Templeton Global
Investment Trust
Templeton Americas Government Securities Fund - Class A
Templeton International Fund - Class A & C
Templeton Latin American Fund - Class A & C
STATEMENT OF ADDITIONAL INFORMATION [LOGO(R)]
August 1, 1999 [FRANKLIN(R) TEMPLETON(R)]
P.O. Box 33030, St. Petersburg, FL
33733-8030 1-800/DIAL BEN(R)
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This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in each fund's prospectus. Each
fund's prospectus, dated August 1, 1999, which we may amend from time to time,
contains the basic information you should know before investing in the funds.
You should read this SAI together with each fund's prospectus.
The audited financial statements and auditor's report in each fund's Annual
Report to Shareholders, for the fiscal year ended March 31, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies 2
Risks 10
Officers and Trustees 14
Management and Other Services 17
Portfolio Transactions 19
Distributions and Taxes 20
Organization, Voting Rights
and Principal Holders 21
Buying and Selling Shares 22
Pricing Shares 29
The Underwriter 30
Performance 31
Miscellaneous Information 34
Description of Ratings 34
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
GOALS AND STRATEGIES
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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).
International (formerly known as Templeton 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 companies located in any developed country
outside the U.S.
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 American issuers. The Latin
America Fund may invest the remaining 35% of its total assets in any combination
of: (a) equity and debt securities of issuers domiciled outside Latin America;
and (b) short-term and medium-term debt securities as described below under
"Temporary investments."
Each fund's goal is fundamental, which means that it may not be changed without
shareholder approval.
GENERAL Each fund, except the International Fund, may invest up to 100% of its
total assets in developing or emerging markets, including up to 5% of its total
assets in Russian securities. The International Fund excludes investments in any
emerging or developing countries. The definition of emerging markets as used by
each fund's manager may differ from the definition of the same terms as used in
managing other Franklin Templeton funds.
EQUITY SECURITIES The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner of
an equity security may participate in a company's success through the receipt of
dividends which are distributions of earnings by the company to its owners.
Equity security owners may also participate in a company's success or lack of
success through increases or decreases in the value of the company's shares as
traded in the public trading market for such shares. Equity securities generally
take the form of common stock or preferred stock. Preferred stockholders
typically receive greater dividends but may receive less appreciation than
common stockholders and may have greater voting rights as well. Equity
securities may also include convertible securities, warrants or rights.
Convertible securities typically are debt securities or preferred stocks which
are convertible into common stock after certain time periods or under certain
circumstances. Warrants or rights give the holder the right to purchase a common
stock at a given time for a specified price.
DEPOSITARY RECEIPTS are certificates that give their holders the right to
receive securities (a) of a foreign issuer deposited in a U.S. bank or trust
company (American Depositary Receipts, "ADRs"); or (b) of a foreign or U.S.
issuer deposited in a foreign bank or trust company (Global Depositary Receipts,
"GDRs" or European Depositary Receipts, "EDRs").
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 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.
DEBT SECURITIES A debt security typically has a fixed payment schedule, which
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes,
debentures and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in a fund's net asset value.
The International Fund may invest up to 25% of its total assets, and each other
fund may invest without limit in debt securities. Each fund may buy both rated
and unrated debt securities. Independent rating organizations rate debt
securities based upon their assessment of the financial soundness of the issuer.
Generally, a lower rating indicates higher risk. At present, each fund, except
Americas Government Securities Fund, intends not to invest more than 5% of its
total assets in non-investment grade securities rated lower than BBB by Standard
& Poor's Corporation ("S&P")or Baa by Moody's Investors Services, Inc.
("Moody's") and may invest up to 5% of its total assets in defaulted debt
securities.
BRADY BONDS The Latin America and Americas Government Securities Funds may
invest a portion of their assets in U.S. dollar-denominated, collateralized
Brady Bonds, which may be fixed rate par bonds or floating rate discount bonds,
generally collateralized in full as to principal by U.S. Treasury zero coupon
bonds which have the same maturity as the Brady Bonds. These are public-issue
bonds of developing countries that are created through an exchange of existing
commercial bank loans to sovereign entities for new obligations in connection
with a debt restructuring plan introduced by former U.S. Treasury Secretary,
Nicholas F. Brady (the "Brady Plan"). 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.
Brady Plan debt restructurings have been implemented in a number of countries to
date including Argentina, Brazil, Costa Rica, the Dominican Republic, Ecuador,
Mexico, Panama, Peru, Uruguay, and Venezuela (collectively, the "Brady
Countries").
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.
In light of the residual risk of Brady Bonds and, among other factors, the
history of defaults with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds, investments in Brady Bonds are
generally considered speculative. In addition, many Brady Bonds currently are
rated below investment grade. The Latin America Fund's investments in Brady
Bonds are subject to its current policy of not investing more than 5% of its
total assets in non-investment grade securities.
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
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, the investment manager 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 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 the investment manager believes may assist the fund in
achieving its investment goals.
The staff of the U.S. Securities and Exchange Commission (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 the investment
manager under guidelines and standards established by the Trust's 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."
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 Investment Company Act of 1940, as amended (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.
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 Trust's 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
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 Trust's board to
be liquid, are considered to be illiquid and are subject to a fund's limitation
on investment in illiquid securities.
