund will limit its investment in all
restricted securities, including Rule 144A securities, to 15% of its
total assets.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by a fund, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. In this case, the fund
intends to dispose of the investment as soon as practicable while maximizing the
return to shareholders.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
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OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Trust,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Trust who are responsible for
administering the Trust's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of the Trust under the 1940 Act are indicated by an asterisk (*).
<TABLE>
<CAPTION>
POSITIONS AND
OFFICES WITH
NAME, ADDRESS AND AGE THEC TRUST PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS
<S> <C> <C>
HARRIS J. ASHTON Trustee Director, RBC Holdings, Inc. (a bank holding
191 Clapboard Ridge company) and Bar-S Foods (a meat packing
Greenwich, Connecticut 06830 company); director or trustee, as the case may
Age 66 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 Trustee Chairman, Templeton Emerging Markets Investment
The Bullitt House Trust PLC, Templeton Latin America Investment
102 East Dover Street Trust PLC, Darby Overseas Investments, Ltd. and
Easton, Maryland 21601 Darby Emerging Markets Investments LDC
Age 68 (investment firms) (1994-present); Chairman and
Director, Templeton Central and Eastern European
Investment Company; Director, Templeton Global
Strategy Funds, Amerada Hess Corporation (crude
oil and natural gas refining), Christiana Companies
(operating and investment companies), and H.J.
Heinz Company (packaged 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) prior to 1988.
</TABLE>
15
PAGE
<TABLE>
<CAPTION>
Positions and
Offices with
Name, Address and Age the Trust Principal Occupation During the Past Five Years
<S> <C> <C>
*MARTIN L. FLANAGAN Trustee and Vice Senior Vice President and Chief Financial
777 Mariners Island Blvd. President Officer, Franklin Resources, Inc.; Executive
San Mateo, California 94404 Vice President and Director, Templeton
Age 38 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,
Inc. and Franklin Investment Advisory Services,
Inc.; President and Director, Franklin Templeton
Services, Inc.; Senior Vice President and Chief
Financial Officer, Franklin/Templeton Investor
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.
S. JOSEPH FORTUNATO Trustee Member of the law firm of Pitney, Hardin, Kipp &
Park Avenue at Morris County Szuch; director or trustee, as the case may be,
P.O. Box 1945 of 51 of the investment companies in the
Morristown, NJ 07962-1945 Franklin Templeton Group of Funds; and FORMERLY,
Age 66 Director, General Host Corporation (nursery and
craft centers).
JOHN Wm. GALBRAITH Trustee President, Galbraith Properties, Inc. (personal
360 Central Avenue investment company); Director, Gulf West Banks,
Suite 1300 Inc. (bank holding company) (1995-present);
St. Petersburg, Florida 33701 director or trustee, as the case may be, of 20
Age 76 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. Trustee Consultant for the Triangle Consulting Group;
150 Second Avenue N. Executive-in-Residence of Eckerd College
St. Petersburg, Florida 33701 (1991-present); director or trustee, as the case
Age 75 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.
</TABLE>
16
PAGE
<TABLE>
<CAPTION>
Positions and
Offices with
Name, Address and Age the Trust Principal Occupation During the Past Five Years
<S> <C> <C>
EDITH E. HOLIDAY Trustee Director, Amerada Hess Corporation (crude oil
3239 38th Street, N.W. and natural gas refining) (1993-present),
Washington, DC 20016 Hercules Incorporated (chemicals, fibers and
Age 46 resins) (1993-present), Beverly Enterprises,
Inc. (health care) (1995-present) and H.J.
Heinz Company (packaged 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 Chairman of President, Chief Executive Officer and Director,
777 Mariners Island Blvd. the Board and Vice Franklin Resources, Inc.; Chairman of the Board
San Mateo, California 94404 President and Director, Franklin Advisers, Inc., Franklin
Age 65 Advisory Services, 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; and FORMERLY,
Director, General Host Corporation (nursery and
craft centers).
BETTY P. KRAHMER Trustee Director or trustee of various civic
2201 Kentmere Parkway associations; director or trustee, as the case
Wilmington, Delaware 19806 may be, of 21 of the investment companies in the
Age 69 Franklin Templeton Group of Funds; and FORMERLY,
Economic Analyst, U.S. government.
GORDON S. MACKLIN Trustee Director, Fund American Enterprises Holdings,
8212 Burning Tree Road Inc., MCI Communications Corporation, MedImmune,
Bethesda, Maryland 20817 Inc. (biotechnology), Spacehab, Inc. (aerospace
Age 70 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.
</TABLE>
17
PAGE
<TABLE>
<CAPTION>
Positions and
Offices with the
Name, Address and Age the Trust Principal Occupation During the Past Five Years
<S> <C> <C>
FRED R. MILLSAPS Trustee Manager of personal investments (1978-present);
2665 N.E. 37th Drive director of various business and nonprofit
Fort Lauderdale, Florida 33308 organizations; director or trustee, as the case
Age 69 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).
MARK G. HOLOWESKO President President and Chief Investment Officer,
Lyford Cay Templeton Global Advisors Limited; Executive
Nassau, Bahamas Vice President and Director, Templeton
Age 38 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. Vice President Executive Vice President and Director, Franklin
777 Mariners Island Blvd. Resources, Inc. and Franklin Templeton
San Mateo, California 94404 Distributors, Inc.; President and Director,
Age 57 Franklin Advisers, Inc.; Senior Vice President
and Director, Franklin Advisory Services, Inc.
and Franklin Investment Advisory Services, Inc.;
Director, Franklin/Templeton Investor Services,
Inc.; and officer and/or director or trustee, as
the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin
Templeton Group of Funds.
HARMON E. BURNS Vice President Executive Vice President and Director, Franklin
777 Mariners Island Blvd. Resources, Inc., Franklin Templeton
San Mateo, California 94404 Distributors, Inc. and Franklin Templeton
Age 53 Services, Inc.; Executive Vice President,
Franklin Advisers, Inc.; Director,
Franklin/Templeton Investor Services, Inc.; and
officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 53 of the
investment companies in the Franklin
Templeton Group of Funds.
CHARLES E. JOHNSON Vice President Senior Vice President and Director, Franklin
500 East Broward Blvd. Resources, Inc.; Senior Vice President, Franklin
Fort Lauderdale, Florida 33394-3091 Templeton Distributors, Inc.; President and
Age 42 Director, Templeton Worldwide, Inc.; President,
Chief Executive Officer, Chief Investment
Officer and Director, Franklin Institutional
Services Corporation; Chairman and Director,
Templeton Investment Counsel, Inc.; Vice
President, Franklin Advisers, Inc.; officer
and/or director of some of the subsidiaries
of Franklin Resources, Inc.; and officer
and/or director or trustee, as the case may
be, of 34 of the investment companies in
the Franklin Templeton Group of
Funds.
</TABLE>
18
PAGE
<TABLE>
<CAPTION>
Positions and
Offices with
Name, Address and Age the Trust Principal Occupation During the Past Five Years
<S> <C> <C>
DEBORAH R. GATZEK Vice President Senior Vice President and General Counsel,
777 Mariners Island Blvd. Franklin Resources, Inc.; Senior Vice President,
San Mateo, California 94404 Franklin Templeton Services, Inc. and Franklin
Age 49 Templeton Distributors, Inc.; Executive Vice
President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.;
Vice President, Chief Legal Officer and Chief
Operating Officer, Franklin Investment Advisory
Services, Inc.; and officer of 53 of the
investment companies in the Franklin Templeton
Group of Funds.
SAMUEL J. FORESTER, JR. Vice President Vice President of 10 of the investment companies
500 East Broward Blvd in the Franklin Templeton Group of Funds; and
Fort Lauderdale, Florida 33394-3091 FORMERLY, President, Templeton Global Bond
Age 50 Managers, a division of Templeton Investment
Counsel, Inc.; Founder and Partner, Forester,
Hairston Investment Management, Inc.
(1989-1990), Managing Director (Mid-East
Region), Merrill Lynch, Pierce, Fenner & Smith
Inc. (1987-1988) and Advisor for Saudi Arabian
Monetary Agency (1982-1987).
JOHN R. KAY Vice President Vice President and Treasurer, Templeton
500 East Broward Blvd Worldwide, Inc.; Assistant Vice President,
Fort Lauderdale, Florida 33394-3091 Franklin Templeton Distributors, Inc.; officer
Age 58 of 25 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY,
Vice President and Controller, Keystone Group,
Inc.
GARY R. CLEMONS Vice President Senior Vice President, Templeton Investment
500 East Broward Blvd. Counsel, Inc.; and FORMERLY, Research Analyst
Fort Lauderdale, Florida 33394-3091 for Templeton Quantitative Advisors, Inc.
Age 41
DOUGLAS R. LEMPEREUR Vice President Managing Director, Global Corporate Development,
500 East Broward Blvd. Templeton Worldwide, Inc. and officer of 3 of
Fort Lauderdale, Florida 33394-3091 the investment companies in the Franklin
Age 49 Templeton Group of Funds; and FORMERLY, Senior
Vice President, Templeton Global Bond Managers, a
division of Templeton Investment Counsel, Inc.,
Vice President and Assistant Director of Research,
Colonial Management Associates (1985-1988), Vice
President and Director, Standish, Ayer & Wood
(investment management firm) (1977-1985),and
Securities Analyst, The First National Bank
of Chicago (1974-1977).
</TABLE>
19
PAGE
<TABLE>
<CAPTION>
Positions and
Offices with
Name, Address and Age the Trust Principal Occupation During the Past Five Years
<S> <C> <C>
NEIL S. DEVLIN Vice President Executive Vice President and Chief Investment
500 East Broward Blvd. Officer, Templeton Global Bond Managers, a
Fort Lauderdale, Florida 33394-3091 division of Templeton Investment Counsel, Inc.;
Age 41 officer of 4 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY,
Portfolio Manager and Bond Analyst, Constitution
Capital Management (1985-1987), and Bond Trader
and Research Analyst, Bank of New England
(1982-1985).
ELIZABETH M. KNOBLOCK Vice President- General Counsel, Secretary and Senior Vice
500 East Broward Blvd. Compliance President, Templeton Investment Counsel, Inc.;
Fort Lauderdale, Florida 33394-3091 Senior Vice President, Templeton Global
Age 43 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 of the Division
of Investment Management, U.S. Securities and
Exchange Commission (1984-1986).
JAMES R. BAIO Treasurer Certified Public Accountant; Treasurer, Franklin
500 East Broward Blvd. Mutual Advisers, Inc.; Senior Vice President,
Fort Lauderdale, Florida 33394-3091 Templeton Worldwide, Inc., Templeton Global
Age 44 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).
BARBARA J. GREEN Secretary Senior Vice President, Templeton Worldwide, Inc.
500 East Broward Blvd. and Templeton Global Investors, Inc.; officer of
Fort Lauderdale, Florida 33394-3091 21 of the investment companies in the Franklin
Age 50 Templeton Group of Funds; and FORMERLY, Deputy
Director of the 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).
</TABLE>
*Mr. Brady's status as an interested person results from his business
affiliations with Resources and Global Advisors. Mr. Brady and Resources are
both limited partners of Darby Overseas Partners, L.P. ("Darby Overseas"). In
addition, Darby Overseas and Global Advisors are limited partners of Darby
Emerging Markets Fund, L.P.
The table above shows the officers and Board members who are affiliated with
Distributors and the Investment Managers. Nonaffiliated members of the Board and
Mr. Brady are currently paid an annual retainer and/or fees for attendance at
Board and committee meetings. Currently, the Trust pays the nonaffiliated Board
members and Mr. Brady an annual retainer of $2,000 and a fee of $100 per Board
meeting attended. Members of the Board serving on the audit committee of the
Trust and other investment companies in the Franklin Templeton Group of Funds
receive a flat fee of $2,000 per meeting attended, a portion of which is
allocated to the funds. Members of the nominating and compensation committee are
not compensated for any committee meeting that is held in conjunction with a
20
PAGE
Board meeting. As shown above, the nonaffiliated Board members also serve as
directors or trustees of other investment companies in the Franklin Templeton
Group of Funds. They may receive fees from these funds for their services. The
fees payable to nonaffiliated Board members and Mr. Brady by the Trust are
subject to reductions resulting from fee caps limiting the amount of fees
payable to Board members who serve on other boards within the Franklin Templeton
Group of Funds. The following table provides the total fees paid to
nonaffiliated Board members and Mr. Brady by the Trust and by other funds in the
Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
NUMBER OF BOARDS IN THE
TOTAL FEES TOTAL FEES RECEIVED FROM FRANKLIN TEMPLETON GROUP
RECEIVED FROM THE FRANKLIN TEMPLETON OF FUNDS ON
NAME THE TRUST* GROUP OF FUNDS** WHICH EACH SERVES***
<S> <C> <C> <C>
Harris J. Ashton $1,400 $344,642 49
Nicholas F. Brady 1,400 119,675 21
S. Joseph Fortunato 1,400 361,562 51
John Wm. Galbraith 1,446 117,675 20
Andrew H. Hines, Jr. 1,546 144,175 22
Edith E. Holiday 1,400 72,875 25
Betty P. Krahmer 1,400 119,675 21
Gordon S. Macklin 1,400 337,292 49
Fred R. Millsaps 1,546 144,175 22
<FN>
*For the fiscal year ended March 31, 1998, during which time fees at the rate of
an annual retainer of $1,000 plus $100 per meeting attended were in effect.
**For the calendar year ended December 31, 1997.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 54 registered investment companies, with approximately 170 U.S. based
funds or series.
</FN>
</TABLE>
Nonaffiliated members of the Board and Mr. Brady are reimbursed for expenses
incurred in connection with attending board meetings, paid pro rata by each fund
in the Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or Board member received any other compensation, including
pension or retirement benefits, directly or indirectly from the fund or other
funds in the Franklin Templeton Group of Funds. Certain officers or Board
members who are shareholders of Resources may be deemed to receive indirect
remuneration by virtue of their participation, if any, in the fees paid to its
subsidiaries.
As of May 15, 1998, the officers and Board members, as a group, owned of record
and beneficially the following shares of the funds: approximately 1,688 shares
of Growth and Income Fund - Class I, 1,075 shares of Infrastructure Fund - Class
I, 447 shares of Americas Government Securities Fund - Class I, 274 shares of
Greater European Fund - Class I and 489 shares of Latin America Fund - Class I,
or less than 1% of the total outstanding shares of each respective fund's Class
I shares. Many of the Board members also own shares in other funds in the
Franklin Templeton Group of Funds. Charles B. Johnson and Rupert H. Johnson, Jr.
are brothers and the father and uncle, respectively, of Charles E. Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGERS AND SERVICES PROVIDED. Each fund's Investment Manager
provides investment research and portfolio management services, including the
selection of securities for the respective fund to buy, hold or sell and the
selection of brokers through whom the fund's portfolio transactions are
executed. Global Advisors renders it services to the funds it manages from
outside the U.S. The Investment Managers' activities are subject to the review
and supervision of the Board to whom the Investment Managers render periodic
reports of the funds' investment activities. Each Investment Manager and its
officers, directors and employees are covered by fidelity insurance for the
protection of the fund.
The Investment Managers and their affiliates act as investment manager to
numerous other investment companies and accounts. An Investment 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 Investment Manager on
behalf of a fund. Similarly, with respect to a fund, the Investment Manager is
not obligated to recommend, buy or sell, or to refrain from recommending, buying
21
PAGE
or selling any security that the Investment Manager and access persons, as
defined by the 1940 Act, may buy or sell for its or their own account or for the
accounts of any other fund. An Investment Manager is not obligated to refrain
from investing in securities held by the fund or other funds that it manages. Of
course, any transactions for the accounts of an Investment Manager and other
access persons will be made in compliance with the Trust's Code of Ethics.
Please see "Miscellaneous Information - Summary of Code of Ethics."
MANAGEMENT FEES. Under its management agreement each fund pays an investment
management fee. Growth and Income Fund and Greater European Fund each pay Global
Advisors a monthly fee equal on an annual basis to 0.75% of its respective
average daily net assets. Infrastructure Fund, Americas Government Securities
Fund and Latin America Fund each pay Investment Counsel a monthly fee equal on
an annual basis to 0.75%, 0.60% and 1.25%, respectively, of its average daily
net assets. Each class of each fund pays its proportionate share of the
management fee. Under a sub-advisory agreement that was terminated as of August
1, 1998, Investment Counsel paid Advisers a sub-advisory fee, in U.S. dollars,
equal to an annual rate of 0.25% of Americas Government Securities Fund's
average daily net assets. This fee was not a separate expense of such fund but
was paid by Investment Counsel from the management fees it received from the
fund.