CLOSED-END INVESTMENT COMPANIES International Fund and Latin America Fund may
invest in closed-end investment companies, except those for which their managers
serve 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 "Distributions and Taxes."
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 to earn additional income and/or to help protect their
portfolios against market and/or exchange rate movements, although they
presently have no intention of doing so. Each fund will limit the sale of
options on its securities to 15% or less of its total assets. Each fund may only
buy options if the total premiums it paid for such options is 5% or less of its
total assets.
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 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
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. The funds
have no specific limitation on the percentage of assets they may commit to
forward contracts, subject to their stated investment goals and policies, except
that a fund will not enter into a forward contract if the amount of assets set
aside to cover forward contracts would impede portfolio management or the fund's
ability to meet redemption requests.
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." The funds will only use forward
foreign currency transactions for the above purposes. Because in connection with
a fund's 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.
SECURITIES LENDING To generate additional income and for investment purposes,
each fund may lend its portfolio securities to qualified securities dealers or
other institutional investors. Such loans may not exceed 33 1/3% of the value of
the fund's total assets measured at the time of the most recent loan. For each
loan, the fund must receive in return collateral with a value at least equal to
100% of the current market value of the loaned securities.
BORROWING Each fund may borrow up to one-third of the value of its total assets
from banks to increase its holdings of portfolio securities. Under the 1940 Act,
each fund is required to maintain continuous asset coverage of 300% with respect
to such borrowings and to sell (within three days) sufficient portfolio holdings
to restore such coverage if it should decline to less than 300% due to market
fluctuations or otherwise, even if such liquidations of a fund's holdings may be
disadvantageous from an investment standpoint. Leveraging by means of borrowing
may exaggerate the effect of any increase or decrease in the value of portfolio
securities on a fund's net asset value, and money borrowed will be subject to
interest and other costs (which may include commitment fees and/or the cost of
maintaining minimum average balances) which may or may not exceed the income
received from the securities purchased with borrowed funds.
TEMPORARY INVESTMENTS When the manager of a fund believes that the securities
trading markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist, it may invest a
fund's portfolio in a temporary defensive manner.
Under such circumstances, each fund may invest up to 100% of its assets in money
market securities denominated in the currency of any nation. These may include:
o short-term (maturities of less than 12 months) and medium-term (maturities up
to 5 years) securities issued or guaranteed by the U.S. or a foreign
government, their agencies or instrumentalities;
o finance company and corporate commercial paper, and other short-term corporate
obligations, rated A by S&P or Prime-1 by Moody's or, if unrated, determined
by the fund to be of comparable quality;
o bank obligations (including CDs, time deposits and bankers' acceptances); and
o repurchase agreements with banks and broker-dealers.
INVESTMENT RESTRICTIONS The 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 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 331/3% 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 "Buying and Selling Shares" 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.
The funds presently have the following additional restrictions which are not
fundamental and may be changed without shareholder approval. 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 a fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security no
longer meets one or more of the fund's policies or restrictions. If a percentage
restriction or limitation 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 will not be considered a violation of the restriction or
limitation.
RISKS
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FOREIGN SECURITIES Each fund, except the International Fund, has the right to
purchase securities in any foreign country, developed or developing. The
International Fund will limit its investments to securities of companies located
in foreign developed countries only. 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 New York Stock Exchange (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; and
(v) the absence of developed structures governing private or foreign investment
or allowing for judicial redress for injury to private property.
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.
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.
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
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.
Each fund's investment manager 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.
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.
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,
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 "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.
The purchase of defaulted debt securities involves significant additional risks,
such as the possibility of complete loss of the investment in the event the
issuer does not restructure or reorganize to enable it to resume paying interest
and principal to holders.
Based upon the monthly weighted average ratings of debt securities held during
the Americas Government Securities Fund's fiscal year ended March 31, 1999, the
fund had 91.9% of its total assets invested in debt securities that received a
rating from Moody's and/or S&P, and 8.1% of its total assets invested in debt
securities that were not so rated. The fund had the following percentages of its
total assets invested in rated securities: AAA and/or Aaa: 43.9%, BB and/or Ba:
30.0%, and B: 18.0%. Included within the 8.1% unrated category are securities
that have been determined by the manager to be comparable to securities rated B
or below.
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.
OFFICERS AND TRUSTEES
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The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of each fund's
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 board
also monitors each fund (except Americas Government Securities Fund, which has
only one class of shares) to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 48 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
*Nicholas F. Brady (69)
16 North Washington Street, Easton, MD 21601
TRUSTEE
Chairman, Templeton Emerging Markets Investment Trust PLC, Templeton Latin
America Investment Trust PLC, Darby Overseas Investments, Ltd. and Darby
Emerging Markets Investments LDC (investment firms) (1994-present); Director,
Templeton Global Strategy Funds, Amerada Hess Corporation (exploration and
refining of natural gas), Christiana Companies, Inc. (operating and investment
companies), and H.J. Heinz Company (processed foods and allied products);
director or trustee, as the case may be, of 20 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Secretary of the United
States Department of the Treasury (1988-1993) and Chairman of the Board, Dillon,
Read & Co., Inc. (investment banking) (until 1988).
*Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President, Chief Financial Officer and Director, Templeton
Worldwide, Inc.; Executive Vice President, Chief Operating Officer and Director,
Templeton Investment Counsel, Inc.; Executive Vice President and Chief Financial
Officer, Franklin Advisers, Inc.; Chief Financial Officer, Franklin Advisory
Services, LLC and Franklin Investment Advisory Services, Inc.; President and
Director, Franklin Templeton Services, Inc.; officer and/or director of some of
the other subsidiaries of Franklin Resources, Inc.; and officer and/or director
or trustee, as the case may be, of 52 of the investment companies in the
Franklin Templeton Group of Funds.
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee, as
the case may be, of 50 of the investment companies in the Franklin Templeton
Group of Funds.
John Wm. Galbraith (77)
360 Central Avenue, Suite 1300, St. Petersburg, FL 33701
TRUSTEE
President, Galbraith Properties, Inc. (personal investment company); Director
Emeritus, Gulf West Banks, Inc. (bank holding company) (1995-present); director
or trustee, as the case may be, of 19 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, Mercantile Bank
(1991-1995), Vice Chairman, Templeton, Galbraith & Hansberger Ltd. (1986-1992),
and Chairman, Templeton Funds Management, Inc. (1974-1991).
Andrew H. Hines, Jr. (76)
150 2nd Avenue N., St. Petersburg, FL 33701
TRUSTEE
Consultant,Triangle Consulting Group; Executive-in-Residence, Eckerd College
(1991-present); director or trustee, as the case may be, of 21 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Chairman and
Director, Precise Power Corporation (1990-1997), Director, Checkers Drive-In
Restaurant, Inc. (1994-1997), and Chairman of the Board and Chief Executive
Officer, Florida Progress Corporation (holding company in the energy area)
(1982-1990) and director of various of its subsidiaries.
Edith E. Holiday (47)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and H.J.
Heinz Company (processed foods and allied products) (1994-present); director or
trustee, as the case may be, of 24 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and Trustee
(1993-1997), National Child Research Center, Assistant to the President of the
United States and Secretary of the Cabinet (1990-1993), General Counsel to the
United States Treasury Department (1989-1990), and Counselor to the Secretary
and Assistant Secretary for Public Affairs and Public Liaison-United States
Treasury Department (1988-1989).
*Charles B. Johnson (66)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Investment
Advisory Services, Inc. and Franklin Templeton Distributors, Inc.; Director,
Franklin/Templeton Investor Services, Inc. and Franklin Templeton Services,
Inc.; officer and/or director or trustee, as the case may be, of most of the
other subsidiaries of Franklin Resources, Inc. and of 49 of the investment
companies in the Franklin Templeton Group of Funds.
Betty P. Krahmer (70)
2201 Kentmere Parkway, Wilmington, DE 19806
TRUSTEE
Director or trustee of various civic associations; director or trustee, as the
case may be, of 20 of the investment companies in the Franklin Templeton Group
of Funds; and FORMERLY, Economic Analyst, U.S. government.
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 48 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, White River
Corporation (financial services) and Hambrecht and Quist Group (investment
banking), and President, National Association of Securities Dealers, Inc.
Fred R. Millsaps (70)
2665 NE 37th Drive, Fort Lauderdale, FL 33308
TRUSTEE
Manager of personal investments (1978-present); director of various business and
nonprofit organizations; director or trustee, as the case may be, of 21 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).
James R. Baio (45)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
TREASURER
Certified Public Accountant; Senior Vice President, Templeton Worldwide, Inc.,
Templeton Global Investors, Inc. and Templeton Funds Trust Company; officer of
21 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Senior Tax Manager, Ernst & Young (certified public accountants)
(1977-1989).
Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory
Services, Inc. and Franklin/Templeton Investor Services, Inc.; and officer
and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 52 of the investment companies
in the Franklin Templeton Group of Funds.
Gary R. Clemons (42)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
VICE PRESIDENT
Senior Vice President, Templeton Investment Counsel, Inc.; and FORMERLY,
Research Analyst, Templeton Quantitative Advisors, Inc.
Samuel J. Forester, Jr. (51)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
VICE PRESIDENT
Managing Director, Templeton Worldwide, Inc.; Vice President and Director,
Templeton Global Income Portfolio Ltd.; Director, Closed Joint-Stock Company
Templeton and Templeton Trust Services Pvt. Ltd.; officer of 10 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Templeton Global Bond 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).
Deborah R. Gatzek (50)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 53 of the investment
companies in the Franklin Templeton Group of Funds.
Barbara J. Green (51)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
SECRETARY
Senior Vice President, Templeton Worldwide, Inc. and Templeton Global Investors,
Inc.; officer of 20 of the investment companies in the Franklin Templeton Group
of Funds; and FORMERLY, Deputy Director, Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman, Counselor to the
Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986-1995), Attorney, Rogers & Wells, and Judicial Clerk, U.S.
District Court (District of Massachusetts).
Mark G. Holowesko (39)
Lyford Cay, Nassau, Bahamas
PRESIDENT
President, Templeton Global Advisors Limited; Chief Investment Officer, Global
Equity Group; Executive Vice President and Director, Templeton Worldwide, Inc.;
officer of 20 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Investment Administrator, RoyWest Trust Corporation
(Bahamas) Limited (1984-1985).
Charles E. Johnson (43)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
VICE PRESIDENT
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; Chairman and Director, Templeton Investment Counsel,
Inc.; Vice President, Franklin Advisers, Inc.; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 33 of the investment companies in
the Franklin Templeton Group of Funds.
Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.
and Franklin Investment Advisory Services, Inc.; Senior Vice President, Franklin
Advisory Services, LLC; Director, Franklin/Templeton Investor Services, Inc.;
and officer and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 52 of the investment companies
in the Franklin Templeton Group of Funds.
John R. Kay (59)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
VICE PRESIDENT
Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin
Templeton Distributors, Inc.; officer of 25 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Vice President and Controller,
Keystone Group, Inc.
Elizabeth M. (44)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
VICE PRESIDENT - Compliance
General Counsel, Secretary and Senior Vice President, Templeton Investment
Counsel, Inc.; Senior Vice President, Templeton Global Investors, Inc.; officer
of 20 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Vice President and Associate General Counsel, Kidder Peabody & Co.
Inc. (1989-1990), Assistant General Counsel, Gruntal & Co., Inc. (1988), Vice
President and Associate General Counsel, Shearson Lehman Hutton Inc. (1988),
Vice President and Assistant General Counsel, E.F. Hutton & Co. Inc.
(1986-1988), and Special Counsel, Division of Investment Management, U.S.
Securities and Exchange Commission (1984-1986).
*This board member is considered an "interested person" under federal securities
laws. Mr. Brady's status as an interested person results from his business
affiliations with Franklin Resources, Inc. and Templeton Global Advisors
Limited. Mr. Brady and Franklin Resources, Inc. are both limited partners of
Darby Overseas Partners, L.P. (Darby Overseas). In addition, Darby Overseas and
Templeton Global Advisors Limited are limited partners of Darby Emerging Markets
Fund, L.P.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father
and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members and Mr. Brady an annual retainer of
$2,000 and a fee of $100 per board meeting attended. Board members who serve on
the audit committee of the trust and other funds in the Franklin Templeton Group
of Funds receive a flat fee of $2,000 per committee meeting attended, a portion
of which is allocated to the trust. Members of a committee are not compensated
for any committee meeting held on the day of a board meeting. Noninterested
board members also may serve as directors or trustees of other funds in the
Franklin Templeton Group of Funds and may receive fees from these funds for
their services. The following table provides the total fees paid to
noninterested board members and Mr. Brady by the trust and by the Franklin
Templeton Group of Funds.
<TABLE>
<CAPTION>
TOTAL FEES RECEIVED FROM NUMBER OF BOARDS IN THE
TOTAL FEES RECEIVED THE FRANKLIN TEMPLETON FRANKLIN TEMPLETON GROUP OF
NAME FROM THE TRUST/1/ ($) GROUP OF FUNDS/2/ ($) FUNDS ON WHICH EACH SERVES/3/
- -------------------------- -------------------------- ----------------------------- ------------------------------
<S> <C> <C> <C>
Harris J. Ashton 2,500 159,051 48
Nicholas F. Brady 2,500 140,975 20
S. Joseph Fortunato 2,500 367,835 50
John Wm. Galbraith 2,883 134,425 19
Andrew H. Hines, Jr. 2,883 208,075 21
Edith E. Holiday 2,500 211,400 24
Betty P. Krahmer 2,500 141,075 20
Gordon S. Macklin 2,500 361,157 48
Fred R. Millsaps 2,881 210,075 21
</TABLE>
1. For the fiscal year ended March 31, 1999.
2. For the calendar year ended December 31, 1998.
3. We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the board
members are responsible. The Franklin Templeton Group of Funds currently
includes 54 registered investment companies, with approximately 162 U.S. based
funds or series.
Noninterested board members and Mr. Brady are reimbursed for expenses incurred
in connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or trustee.
No officer or board member received any other compensation, including pension or
retirement benefits, directly or indirectly from the funds or other funds in the
Franklin Templeton Group of Funds. Certain officers or board members who are
shareholders of Franklin Resources, Inc. may be deemed to receive indirect
remuneration by virtue of their participation, if any, in the fees paid to its
subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
- -------------------------------------------------------------------------------
MANAGER AND SERVICES PROVIDED Templeton Investment Counsel, Inc., is the manager
of Latin America Fund, and through its Global Bond Managers division, of
Americas Government Securities Fund. Templeton Global Advisors Limited is the
manager of International Fund. The managers are wholly owned subsidiaries of
Franklin Resources, Inc. (Resources), a publicly owned company engaged in the
financial services industry through its subsidiaries. Charles B. Johnson and
Rupert H. Johnson, Jr. are the principal shareholders of Resources.
The managers provide investment research and portfolio management services, and
select the securities for the funds to buy, hold or sell. The managers also
select the brokers who execute the funds' portfolio transactions. The managers
provide periodic reports to the board, which reviews and supervises the
managers' investment activities. To protect the funds, the managers and their
officers, directors and employees are covered by fidelity insurance. Templeton
Global Advisors Limited renders its services to the International Fund from
outside the U.S.
The Templeton organization has been investing globally since 1940. The managers
and their affiliates have offices in Argentina, Australia, Bahamas, Belgium,
Bermuda, Brazil, British Virgin Islands, Canada, China, Cyprus, France, Germany,
Hong Kong, India, Italy, Japan, Korea, Luxembourg, Mauritius, the Netherlands,
Poland, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan,
Turkey, United Kingdom, Venezuela, and the U.S.