Under an agreement by each Investment Manager to limit or waive its fees, for
the fiscal years and periods indicated, the funds paid the following management
fees:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
INCLUDING EXCLUDING INCLUDING EXCLUDING INCLUDING EXCLUDING
WAIVER WAIVER WAIVER WAIVER WAIVER WAIVER
-------------- -------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Growth and Income Fund $ 104,173 $326,967 $ 0 $157,964 $ 0 $ 64,366
Infrastructure Fund /1/ -- 254,384 -- 202,081 158,648 158,648
Americas Government
Securities Fund 0 51,899 0 27,267 0 19,280
Greater European Fund 29,958 119,267 0 59,263 0/2/ 24,741/2/
Latin America Fund 370,115 447,715 51,427 133,551 0/2/ 44,350/2/
<FN>
/1/ The agreement to limit the expenses of Infrastructure Fund was terminated on
April 15, 1995.
/2/ For the period May 8, 1995 (commencement of operations) to March 31, 1996.
</FN>
</TABLE>
After July 31, 1999, these agreements may end at any time upon notice to the
Board.
For the fiscal years ended March 31, 1998, 1997 and 1996, Investment Counsel
paid Advisers sub-advisory fees of $0, $0, and $8,033, respectively in
connection with the Americas Government Securities Fund.
MANAGEMENT AGREEMENTS. The management and sub-advisory agreements are in effect
until August 1, 1999. They may continue in effect for successive annual periods
if their continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of a fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to either agreement or interested persons of any such party (other
than as members of the Board), cast in person at a meeting called for that
purpose. A management agreement may be terminated without penalty at any time by
the Board or by a vote of the holders of a majority of the fund's outstanding
voting securities on 60 days' written notice to the respective Investment
Manager, or by the respective Investment Manager on 60 days' written notice to
the fund, and will automatically terminate in the event of its assignment, as
defined in the 1940 Act.
ADMINISTRATIVE SERVICES. Since October 1, 1996, FT Services has provided certain
administrative services and facilities for the funds. Prior to that date,
Templeton Global Investors, Inc. provided the same services to the funds. These
include preparing and maintaining books, records, and tax and financial reports,
and monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under its administration agreement, the Trust pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Trust's average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
The fee is allocated between the funds according to their respective average
daily net assets.
22
PAGE
Under an agreement by the funds' administrator to limit or waive its fees, for
the fiscal years and periods indicated, the funds paid the following
administrative fees:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 1998 1997 1996
- --------------------------------- --------------------------- ---------------------------- ---------------------------
INCLUDING EXCLUDING INCLUDING EXCLUDING INCLUDING EXCLUDING
WAIVER WAIVER WAIVER WAIVER WAIVER WAIVER
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Growth and Income Fund $ 65,372 $ 65,372 $ 0 $ 31,593 $ 0 $ 12,868
Infrastructure Fund /1/ -- 50,877 -- 40,416 31,729 31,729
Americas Government
Securities Fund 9,342 12,975 0 6,819 0 4,822
Greater European Fund 23,853 23,853 9,376 11,851 0/2/ 4,949/2/
Latin America Fund 53,726 53,726 16,026 16,026 0/2/ 5,322/2/
<FN>
/1/ The agreement to limit the expenses of Infrastructure Fund was terminated on
April 15, 1995.
/2/ For the period May 8, 1995 (commencement of operations) to March 31, 1996.
</FN>
</TABLE>
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the funds' shareholder servicing agent and acts as the funds'
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. The funds may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of a fund. The amount of reimbursements for these services per
benefit plan participant fund account per year may not exceed the per account
fee payable by the respective fund to Investor Services in connection with
maintaining shareholder accounts.
CUSTODIAN. The Chase Manhattan Bank, at its principal office at MetroTech
Center, Brooklyn, New York 11245, and at the offices of its branches and
agencies throughout the world, acts as custodian and foreign custody manager of
the funds' assets. As foreign custody manager, the bank is responsible for the
selection and monitoring of foreign sub-custodian banks, as well as the
selection and evaluation of non-compulsory foreign depositories. As foreign
custody manager, the bank also furnishes information relevant to the selection
of compulsory depositories. The custodian does not participate in decisions
relating to the purchase and sale of portfolio securities.
AUDITORS. McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, New York 10017,
are the funds' independent auditors. During the fiscal year ended March 31,
1998, their auditing services consisted of rendering an opinion on the financial
statements included in each fund's Annual Report to Shareholders for the fiscal
year ended March 31, 1998, and review of the Trust's filings with the SEC.
HOW DO THE FUNDS BUY SECURITIES FOR THEIR PORTFOLIOS?
The Investment Managers select brokers and dealers to execute the respective
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, an Investment 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 by a fund
is negotiated between its Investment 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. An
Investment 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 Investment 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.
23
PAGE
An Investment Manager may pay certain brokers commissions that are higher than
those another broker may charge, if the Investment 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 Investment Manager's overall
responsibilities to client accounts over which it exercises investment
discretion. The services that brokers may provide to an Investment 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 Investment
Manager in carrying out its investment advisory responsibilities. These services
may not always directly benefit the fund. They must, however, be of value to an
Investment 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 an Investment Manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order to
obtain additional research services permits an Investment 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, an Investment Manager and its
affiliates may use this research and data in their investment advisory
capacities with other clients. If the Trust's officers are satisfied that the
best execution is obtained, the sale of fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, may also be considered a factor
in the selection of broker-dealers to execute the fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when a fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of a 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 that fund's Investment 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 a fund and one or more other investment
companies or clients supervised by the fund's Investment 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 Investment 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 a 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 a fund.
During the fiscal years and periods indicated, the funds paid the following
brokerage commissions:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 1998 1997 1996
---------------------------------- ---- ---- ----
<S> <C> <C> <C>
Growth and Income Fund $ 80,381 $ 35,486 $ 26,767
Infrastructure Fund 52,572 71,025 56,451
Americas Government Securities
Fund 0 0 0
Greater European Fund 23,973 21,967 17,067/1/
Latin America Fund 179,185 50,579 20,945/1/
<FN>
(1)For the period May 8, 1995 (commencement of operations) to March 31, 1996.
</FN>
</TABLE>
As of March 31, 1998, Infrastructure Fund, Americas Government Securities Fund,
and Latin America Fund did not own securities of their regular broker-dealers.
As of March 31, 1998, Growth and Income Fund owned securities issued by Morgan
Stanley Dean Witter & Co. valued in the aggregate at $568,425 and Greater
European Fund owned securities issued by HSBC Holdings Plc. valued in the
aggregate at $305,874. Except as noted Growth and Income Fund and Greater
European Fund did not own any other securities issued by their regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The funds continuously offer their shares through Securities Dealers who have an
agreement with Distributors. Securities Dealers may at times receive the entire
sales charge. A Securities Dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
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Securities laws of states where a fund offers its shares may differ from federal
law. Banks and financial institutions that sell shares of a fund may be required
by state law to register as Securities Dealers. Financial institutions or their
affiliated brokers may receive an agency transaction fee in the percentages
indicated in the table under "How Do I Buy Shares? - Purchase Price of Fund
Shares" in each fund's Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid to
a fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, the funds'
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.
Class I shares of a fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges for all funds
except Americas Government Securities Fund:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE
- ----------------------------------------------------------
Under $30,000 3.0%
$30,000 but less than $50,000 2.5%
$50,000 but less than $100,000 2.0%
$100,000 but less than $200,000 1.5%
$200,000 but less than $400,000 1.0%
$400,000 or more 0%
In conformity with local business practices in Taiwan, shares of Americas
Government Securities Fund may be offered with the following schedule of sales
charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE
- ---------------------------------------------------------------
Under $30,000 3%
$30,000 but less than $100,000 2%
$100,000 but less than $400,000 1%
$400,000 or more 0%
OTHER PAYMENTS TO SECURITIES DEALERS. For each fund, except Americas Government
Securities Fund, Distributors may pay the following commissions, out of its own
resources, to Securities Dealers who initiate and are responsible for purchases
of Class I shares of $1 million or more: 1% on sales of $1 million to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on sales
over $3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million.
For Americas Government Securities Fund, Distributors may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of its shares of $1 million or more: 0.75% on
sales of $1 million to $2 million, plus 0.60% on sales over $2 million to $3
million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on sales
over $50 million to $100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases of Class I shares by certain retirement plans without a front-end
sales charge, as discussed in each fund's Prospectus: 1% on sales of $500,000 to
$2 million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on
sales over $3 million to $50 million, plus 0.25% on sales over $50 million to
$100 million, plus 0.15% on sales over $100 million. Distributors may make these
payments in the form of contingent advance payments, which may be recovered from
the Securities Dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
25
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receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. 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.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy Class
I shares as described in each fund's Prospectus. At any time within 90 days
after the first investment that you want to qualify for a reduced sales charge,
you may file with a fund a signed shareholder application with the Letter of
Intent section completed. After the Letter is filed, each additional investment
will be entitled to the sales charge applicable to the level of investment
indicated on the Letter. Sales charge reductions based on purchases in more than
one Franklin Templeton Fund will be effective only after notification to
Distributors that the investment qualifies for a discount. Your holdings in the
Franklin Templeton Funds acquired more than 90 days before the Letter is filed
will be counted towards completion of the Letter, but they will not be entitled
to a retroactive downward adjustment in the sales charge. Any redemptions you
make during the 13 month period, except in the case of certain retirement plans,
will be subtracted from the amount of the purchases for purposes of determining
whether the terms of the Letter have been completed. If the Letter is not
completed within the 13-month period, there will be an upward adjustment of the
sales charge, depending on the amount actually purchased (less redemptions)
during the period. The upward adjustment does not apply to certain retirement
plans. If you execute a Letter before a change in the sales charge structure of
the fund, you may complete the Letter at the lower of the new sales charge
structure or the sales charge structure in effect at the time the Letter was
filed.
As mentioned in each fund's Prospectus, five percent (5%) of the amount of the
total intended purchase will be reserved in Class I shares of the fund
registered in your name until you fulfill the Letter. This policy of reserving
shares does not apply to certain retirement plans. If the amount of your total
purchases, less redemptions, equals the amount specified under the Letter, the
reserved shares will be deposited to an account in your name or delivered to you
or as you direct. If the amount of your total purchases, less redemptions,
exceeds the amount specified under the Letter and is an amount that would
qualify for a further quantity discount, a retroactive price adjustment will be
made by Distributors and the Securities Dealer through whom purchases were made
pursuant to the Letter (to reflect such further quantity discount) on purchases
made within 90 days before and on those made after filing the Letter. The
resulting difference in Offering Price will be applied to the purchase of
additional shares at the Offering Price applicable to a single purchase or the
dollar amount of the total purchases. If the amount of your total purchases,
less redemptions, is less than the amount specified under the Letter, you will
remit to Distributors an amount equal to the difference in the dollar amount of
sales charge actually paid and the amount of sales charge that would have
applied to the aggregate purchases if the total of the purchases had been made
at a single time. Upon remittance, the reserved shares held for your account
will be deposited to an account in your name or delivered to you or as you
direct. If within 20 days after written request the difference in sales charge
is not paid, the redemption of an appropriate number of reserved shares to
realize the difference will be made. In the event of a total redemption of the
account before fulfillment of the Letter, the additional sales charge due will
be deducted from the proceeds of the redemption, and the balance will be
forwarded to you.
If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will be
purchased at the Net Asset Value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
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PAGE
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of a fund under the exchange privilege, the fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
each fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the fund's investment goal exist
immediately. This money will then be withdrawn from the short-term, money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the 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. Please see "May I Exchange Shares for Shares of Another
Fund?" in each fund's Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be made
from the redemption of an equivalent amount of shares in your account, generally
on the 25th day of the month in which a payment is scheduled. If the 25th falls
on a weekend or holiday, we will process the redemption on the next business
day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from a 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.
A fund may discontinue a systematic withdrawal plan by notifying you in writing
and will automatically discontinue a systematic withdrawal plan if all shares in
your account are withdrawn or if the fund receives notification of the
shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the
respective fund in a timely fashion. Any loss to you resulting from your
dealer's failure to do so must be settled between you and your Securities
Dealer.
REDEMPTIONS IN KIND. Each fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
funds net assets and you may incur brokerage fees in converting the securities
to cash. The funds do not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to a 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 funds nor their
affiliates will be liable for any loss caused by your failure to cash such
checks. The funds are not responsible for tracking down uncashed checks, unless
a check is returned as undeliverable.
27
PAGE
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of a fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions that
maintain omnibus accounts with a fund on behalf of numerous beneficial owners
for recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, a fund may reimburse Investor Services
an amount not to exceed the per account fee that the fund normally pays Investor
Services. These financial institutions may also charge a fee for their services
directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the close of the NYSE, normally
4:00 p.m. Eastern time, each day that the NYSE is open for trading. As of the
date of this SAI, the Trust is informed that the NYSE observes the following
holidays: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
For the purpose of determining the aggregate net assets of each fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by an Investment Manager.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
a fund is its last sale price on the relevant exchange before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
of the NYSE on each day that the NYSE is open. Trading in European or Far
Eastern securities generally, or in a particular country or countries, may not
take place on every NYSE business day. Furthermore, trading takes place in
various foreign markets on days that are not business days for the NYSE and on
which the Net Asset Value of each class is not calculated. Thus, the calculation
of the Net Asset Value of each class does not take place contemporaneously with
the determination of the prices of many of the portfolio securities used in the
calculation and, if events materially affecting the values of these foreign
securities occur, the securities will be valued at fair value as determined by
management and approved in good faith by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the Net
Asset Value of each class is determined as of such times. Occasionally, events
affecting the values of these securities may occur between the times at which
they are determined and the close of the NYSE that will not be reflected in the
computation of the Net Asset Value. If events materially affecting the values of
these securities occur during this period, the securities will be valued at
their fair value as determined in good faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
28
PAGE
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, a
fund may use a pricing service, bank or Securities Dealer to perform any of the
above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
DISTRIBUTIONS OF NET INVESTMENT INCOME. A fund receives income generally in the
form of dividends, interest, original issue, market and acquisition discount,
and other income derived from its investments. This income, less expenses
incurred in the operation of the fund, constitutes its net investment income
from which dividends may be paid to you. Any distributions by the fund from such
income will be taxable to you as ordinary income, whether you take them in cash
or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS. A fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income. Distributions
paid from long-term capital gains realized by the fund will be taxable to you as
long-term capital gain, regardless of how long you have held your shares in the
fund. Any net short-term or long-term capital gains realized by the fund (net of
any capital loss carryovers) generally will be distributed once each year, and
may be distributed more frequently, if necessary, in order to reduce or
eliminate federal excise or income taxes on the fund.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), each fund is required to
report the capital gain distributions paid to you from gains realized on the
sale of portfolio securities using the following categories:
"28% RATE GAINS": gains resulting from securities sold by the fund after July
28, 1997 that were held for more than one year but not more than 18 months, and
securities sold by the fund before May 7, 1997 that were held for more than one
year. These gains will be taxable to individual investors at a maximum rate of
28%.
"20% RATE GAINS": gains resulting from securities sold by the fund after July
28, 1997 that were held for more than 18 months, and under a transitional rule,
securities sold by the fund between May 7 and July 28, 1997 (inclusive) that
were held for more than one year. These gains will be taxable to individual
investors at a maximum rate of 20% for individual investors in the 28% or higher
federal income tax brackets, and at a maximum rate of 10% for investors in the
15% federal income tax bracket.
The 1997 Act also provides for a new maximum rate of tax on capital gains of 18%
for individuals in the 28% or higher federal income tax brackets and 8% for
individuals in the 15% federal income tax bracket for "qualified 5-year gains."
For individuals in the 15% bracket, qualified 5-year gains are net gains on
securities held for more than 5 years which are sold after December 31, 2000.
For individuals who are subject to tax at higher rates, qualified 5-year gains
are net gains on securities which are purchased after December 31, 2000 and are
held for more than 5 years. Taxpayers subject to tax at the higher rates may
also make an election for shares held on January 1, 2001 to recognize gain on
their shares in order to qualify such shares as qualified 5-year property.
Each fund will advise you at the end of each calendar year of the amount of its
capital gain distributions paid during the calendar year that qualify for these
maximum federal tax rates. Additional information on reporting these
distributions on your personal income tax returns is available in Franklin
Templeton's Tax Information Handbook. This handbook has been revised to include
1997 Act tax law changes. Please call Fund Information to request a copy.
Questions concerning each investor's personal tax reporting should be addressed
to the investor's personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions which are declared in
October, November or December and paid to you in January of the following year
will be treated for tax purposes as if they had been received by you on December
31 of the year in which they were declared. Each fund will report this income to
you on your IRS Form 1099-DIV for the year in which these distributions were
declared.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS. Most foreign exchange gains
realized on the sale of debt instruments and certain other financial instruments
are treated as ordinary income by a fund. Similarly, foreign exchange losses
realized by a fund on the sale of debt instruments and certain other financial
instruments are generally treated as ordinary losses by the fund. These gains
when distributed will be taxable to you as ordinary dividends, and any losses
will reduce a 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.