The managers and their affiliates manage numerous other investment companies and
accounts. A manager may give advice and take action with respect to any of the
other funds it manages, or for its own account, that may differ from action
taken by the manager on behalf of a fund. Similarly, with respect to a fund, the
manager is not obligated to recommend, buy or sell, or to refrain from
recommending, buying or selling any security that the manager and access
persons, as defined by applicable federal securities laws, may buy or sell for
its or their own account or for the accounts of any other fund. A manager is not
obligated to refrain from investing in securities held by a fund or other funds
it manages. Of course, any transactions for the accounts of the manager and
other access persons will be made in compliance with the funds' code of ethics.
Under the funds' code of ethics, employees of the Franklin Templeton Group who
are access persons may engage in personal securities transactions subject to the
following general restrictions and procedures: (i) the trade must receive
advance clearance from a compliance officer and must be completed by the close
of the business day following the day clearance is granted; (ii) copies of all
brokerage confirmations and statements must be sent to a compliance officer;
(iii) all brokerage accounts must be disclosed on an annual basis; and (iv)
access persons involved in preparing and making investment decisions must, in
addition to (i), (ii) and (iii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
MANAGEMENT FEES Each fund pays its manager a fee equal to an annual rate of its
respective average daily net assets, as shown below:
ANNUAL RATE (%)
- ------------------------------------------------------------------------
Americas Government Securities Fund 0.60
International Fund 0.75
Latin America Fund 1.25
The fee is computed according to the terms of the management agreement. Each
class of the funds' shares pays its proportionate share of the fee.
For the last three fiscal years ended March 31, the funds paid the following
management fees:
MANAGEMENT FEES PAID ($)
--------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------
Americas Government
Securities Fund/1/ 57,025 0 0
International Fund/2/ 423,088 29,958 0
Latin America Fund/3/ 122,404 370,115 51,427
1. For the fiscal years ended March 31, 1999, 1998 and 1997, management fees,
before any advance waiver, totaled $131,960, $51,899 and $27,267, respectively.
Under an agreement by the manager to waive or limit its fees, the fund paid the
management fees shown.
2. For the fiscal years ended March 31, 1998 and 1997, management fees, before
any advance waiver, totaled $119,267 and $59,263, respectively. Under an
agreement by the manager to waive or limit its fees, these funds paid the
management fees shown.
3. For the fiscal years ended March 31, 1999, 1998 and 1997, management fees,
before any advance waiver, totaled $266,973, $447,715 and $133,551,
respectively. Under an agreement by the manager to limit its fees, the fund paid
the management fees shown.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the funds to provide certain administrative
services and facilities for each fund. FT Services is wholly owned by Resources
and is an affiliate of each fund's manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The trust pays FT Services a monthly fee equal to an annual
rate of:
o 0.15% of the trust's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion; and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended March 31, the funds paid the following
administration fees:
ADMINISTRATION FEES PAID ($)
--------------------------------------------
1999 1998 1997/3/
- -------------------------------------------------------------------------------
Americas Government
Securities Fund/1/ 32,989 9,342 0
International Fund/2/ 84,618 23,853 9,376
Latin America Fund 32,037 53,726 16,026
1. For the fiscal years ended March 31, 1998 and 1997, administration fees,
before any advance waiver, totaled $12,975 and $6,819, respectively. Under an
agreement by FT Services to waive or limit its fees, the fund paid the
administration fees shown.
2. For the fiscal year ended March 31, 1997, administration fees, before any
advance waiver, totaled $11,851. Under an agreement by the FT Services to limit
its fees, the fund paid the administration fees shown.
3. Before October 1, 1996, Templeton Global Investors, Inc. provided
administrative services to the funds.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is the funds' shareholder servicing agent and acts as
the funds' transfer agent and dividend-paying agent. Investor Services is
located at 100 Fountain Parkway, St. Petersburg, FL 33733-8030. Please send all
correspondence to Investor Services to P.O. Box 33030, St. Petersburg, FL
33733-8030.
For its services, Investor Services receives a fixed fee per account. The funds
also will reimburse Investor Services for certain out-of-pocket expenses, which
may include payments by Investor Services to entities, including affiliated
entities, that provide sub-shareholder services, recordkeeping and/or transfer
agency services to beneficial owners of the funds. The amount of reimbursements
for these services per benefit plan participant fund account per year will not
exceed the per account fee payable by the funds to Investor Services in
connection with maintaining shareholder accounts.
CUSTODIAN The Chase Manhattan Bank, at its principal office at MetroTech Center,
Brooklyn, NY 11245, and at the offices of its branches and agencies throughout
the world, acts as custodian of the funds' assets. As foreign custody manager,
the bank selects and monitors foreign sub-custodian banks, selects and evaluates
non-compulsory foreign depositories, and furnishes information relevant to the
selection of compulsory depositories.
AUDITOR McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, NY 10017, is each
fund's independent auditor. The auditor gives an opinion on the financial
statements included in the trust's Annual Report to Shareholders and reviews the
trust's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).
PORTFOLIO TRANSACTIONS
- -------------------------------------------------------------------------------
The managers select brokers and dealers to execute the funds' portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the board may give.
When placing a portfolio transaction, the managers seek to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid is negotiated between a
manager and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. The managers 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 a manager,
a better price and execution can otherwise be obtained. Purchases of portfolio
securities from underwriters will include a commission or concession paid by the
issuer to the underwriter, and purchases from dealers will include a spread
between the bid and ask price.
The managers may pay certain brokers commissions that are higher than those
another broker may charge, if a manager determines in good faith that the amount
paid is reasonable in relation to the value of the brokerage and research
services it receives. This may be viewed in terms of either the particular
transaction or the manager's overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to the managers 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 managers in carrying out its investment advisory
responsibilities. These services may not always directly benefit the funds. They
must, however, be of value to the managers in carrying out its overall
responsibilities to its clients.
Since most purchases by the Americas Government Securities Fund are principal
transactions at net prices, the fund incurs little or no brokerage costs. The
fund deals directly with the selling or buying principal or market maker without
incurring charges for the services of a broker on its behalf, unless it is
determined that a better price or execution may be obtained by using the
services of a broker. 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 prices. The
fund seeks to obtain prompt execution of orders at the most favorable net price.
Transactions may be directed to dealers in return for research and statistical
information, as well as for special services provided by the dealers in the
execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services the managers receive from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services allows the managers to supplement their own
research and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, the managers and their affiliates may use this
research and data in their investment advisory capacities with other clients. If
the funds' officers are satisfied that the best execution is obtained, the sale
of fund shares, as well as shares of other funds in the Franklin Templeton Group
of Funds, also may be considered a factor in the selection of broker-dealers to
execute the funds' portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when the funds tender portfolio securities pursuant to a
tender-offer solicitation. To recapture 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 a manager will be reduced by the amount of any fees received by Distributors
in cash, less any costs and expenses incurred in connection with the tender.
If purchases or sales of securities of the funds and one or more other
investment companies or clients supervised by the manager are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to all
by the managers, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. In some cases this procedure could
have a detrimental effect on the price or volume of the security so far as the
funds are concerned. In other cases it is possible that the ability to
participate in volume transactions may improve execution and reduce transaction
costs to the funds.
During the last three fiscal years ended March 31, the funds paid the following
brokerage commissions:
BROKERAGE FEES PAID ($)
---------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
Americas Government
Securities Fund 0 0 0
International Fund 172,738 23,973 21,967
Latin America Fund 96,317 179,185 50,579
For the fiscal year ended March 31, 1999, the funds paid brokerage commissions
from aggregate portfolio transactions to brokers who provided research services
as follows:
FROM
AGGREGATE
BROKERAGE PORTFOLIO
COMMISSIONS TRANSACTIONS
($) OF ($)
- -------------------------------------------------------------------------------
Americas Government
Securities Fund 0 0
International Fund 171,807 69,873,207
Latin America Fund 96,317 27,514,736
As of March 31, 1999, the funds did not own any securities of their regular
broker-dealers.
Because the funds may, from time to time, invest in broker-dealers, it is
possible that a fund will own more than 5% of the voting securities of one or
more broker-dealers through whom the fund places portfolio brokerage
transactions. In such circumstances, the broker-dealer would be considered an
affiliated person of the fund. To the extent the fund places brokerage
transactions through such a broker-dealer at a time when the broker-dealer is
considered to be an affiliate of the fund, the fund will be required to adhere
to certain rules relating to the payment of commissions to an affiliated
broker-dealer. These rules require the funds to adhere to procedures adopted by
the board relating to ensuring that the commissions paid to such broker-dealers
do not exceed what would otherwise be the usual and customary brokerage
commissions for similar transactions.
DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The funds calculate dividends and capital gains the same way for each class. The
amount of any income dividends per share will differ, however, generally due to
the difference in the distribution and service (Rule 12b-1) fees of each class.
The funds do not pay "interest" or guarantee any fixed rate of return on an
investment in their shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The funds receive income generally in the
form of dividends and interest on their investments. This income, less expenses
incurred in the operation of a fund, constitutes a fund's net investment income
from which dividends may be paid to you. Any distributions by a fund from such
income will be taxable to you as ordinary income, whether you take them in cash
or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The funds may derive capital gains and losses in
connection with sales or other dispositions of their portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in a fund. Any net capital gains realized by a fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate excise or income taxes on the funds.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by a
fund. Similarly, foreign exchange losses realized by a fund on the sale of debt
securities are generally treated as ordinary losses by the fund. These gains
when distributed will be taxable to you as ordinary dividends, and any losses
will reduce a fund's ordinary income otherwise available for distribution to
you. This treatment could increase or reduce a fund's ordinary income
distributions to you, and may cause some or all of a fund's previously
distributed income to be classified as a return of capital.
The funds may be subject to foreign withholding taxes on income from certain of
their foreign securities. If more than 50% of a fund's total assets at the end
of the fiscal year are invested in securities of foreign corporations, the fund
may elect to pass-through to you your pro rata share of foreign taxes paid by
the fund. If this election is made, the year-end statement you receive from a
fund will show more taxable income than was actually distributed to you.
However, you will be entitled to either deduct your share of such taxes in
computing your taxable income or (subject to limitations) claim a foreign tax
credit for such taxes against your U.S. federal income tax. A fund will provide
you with the information necessary to complete your individual income tax return
if it makes this election.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held fund shares for a full year, a fund may designate and distribute to
you, as ordinary income or capital gain, a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the funds.