29
PAGE
FOREIGN TAX CREDITS INCLUDED IN DISTRIBUTIONS. A fund may be subject to foreign
withholding taxes on income from certain of its foreign securities. If more than
50% of the total assets of the fund at the end of its 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,
you will be (i) required to include in your gross income your pro rata share of
foreign source income (including any foreign taxes paid by the fund), and (ii)
entitled to either deduct your share of such foreign taxes in computing your
taxable income or to claim a credit for such taxes against your U.S. income tax,
subject to certain limitations under the Code. If the fund elects to pass
through to you the foreign income taxes that it has paid, you will be informed
at the end of the calendar year of the amount of foreign taxes paid and foreign
source income that must be included on your federal income tax return. If the
fund invests 50% or less of its total assets in securities of foreign
corporations, it will not be entitled to pass-through to you your pro-rata share
of the foreign taxes paid by the fund. In this case, these taxes will be taken
as a deduction by the fund, and the income reported to you will be the net
amount after these deductions.
The 1997 Act also simplifies the procedures by which investors in funds that
invest in foreign securities can claim tax credits on their individual income
tax returns for the foreign taxes paid by a fund. These provisions will allow
investors who claim a credit for foreign taxes paid of $300 or less on a single
return or $600 or less on a joint return during any year (all of which must be
reported on IRS Form 1099-DIV from the fund to the investor or qualify as
passive investment-type income if received from other sources) to bypass the
burdensome and detailed reporting requirements on the supporting foreign tax
credit schedule (IRS Form 1116) and report foreign taxes paid directly on page 2
of IRS Form 1040. THIS SIMPLIFIED PROCEDURE IS AVAILABLE BEGINNING WITH CALENDAR
YEAR 1998.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. Each fund will inform you of
the amount and character of your distributions at the time they are paid, and
will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held fund shares for a full year, you may have designated and distributed to you
as ordinary income or capital gain a percentage of income that is not equal to
the actual amount of such income earned during the period of your investment in
the fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. Each fund has elected to
be treated as a regulated investment company under Subchapter M of the Code, has
qualified as such for its most recent fiscal year, and intends to so qualify
during the current fiscal year. The Board reserves the right not to maintain the
qualification of each fund as a regulated investment company if it determines
such course of action to be beneficial to you. In such case, the fund will be
subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of the fund's available earnings and profits.
In order to qualify as a regulated investment company for tax purposes, each
fund must meet certain specific requirements, including:
/bullet/ The fund must maintain a diversified portfolio of securities, wherein
no security (other than U.S. government securities and securities of
other regulated investment companies) can exceed 25% of the fund's
total assets, and, with respect to 50% of the fund's total assets, no
investment (other than cash and cash items, U.S. government securities
and securities of other regulated investment companies) can exceed 5%
of the fund's total assets or 10% of the outstanding voting securities
of the issuer of the investment;
/bullet/ The fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from
the sale or disposition of stock, securities or foreign currencies, or
other income derived with respect to its business of investing in such
stock, securities, or currencies; and
/bullet/ The fund must distribute to its shareholders at least 90% of its net
investment income, net short-term gains and net tax-exempt income for
each of its fiscal years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires each fund to distribute
at least 98% of its taxable ordinary income earned during the calendar year and
98% of its capital gain net income earned during the twelve month period ending
October 31 (in addition to undistributed amounts from the prior year) to you by
December 31 of each year in order to avoid federal excise taxes. Each fund
intends to declare and pay sufficient dividends in December (or in January that
30
PAGE
are treated by you as received in December) but does not guarantee and can give
no assurances that its distributions will be sufficient to eliminate all such
taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. The tax law requires
that you recognize a gain or loss in an amount equal to the difference between
your tax basis and the amount you received in exchange for your shares, subject
to the rules described below. If you hold your shares as a capital asset, the
gain or loss that you realize will be capital gain or loss, and will be
long-term for federal income tax purposes if you have held your shares for more
than one year at the time of redemption or exchange. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated as
a long-term capital loss to the extent of any long-term capital gains
distributed to you by the fund on those shares. The holding periods and
categories of capital gain that apply under the 1997 Act are described above in
the "Distributions" section.
All or a portion of any loss that you realize upon the redemption of your fund
shares will be disallowed to the extent that you purchase other shares in the
fund (through reinvestment of dividends or otherwise) within 30 days before or
after your share redemption. Any loss disallowed under these rules will be added
to your tax basis in the new shares you purchase.
DEFERRAL OF BASIS. All or a portion of the sales charge that you paid for your
shares in a fund will be excluded from your tax basis in any of the shares sold
within 90 days of their purchase (for the purpose of determining gain or loss
upon the sale of such shares) if you reinvest the sales proceeds in the fund or
in another of the Franklin Templeton Funds, and the sales charge that would
otherwise apply to your reinvestment is reduced or eliminated. The portion of
the sales charge excluded from your tax basis in the shares sold will equal the
amount that the sales charge is reduced on your reinvestment. Any portion of the
sales charge excluded from your tax basis in the shares sold will be added to
the tax basis of the shares you acquire from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS. Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment requirements that must be met by a
fund. Investments in GNMA/FNMA securities, bankers' acceptances, commercial
paper and repurchase agreements collateralized by U.S. government securities do
not generally qualify for tax-free treatment. At the end of each calendar year,
the fund will provide you with the percentage of any dividends paid that may
qualify for tax-free treatment on your personal income tax return. You should
consult with your own tax advisor to determine the application of your state and
local laws to these distributions. Because the rules on exclusion of this income
are different for corporations, corporate shareholders should consult with their
corporate tax advisors about whether any of their distributions may be exempt
from corporate income or franchise taxes.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. To the extent that a fund derives
dividend income from domestic corporations, a portion of the dividends paid by
the fund may be eligible for the corporate dividends-received deduction. It is
not anticipated that any portion of the dividends paid by Greater European Fund,
Latin America Fund or Americas Government Securities Fund will so qualify.
INVESTMENT IN COMPLEX SECURITIES. A fund's investments in options, futures
contracts and forward contracts, including transactions involving actual or
deemed short sales or foreign exchange gains or losses are subject to many
complex and special tax rules. Over-the-counter options on debt securities and
equity options, including options on stock and on narrow-based stock indexes,
will be subject to tax under section 1234 of the Code, generally producing a
long-term or short-term capital gain or loss upon exercise, lapse, or closing
out of the option or sale of the underlying stock or security. Certain other
options, futures and forward contracts entered into by the fund are generally
governed by section 1256 of the Code. These "section 1256" positions generally
include listed options on debt securities, options on broad-based stock indexes,
options on securities indexes, options on futures contracts, regulated futures
contracts and certain foreign currency contracts and options thereon.
Absent a tax election to the contrary, each such section 1256 position held by a
fund will be marked-to-market (i.e., treated as if it were sold for fair market
value) on the last business day of the fund's fiscal year (and on other dates as
prescribed by the Code), and all gain or loss associated with fiscal year
transactions and mark-to-market positions at fiscal year end (except certain
currency gain or loss covered by section 988 of the Code) will generally be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. Under legislation pending in technical corrections to the 1997 Act, the
31
PAGE
60% long-term capital gain portion will qualify as 20% rate gain and will be
subject to tax to individual investors at a maximum rate of 20% for investors in
the 28% or higher federal income tax brackets, or at a maximum rate of 10% for
investors in the 15% federal income tax bracket. Even though marked-to-market,
gains and losses realized on foreign currency and foreign security investments
will generally be treated as ordinary income. The effect of section 1256
mark-to-market rules may be to accelerate income or to convert what otherwise
would have been long-term capital gains into short-term capital gains or
short-term capital losses into long-term capital losses within a fund. The
acceleration of income on section 1256 positions may require a fund to accrue
taxable income without the corresponding receipt of cash. In order to generate
cash to satisfy the distribution requirements of the Code, the fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
fund shares. In these ways, any or all of these rules may affect the amount,
character and timing of income distributed to you by a fund.
When a fund holds an option or contract which substantially diminishes the
fund's risk of loss with respect to another position of the fund (as might occur
in some hedging transactions), this combination of positions could be treated as
a "straddle" for tax purposes, possibly resulting in deferral of losses,
adjustments in the holding periods and conversion of short-term capital losses
into long-term capital losses. The funds may make certain tax elections for
mixed straddles (i.e., straddles comprised of at least one section 1256 position
and at least one non-section 1256 position) which may reduce or eliminate the
operation of these straddle rules.
The 1997 Act has also added new provisions for dealing with transactions that
are generally called "Constructive Sale Transactions." Under these rules, a fund
must recognize gain (but not loss) on any constructive sale of an appreciated
financial position in stock, a partnership interest or certain debt instruments.
A fund will generally be treated as making a constructive sale when it: 1)
enters into a short sale on the same property, 2) enters into an offsetting
notional principal contract, or 3) enters into a futures or forward contract to
deliver the same or substantially similar property. Other transactions
(including certain financial instruments called collars) will be treated as
constructive sales as provided in Treasury regulations to be published. There
are also certain exceptions that apply for transactions that are closed before
the end of the 30th day after the close of the taxable year.
Distributions paid to you by a fund of ordinary income and short-term capital
gains arising from the fund's investments, including investments in options,
forwards, and futures contracts, will be taxable to you as ordinary income. Each
fund will monitor its transactions in such options and contracts and may make
certain other tax elections in order to mitigate the effect of the above rules.
INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES. Each fund is
authorized to invest in foreign currency denominated securities. Such
investments, if made, will have the following additional tax consequences:
Under the Code, gains or losses attributable to fluctuations in foreign currency
exchange rates which occur between the time a fund accrues income (including
dividends) or expenses which are denominated in a foreign currency, and the time
the fund actually collects such income or pays such expenses generally are
treated as ordinary income or loss. Similarly, on the disposition of debt
securities denominated in a foreign currency and on the disposition of certain
options, futures, and forward contracts, gain or loss attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of its disposition are also treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"section 988" gains or losses, may increase or decrease the amount of a fund's
net investment company taxable income, which, in turn, will affect the amount of
income to be distributed to you by the fund.
If a fund's section 988 losses exceed the fund's other net investment company
taxable income during a taxable year, the fund generally will not be able to
make ordinary dividend distributions to you for that year, or distributions made
before the losses were realized will be recharacterized as return of capital
distributions for federal income tax purposes, rather than as an ordinary
dividend or capital gain distribution. If a distribution is treated as a return
of capital, your tax basis in your fund shares will be reduced by a like amount
(to the extent of such basis), and any excess of the distribution over your tax
basis in your fund shares will be treated as capital gain to you.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANY SECURITIES. A fund may invest
in shares of foreign corporations which may be classified under the Code as
passive foreign investment companies ("PFICs"). In general, a foreign
corporation is classified as a PFIC if at least one-half of its assets
32
PAGE
constitute investment-type assets or 75% or more of its gross income is
investment-type income.
If a fund receives an "excess distribution" with respect to PFIC stock, the fund
itself may be subject to U.S. federal income tax on a portion of the
distribution, whether or not the corresponding income is distributed by the fund
to you. In general, under the PFIC rules, an excess distribution is treated as
having been realized ratably over the period during which the fund held the PFIC
shares. The fund itself will be subject to tax on the portion, if any, of an
excess distribution that is so allocated to prior fund taxable years, and an
interest factor will be added to the tax, as if the tax had been payable in such
prior taxable years. In this case, you would not be permitted to claim a credit
on your own tax return for the tax paid by the fund. Certain distributions from
a PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain. This may have the effect of increasing
fund distributions to you that are treated as ordinary dividends rather than
long-term capital gain dividends.
A fund may be eligible to elect alternative tax treatment with respect to PFIC
shares. Under an election that currently is available in some circumstances, the
fund generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether distributions are
received from the PFIC during such period. If this election were made, the
special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, the 1997 Act provides for another
election that would involve marking-to-market the fund's PFIC shares at the end
of each taxable year (and on certain other dates as prescribed in the Code),
with the result that unrealized gains would be treated as though they were
realized. The fund would also be allowed an ordinary deduction for the excess,
if any, of the adjusted basis of its investment in the PFIC stock over its fair
market value at the end of the taxable year. This deduction would be limited to
the amount of any net mark-to-market gains previously included with respect to
that particular PFIC security. If the fund were to make this second PFIC
election, tax at the fund level under the PFIC rules would generally be
eliminated.
The application of the PFIC rules may affect, among other things, the amount of
tax payable by a fund (if any), the amounts distributable to you by the fund,
the time at which these distributions must be made, and whether these
distributions will be classified as ordinary income or capital gain
distributions to you.
You should be aware that it is not always possible at the time shares of a
foreign corporation are acquired to ascertain that the foreign corporation is a
PFIC, and that there is always a possibility that a foreign corporation will
become a PFIC after the fund acquires shares in that corporation. While each
fund will generally seek to avoid investing in PFIC shares to avoid the tax
consequences detailed above, there are no guarantees that it will do so and it
reserves the right to make such investments as a matter of its fundamental
investment policy.
CONVERSION TRANSACTIONS. Gains realized by a fund from transactions that are
deemed to be "conversion transactions" under the Code, and that would otherwise
produce capital gain, may be recharacterized as ordinary income to the extent
that such gain does not exceed an amount defined as the "applicable imputed
income amount". A conversion transaction is any transaction in which
substantially all of the fund's expected return is attributable to the time
value of the fund's net investment in such transaction, and any one of the
following criteria are met:
1) there is an acquisition of property with a substantially contemporaneous
agreement to sell the same or substantially identical property in the future;
2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the fund on the basis that it would
have the economic characteristics of a loan but would be taxed as capital gain;
or
4) the transaction is specified in Treasury regulations to be promulgated in the
future.
The applicable imputed income amount, which represents the deemed return on the
conversion transaction based upon the time value of money, is computed using a
yield equal to 120 percent of the applicable federal rate, reduced by any prior
recharacterizations under this provision or the provisions of section 263(g) of
the Code dealing with capitalized carrying costs.
STRIPPED PREFERRED STOCK. Occasionally, a fund may purchase "stripped preferred
stock" that is subject to special tax treatment. Stripped preferred stock is
defined as certain preferred stock issues where ownership of the stock has been
separated from the right to receive dividends that have not yet become payable.
The stock must have a fixed redemption price, must not participate substantially
33
PAGE
in the growth of the issuer, and must be limited and preferred as to dividends.
The difference between the redemption price and purchase price is taken into
fund income over the term of the instrument as if it were original issue
discount. The amount that must be included in each period generally depends on
the original yield to maturity, adjusted for any prepayments of principal.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT (MD) BONDS. A
fund's investments in zero coupon bonds, bonds issued or acquired at a discount,
delayed interest bonds, or bonds that provide for payment of interest-in-kind
(PIK) may cause the fund to recognize income and make distributions to you prior
to its receipt of cash payments. Zero coupon and delayed interest bonds are
normally issued at a discount and are therefore generally subject to tax
reporting as OID obligations. The fund is required to accrue as income a portion
of the discount at which these securities were issued, and to distribute such
income each year (as ordinary dividends) in order to maintain its qualification
as a regulated investment company and to avoid income reporting and excise taxes
at the fund level. PIK bonds are subject to similar tax rules concerning the
amount, character and timing of income required to be accrued by the fund. Bonds
acquired in the secondary market for a price less than their stated redemption
price, or revised issue price in the case of a bond having OID, are said to have
been acquired with market discount. For these bonds, the fund may elect to
accrue market discount on a current basis, in which case the fund will be
required to distribute any such accrued discount. If the fund does not elect to
accrue market discount into income currently, gain recognized on sale will be
recharacterized as ordinary income instead of capital gain to the extent of any
accumulated market discount on the obligation.
DEFAULTED OBLIGATIONS. A fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy these distribution requirements, the fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
fund shares.
THE FUNDS' UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of each fund's shares. Each
underwriting agreement will continue in effect for successive annual periods if
its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of a fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting called
for that purpose. Each underwriting agreement terminates automatically in the
event of its assignment and may be terminated by either party on 90 days'
written notice.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. Each fund pays the expenses of preparing and
printing amendments to its registration statement and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
For the fiscal years and periods indicated below, in connection with the
offering of shares, each fund paid the following aggregate underwriting
commissions and, after allowances to dealers, Distributors retained the
following net underwriting discounts and commissions and received the following
compensation in connection with redemptions or repurchases of shares:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 1998 1997 1996
-------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
GROWTH AND INCOME FUND
Aggregate underwriting commissions paid..... $542,252 $ 225,287 $ 145,909
Net underwriting discounts and commissions
retained.................................... 91,181 39,159 29,841
Compensation received in connection with
redemptions or repurchases.................. 2,781 1,489 49
</TABLE>
34
PAGE
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 1998 1997 1996
-------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
INFRASTRUCTURE FUND
Aggregate underwriting commissions paid..... $193,432 $173,935 $211,424
Net underwriting discounts and commissions
retained.................................... 11,940 27,323 25,501
Compensation received in connection with
redemptions or repurchases.................. 3,705 747 456
AMERICAS GOVERNMENT SECURITIES FUND
Aggregate underwriting commissions paid..... $167,684 $ 62,167 $ 19,359
Net underwriting discounts and commissions
retained.................................... 13,743 5,018 2,021
Compensation received in connection with
redemptions or repurchases.................. 0 0 0
GREATER EUROPEAN FUND
Aggregate underwriting commissions paid..... $323,121 $ 96,312 $112,442/1/
Net underwriting discounts and commissions
retained.................................... 19,388 15,811 (1,130)/1/
Compensation received in connection with
redemptions or repurchases.................. 3,342 6,203 141
LATIN AMERICA FUND
Aggregate underwriting commissions paid..... $496,868 $215,273 $190,7561
Net underwriting discounts and commissions
retained.................................... 75,850 35,174 9,2261
Compensation received in connection with
redemptions or repurchases.................. 6,014 852 201
<FN>
/1/ For the period May 8, 1995 (commencement of operations) to March 31, 1996.