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 Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As regulated investment companies,
the funds generally pay no federal income tax on the income and gains they
distribute to you. The board reserves the right not to maintain the
qualification of a fund as a regulated investment company if it determines such
course of action to be beneficial to shareholders. In such case, a fund will be
subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires a fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year. Each fund intends to declare and pay these amounts in
December (or in January that are treated by you as received in December) to
avoid these excise taxes, but can give no assurances that its distributions will
be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. If you redeem your fund
shares, or exchange your fund shares for shares of a different Franklin
Templeton Fund, the IRS will require that you report a gain or loss on your
redemption or exchange. If you hold your shares as a capital asset, the gain or
loss that you realize will be capital gain or loss and will be long-term or
short-term, generally depending on how long you hold your shares. Any loss
incurred on the redemption or exchange of shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by the funds on those shares.
All or a portion of any loss that you realize upon the redemption of your fund
shares will be disallowed to the extent that you buy other shares in the fund
(through reinvestment of dividends or otherwise) within 30 days before or after
your share redemption. Any loss disallowed under these rules will be added to
your tax basis in the new shares you buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in a fund, and then
reinvest the sales proceeds in such fund or in another Franklin Templeton Fund
within 90 days of buying the original shares, the sales charge that would
otherwise apply to your reinvestment may be reduced or eliminated. The IRS will
require you to report gain or loss on the redemption of your original shares in
a fund. In doing so, all or a portion of the sales charge that you paid for your
original shares in the funds will be excluded from your tax basis in the shares
sold (for the purpose of determining gain or loss upon the sale of such shares).
The portion of the sales charge excluded will equal the amount that the sales
charge is reduced on your reinvestment. Any portion of the sales charge excluded
from your tax basis in the shares sold will be added to the tax basis of the
shares you acquire from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment requirements that must be met by
the funds. Investments in Government National Mortgage Association or Federal
National Mortgage Association securities, bankers' acceptances, commercial paper
and repurchase agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. The rules on exclusion of this income
are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because the income of each fund is
derived primarily from investments in foreign rather than domestic U.S
securities, or consists of interest rather than dividends, no portion of their
distributions will generally be eligible for the intercorporate
dividends-received deduction. None of the dividends paid by such funds for the
most recent calendar year qualified for the deduction, and it is anticipated
that none of the current year's dividends will so qualify.
INVESTMENT IN COMPLEX SECURITIES The funds may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by a fund are
treated as ordinary income or capital gain, accelerate the recognition of income
to a fund and/or defer a fund's ability to recognize losses, and, in limited
cases, subject a fund to U.S. federal income tax on income from certain of its
foreign securities. In turn, these rules may affect the amount, timing or
character of the income distributed to you by a fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- -------------------------------------------------------------------------------
The funds are series' of Templeton Global Investment Trust, an open-end
management investment company, commonly called a mutual fund. The trust was
organized as a Delaware business trust on December 21, 1993, and is registered
with the SEC.
The Americas Government Securities Fund currently offers one class of shares,
Class A. The International Fund and Latin America Fund currently offer three
classes of shares, Class A, Class C and Advisor Class. Before January 1, 1999,
Class A shares were designated Class I and Class C shares were designated Class
II. The funds may offer additional classes of shares in the future. The full
title of each class of each fund is:
o Templeton Americas Government Securities Fund - Class A
o Templeton International Fund - Class A
o Templeton International Fund - Class C
o Templeton International Fund - Advisor Class
o Templeton Latin America Fund - Class A
o Templeton Latin America Fund - Class C
o Templeton Latin America Fund - Advisor Class
Shares of each class represent proportionate interests in the funds' assets. On
matters that affect a fund as a whole, each class has the same voting and other
rights and preferences as any other class. On matters that affect only one
class, only shareholders of that class may vote. Each class votes separately on
matters affecting only that class, or expressly required to be voted on
separately by state or federal law. Shares of each class of a series have the
same voting and other rights and preferences as the other classes and series of
the trust for matters that affect the trust as a whole. Additional series may be
offered in the future.
The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all of
the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The trust does not intend to hold annual shareholder meetings. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are required
to help you communicate with other shareholders about the removal of a board
member. A special meeting also may be called by the board in its discretion.
As of May 11, 1999, the principal shareholders of the Americas Government
Securities Fund, International Fund and Latin America Fund, beneficial or of
record, were:
PERCENTAGE
NAME AND ADDRESS SHARE CLASS (%)
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AMERICAS GOVERNMENT SECURITIES FUND
Templeton Global Investors, Inc.
Corporate Accounting
Attn: Michael Corcoran
555 Airport Blvd 4th Fl.
Burlingame, CA 94010 Class A 13.63
INTERNATIONAL FUND
Dorothy R. Silva & Jeffrey R. Silva &
Christopher W. Silva Jt Ten
1977 Grosse Ave.
Santa Rosa, CA 95404 Advisor Class 8.38
Michael E. Wagner And
Laura Lee Wagner As Ttees
of the Michael And Laura Wagner
Liv. Family Tr. U/A Dtd 6-29-95
4636 W. Hearn Rd.
Glendale, AZ 85306-4502 Advisor Class 15.12
Wachovia Securities Inc.
FBO 205-83243-16
P.O. Box 1220
Charlotte, NC 28201-1220 Advisor Class 9.23
Franklin Resources Inc.