</FN>
</TABLE>
Distributors may be entitled to reimbursement under the Rule 12b-1 plan for each
class, as discussed below. Except as noted, Distributors received no other
compensation from the funds for acting as underwriter.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 plans" that
were adopted pursuant to Rule 12b-1 of the 1940 Act.
THE CLASS I PLANS. Under the Class I plans, each fund may pay up to a maximum of
0.35% per year of Class I's average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of Class I shares.
The Class I plans do not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.
THE CLASS II PLANS. Under the Class II plans, each fund pays Distributors up to
0.75% per year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the
respective fund.
Under the Class II plans, each fund pays an additional 0.25% per year of Class
II's average daily net assets, payable quarterly, as a servicing fee.
35
PAGE
THE CLASS I AND CLASS II PLANS. The terms and provisions of each plan relating
to required reports, term, and approval are consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of a 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 Trust and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such Board members be done by the non-interested
members of the Board. The plans and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of the
management agreement with the respective Investment Manager or by vote of a
majority of the outstanding shares of the class.Distributors or any dealer or
other firm may also terminate their respective distribution or service agreement
at any time upon written notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the non-interested
members of the Board, cast in person at a meeting called for the purpose of
voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plans should be continued.
For the fiscal year ended March 31, 1998, the total amounts paid by the funds
pursuant to the Class I and Class II plans, and purposes for which they were
used, were as follows:
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND CLASS I CLASS II
---------------------------------------------------------------------------
<S> <C> <C>
Advertising.............. $ 18,433 $ 31,632
Printing and mailing of
prospectuses other than to 20,379 37,522
current shareholders...
Payments to underwriters. 1,402 1,029
Payments to
broker-dealers......... 79,505 23,418
Other.................... 0 0
-------- --------
Total Amount Paid........ $119,71 9 $ 93,601
INFRASTRUCTURE FUND CLASS I CLASS II
-------------------------------------------------------------------------
Advertising............... $ 6,428 $ 828
Printing and mailing of
prospectuses other than to
current shareholders.... 27,817 3,582
Payments to underwriters.. 2,549 796
Payments to
broker-dealers.......... 68,611 33,521
Other 0 0
-------- --------
Total Amount Paid......... $105,405 $ 38,727
</TABLE>
<TABLE>
<CAPTION>
AMERICAS GOVERNMENT
SECURITIES FUND CLASS I
-----------------------------------------------------
<S> <C>
Advertising...................... $ 162
Printing and mailing of
prospectuses other than to
current shareholders........... 15,252
Payments to underwriters......... 1,276
Payments to
broker-dealers................. 12,017
Other 0
--------
Total Amount Paid................ $ 28,707
</TABLE>
36
PAGE
<TABLE>
<CAPTION>
GREATER EUROPEAN FUND CLASS I CLASS II
-------------------------------------------------------------------------
<S> <C> <C>
Advertising.............. $ 9,961 $ 8,921
Printing and mailing of
prospectuses other than to
current shareholders... 3,044 14,605
Payments to underwriters. 1,150 465
Payments to
broker-dealers......... 28,146 12,361
Other 0 0
-------- --------
Total Amount Paid........ $ 42,301 $ 36,352
LATIN AMERICA FUND CLASS I CLASS II
-------------------------------------------------------------------------
Advertising.............. $ 5,064 $ 1,276
Printing and mailing of
prospectuses other than to
current shareholders... 26,985 8,593
Payments to underwriters. 4,920 1,998
Payments to
broker-dealers......... 66,773 47,009
Other 0 0
------- --------
Total Amount Paid........ $103,742 $ 58,876
</TABLE>
HOW DO THE FUNDS MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by a fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by a fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the funds to compute or express performance follows. Regardless of the method
used, past performance does not guarantee future results, and is an indication
of the return to shareholders only for the limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over the periods indicated below that
would equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes the maximum front-end sales charge is deducted
from the initial $1,000 purchase, and income dividends and capital gain
distributions are reinvested at Net Asset Value. The quotation assumes the
account was completely redeemed at the end of each period and the deduction of
all applicable charges and fees. If a change is made to the sales charge
structure, historical performance information will be restated to reflect the
maximum front-end sales charge currently in effect.
When considering the average annual total return quotations, you should keep in
mind that the maximum front-end sales charge reflected in each quotation is a
one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the fund.
For the periods indicated, the average annual total return for each class of
each fund was as follows:
<TABLE>
<CAPTION>
PERIODS ENDED
MARCH 31, 1998 ONE YEAR SINCE INCEPTION
--------------------------------------------------------------------------
<S> <C> <C>
GROWTH AND INCOME FUND
Class I................ 13.32% 12.11%/1/
Class II............... 17.21% 17.33%/2/
INFRASTRUCTURE FUND
Class I................ 8.42% 7.37%/1/
Class II............... 11.96% 12.43%/2/
AMERICAS GOVERNMENT
SECURITIES FUND........ 9.38% 10.36%/3/
GREATER EUROPEAN
FUND
Class I................ 20.91% 15.77%/4/
Class II............... 25.33% 16.97%/4/
LATIN AMERICA FUND
Class I................ (1.07)% 7.89%/4/
Class II............... 2.23% 9.00%/4/
<FN>
/1/For the period March 14, 1994 (commencement of operations) to March 31, 1998.
/2/For the period May 1, 1995 (commencement of sales) to March 31, 1998.
/3/For the period June 27, 1994 (commencement of operations) to March 31, 1998.
/4/For the period May 8, 1995 (commencement of operations) to March 31, 1998.
</FN>
</TABLE>
These figures were calculated according to the SEC formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of
each period at the end of each period
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
37
PAGE
$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.
For the periods indicated, the cumulative total return for each class of each
fund was as follows:
<TABLE>
<CAPTION>
PERIODS ENDED MARCH 31, 1998 ONE YEAR SINCE INCEPTION
----------------------------------------------------------------------------
<S> <C> <C>
GROWTH AND INCOME FUND
Class I................ 13.32% 58.79%/1/
Class II............... 17.21% 59.37%/2/
INFRASTRUCTURE FUND
Class I................ 8.42% 33.33%/1/
Class II............... 11.96% 40.74%/2/
AMERICAS GOVERNMENT
SECURITIES FUND........ 9.38% 44.86%/3/
GREATER EUROPEAN FUND
Class I................ 20.91% 52.84%/4/
Class II............... 25.33% 57.48%/4/
LATIN AMERICA FUND
Class I................ (1.07)% 24.61%/4/
Class II............... 2.23% 28.36%/4/
<FN>
/1/For the period March 14, 1994 (commencement of operations) to March 31, 1998.
/2/For the period May 1, 1995 (commencement of sales) to March 31, 1998.
/3/For the period June 27, 1994 (commencement of operations) to March 31, 1998.
/4/For the period May 8, 1995 (commencement of operations) to March 31, 1998.
</FN>
</TABLE>
YIELD
CURRENT YIELD. Current yield shows the income per share earned by the fund. It
is calculated by dividing the net investment income per share earned during a
30-day base period by the applicable maximum Offering Price per share on the
last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders of the class during the base
period. The yield for Americas Government Securities Fund for the 30-day period
ended March 31, 1998, was 6.41%.
These figures were obtained using the following SEC formula:
Yield = 2 [(A-B + 1)6 - 1]
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum Offering Price per share on the last day of
the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the SEC,
is not indicative of the amounts which were or will be paid to shareholders.
Amounts paid to shareholders are reflected in the quoted current distribution
rate. The current distribution rate is usually computed by annualizing the
dividends paid per share during a certain period and dividing that amount by the
current maximum Offering Price. The current distribution rate differs from the
current yield computation because it may include distributions to shareholders
from sources other than dividends and interest, such as premium income from
option writing and short-term capital gains, and is calculated over a different
period of time. The current distribution rate for Americas Government Securities
Fund for the 30-day period ended March 31, 1998, was 0.72%.
VOLATILITY
Occasionally statistics may be used to show a fund's volatility or risk.
Measures of volatility or risk are generally used to compare a 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
Each fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of a fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
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tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
Each fund may include in its advertising or sales material information relating
to investment goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Resources is the parent company of the Investment
Managers and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in a fund may satisfy your
investment goal, advertisements and other materials about each fund may discuss
certain measures of each class' performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
(i) unmanaged indices so that you may compare a 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 a 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, each fund and its Investment Manager may also refer to the
following information:
a) An Investment Manager and its affiliates' market share of international
equities managed in mutual funds prepared or published by Strategic Insight or a
similar statistical organization.
b) The performance of U.S. equity and debt markets relative to foreign markets
prepared or published by Morgan Stanley Capital International(R) or a similar
financial organization.
c) The capitalization of U.S. and foreign stock markets as prepared or published
by the International Finance Corporation, Morgan Stanley Capital
International(R) or a similar financial organization.
d) The geographic and industry distribution of a fund's portfolio and its top
ten holdings.
e) The gross national product and populations, including age characteristics,
literacy rates, foreign investment improvements due to a liberalization of
securities laws and a reduction of foreign exchange controls, and improving
communication technology, of various countries as published by various
statistical organizations.
f) To assist investors in understanding the different returns and risk
characteristics of various investments, each fund may show historical returns of
various investments and published indices (E.G., Ibbotson Associates, Inc.
Charts and Morgan Stanley EAFE - Index).
g) The major industries located in various jurisdictions as published by the
Morgan Stanley Index.
h) Rankings by DALBAR Surveys, Inc. with respect to mutual fund shareholder
services.
i) Allegorical stories illustrating the importance of persistent long-term
investing.
j) Each fund's portfolio turnover rate and its ranking relative to industry
standards as published by Lipper Analytical Services, Inc. or Morningstar, Inc.
k) A description of the Templeton organization's investment management
philosophy and approach, including its worldwide search for undervalued or
"bargain" securities and its diversification by industry, nation and type of
stocks or other securities.
l) The number of shareholders in a fund or the aggregate number of shareholders
of the open-end investment companies in the Franklin Templeton Group of Funds or
the dollar amount of fund and private account assets under management.
m) Comparison of the characteristics of various emerging markets, including
population, financial and economic conditions.
n) Quotations from the Templeton organization's founder, Sir John Templeton,*
advocating the virtues of diversification and long-term investing, including the
following:
/bullet/ "Never follow the crowd. Superior performance is possible only if you
invest differently from the crowd."
/bullet/ "Diversify by company, by industry and by country."
/bullet/ "Always maintain a long-term perspective."
* Sir John Templeton sold the Templeton organization to Resources in October
1992 and resigned from the Board on April 16, 1995. He is no longer involved
with the investment management process.
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/bullet/ "Invest for maximum total real return."
/bullet/ "Invest - don't trade or speculate."
/bullet/ "Remain flexible and open-minded about types of investment."
/bullet/ "Buy low."
/bullet/ "When buying stocks, search for bargains among quality stocks."
/bullet/ "Buy value, not market trends or the economic outlook."
/bullet/ "Diversify. In stocks and bonds, as in much else, there is safety in
numbers."
/bullet/ "Do your homework or hire wise experts to help you."
/bullet/ "Aggressively monitor your investments."
/bullet/ "Don't panic."
/bullet/ "Learn from your mistakes."
/bullet/ "Outperforming the market is a difficult task."
/bullet/ "An investor who has all the answers doesn't even understand all the
questions."
/bullet/ "There's no free lunch."
/bullet/ "And now the last principle: Do not be fearful or negative too often."
From time to time, advertisements or information for each fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare a fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in each 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 a 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 a fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in a 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 respective 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
A 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 a fund cannot
guarantee that these goals will be met.
The Trust is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 50 years and
now services more than 3 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 $236 billion in assets under
management for more than 6 million U.S. based mutual fund shareholder and other
accounts. The Franklin Templeton Group of Funds offers 119 U.S. based open-end
investment companies to the public. A fund may identify itself by its NASDAQ
symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the NYSE.
While many of them have similar investment goals, no two are exactly alike. As
noted in each fund's Prospectus, shares of a fund are generally sold through
Securities Dealers. Investment representatives of such Securities Dealers are
experienced professionals who can offer advice on the type of investment
suitable to your unique goals and needs, as well as the types of risks
associated with such investment.
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As of May 15, 1998, the principal shareholders of each fund, beneficial or of
record, were as follows:
<TABLE>
<CAPTION>
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
--------------------------------------------------------------------------
<S> <C> <C>
INFRASTRUCTURE FUND - CLASS I
Mercantile Bank of St. Louis NA 122,118 5.50%
Cust Lambro's LP Lehmans LG
Cap Intl
P.O. Box 387 Main Post Office
St. Louis, MO 63166-0387
GROWTH AND INCOME
FUND - CLASS I
Trukan & Co. 232,401 7.12%
250 N. Water Street
Suite 315
P.O. Box 3699
Wichita, KS 67201-3699
AMERICAS GOVERNMENT
SECURITIES FUND
Templeton Global Investors Inc. 353,357 20.65%
1850 Gateway Drive
6th Floor
San Mateo CA 94404
GREATER EUROPEAN
FUND - ADVISOR CLASS
Franklin Templeton Fund 81,675 38.62%
Allocator
Growth Target Fund
c/o Fund Accounting Department
1810 Gateway Dr.
3rd Floor
San Mateo CA 94404
Charles Schwab & Co Inc. 67,150 31.76%
101 Montgomery Street
San Francisco CA 94104-4122
Franklin Templeton Fund 45,503 21.52%
Allocator
Moderate Target Fund
c/o Fund Accounting Department
1810 Gateway Dr.
3rd Floor
San Mateo CA 94404
Franklin Templeton Fund 11,388 5.39%
Allocator
Conservative Target Fund
c/o Fund Accounting Department
1810 Gateway Dr.
3rd Floor
San Mateo CA 94404
LATIN AMERICAN FUND -
CLASS II
Templeton Global 51,284 9.70%
Investors, Inc.
1850 Gateway Drive
6th Floor
San Mateo, CA 94404
LATIN AMERICAN FUND -
ADVISOR CLASS
Franklin Resources, Inc. 1,848 19.42%
Corporate Treasury
1850 Gateway Drive
6th Floor
San Mateo, CA 94404
Donaldson Lufkin Jenrette 1,844 19.37%
Securities Corporation,
Inc.
P.O. Box 2052
Jersey City, NJ
07303-9998
Franklin Templeton Trust 485 5.10%
Company - Custodian for
the IRA of Donald H. Edgren
600 Martin Street
Monterey, CA 93940
</TABLE>
From time to time, the number of fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
In the event of disputes involving multiple claims of ownership or authority to
control your account, a fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
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access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations and statements must be sent
to a compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) above, file annual
reports of their securities holdings each January and inform the compliance
officer (or other designated personnel) if they own a security that is being
considered for a fund or other client transaction or if they are recommending a
security in which they have an ownership interest for purchase or sale by a fund
or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in each fund's Annual Report to
Shareholders, for the fiscal year ended March 31, 1998, including the auditors'
report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., formerly the sub-advisor of Americas
Government Securities Fund
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - Growth and Income Fund and Infrastructure
Fund offer two classes of shares, designated "Class I" and "Class II." Americas
Government Securities Fund offers a single class of shares, "Class I." Greater
European and Latin America Fund offer three classes of shares, designated "Class
I," "Class II," and "Advisor Class." Each class of shares has proportionate
interests in the respective fund's portfolio. They differ, however, primarily in
their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the funds' principal
underwriter
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable Products
Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the funds' administrator
GLOBAL ADVISORS - Templeton Global Advisors Limited, the investment manager of
Growth and Income Fund and Greater European Fund
GOVERNMENT ENTITIES - Governments, their agencies and instrumentalies;
government-owned, controlled or sponsored entities (including central banks
located in the Western Hemisphere); entities organized and operated for the
purpose of restructing the investment characteristics of securities issued by
any of the entities described.
INVESTMENT COUNSEL - Templeton Investment Counsel, Inc., the investment manager
of Infrastructure Fund and Latin America Fund; and Americas Government
Securities Fund, through its Global Bond Managers division
INVESTMENT MANAGER(S) - Global Advisors and Investment Counsel
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the funds'
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 5.75% for each fund's Class I (except Americas
Government Securities Fund which has a maximum front-end sales charge of 4.25%)
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and 1% for Class II. We calculate the offering price to two decimal places using
standard rounding criteria.
PROSPECTUS - The prospectus for each fund's Class I and Class II shares dated
August 1, 1998, which we may amend from time to time.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the fund(s). This reference is for convenience only and does not
indicate a legal conclusion of capacity.
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to a fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present that make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and, thereby, not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. 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.
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.
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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 may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong. 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.
44