Corporate Accounting
Attn: Michael Corcoran
555 Airport Blvd 4th Fl.
Burlingame, CA 94010 Advisor Class 15.58
LATIN AMERICA FUND
FTTC CUST for the IRA of
Joseph E. Sedlick
13347 88th Pl. North
Seminole, FL 33776-2410 Advisor Class 5.03
Sam J. Forester
1105 S. Rio Vista Blvd.
Ft Lauderdale, FL 33316 Advisor Class 9.85
Hao Kim Phan And Thanh C. Tu Jt Ten
733 Kathryne Ave.
San Mateo, CA 94401-3122 Advisor Class 12.43
Franklin Resources Inc.
Corporate Accounting
Attn: Michael Corcoran
555 Airport Blvd 4th Fl.
Burlingame, CA 94010 Advisor Class 10.22
Note: Charles B. Johnson and Rupert H. Johnson, Jr., who are officers and/or
trustees of the trust, may be considered beneficial holders of the fund shares
held by Franklin Resources, Inc. (Resources) and Templeton Global Investors,
Inc. (Global Investors). As principal shareholders of Resources, they may be
able to control the voting of Resources' and Global Investors' shares of the
fund.
From time to time, the number of fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
As of May 11, 1999, the officers and board members, as a group, owned of record
and beneficially 1.8% of the International Fund Advisor Class, 9.8% of the Latin
America Fund - Advisor Class and less than 1% of the outstanding shares of the
other funds and classes. The board members may own shares in other funds in the
Franklin Templeton Group of Funds.
BUYING AND SELLING SHARES
- -------------------------------------------------------------------------------
On May 19, 1999, the board approved a proposal to merge the Templeton Americas
Government Securities Fund into the Templeton Global Bond Fund, subject to
shareholder approval. The board of trustees of Templeton Income Trust also
approved the merger on behalf of the Templeton Global Bond Fund. The investment
goal of Templeton Global Bond Fund is current income with capital appreciation
and growth of income. The boards believe this proposed merger will benefit
shareholders. It is anticipated that shareholders of Templeton Americas
Government Securities Fund will receive a proxy and proxy statement requesting
their votes on the merger this summer.
The Templeton Americas Government Securities Fund is closed to new investors. If
you were a shareholder of record as of the close of business on June 8, 1999,
you may continue to add to your account, subject to your applicable minimum
investment amount, or buy additional shares through the reinvestment of dividend
and capital gain distributions until October 1, 1999. If the merger is approved
by shareholders on October 1, 1999, as of the close of business on October 1,
1999, the fund will be closed to all purchases, although you may continue to buy
additional shares through reinvestment of dividend and capital gain
distributions or through established automatic investment plans.
Although you may redeem your shares of Templeton Americas Government Securities
Fund, please keep in mind that if you sell all the shares in your account, your
account will be closed and you will not be allowed to buy additional shares of
the fund or to reopen your account in the fund. If you sell your shares in the
fund, you may reinvest some or all of the proceeds in most of the other Franklin
Templeton Funds within 365 days without an initial sales charge. The proceeds
must be reinvested within the same share class.
The funds continuously offer their shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer orders
and accounts with the funds. This reference is for convenience only and does not
indicate a legal conclusion of capacity. Banks and financial institutions that
sell shares of the funds may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the funds should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the funds 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. We may deduct any applicable banking charges
imposed by the bank from your account.
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.
If you buy shares through the reinvestment of dividends, the shares will be
purchased at the net asset value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
INITIAL SALES CHARGES The maximum initial sales charge is 5.75% for each fund's
Class A (except Americas Government Securities which has a maximum initial sales
charge of 4.25%) and 1% for Class C.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of the
lower sales charges for large purchases. The Franklin Templeton Funds include
the U.S. registered mutual funds in the Franklin Group of Funds and the
Templeton Group of Funds except Franklin Templeton Variable Insurance Products
Trust, Templeton Capital Accumulator Fund, Inc., and Templeton Variable Products
Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You also may combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you also may add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
LETTER OF INTENT (LOI). You may buy Class A shares at a reduced sales charge by
completing the letter of intent section of your account application. A letter of
intent is a commitment by you to invest a specified dollar amount during a 13
month period. The amount you agree to invest determines the sales charge you
pay. By completing the letter of intent section of the application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the LOI.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the LOI or pay the higher sales charge.
After you file your LOI with a fund, you may buy Class A shares at the sales
charge applicable to the amount specified in your LOI. Sales charge reductions
based on purchases in more than one Franklin Templeton Fund will be effective
only after notification to Distributors that the investment qualifies for a
discount. Any Class A purchases you made within 90 days before you filed your
LOI also may qualify for a retroactive reduction in the sales charge. If you
file your LOI with the fund before a change in the fund's sales charge, you may
complete the LOI at the lower of the new sales charge or the sales charge in
effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days before
you filed your LOI will be counted towards the completion of the LOI, but they
will not be entitled to a retroactive reduction in the sales charge. Any
redemptions you make during the 13 month period, except in the case of certain
retirement plans, will be subtracted from the amount of the purchases for
purposes of determining whether the terms of the LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of your
total purchases, less redemptions, is more than the amount specified in your LOI
and is an amount that would qualify for a further sales charge reduction, a
retroactive price adjustment will be made by Distributors and the securities
dealer through whom purchases were made. The price adjustment will be made on
purchases made within 90 days before and on those made after you filed your LOI
and will be applied towards the purchase of additional shares at the offering
price applicable to a single purchase or the dollar amount of the total
purchases.
If the amount of your total purchases, less redemptions, is less than the amount
specified in your LOI, the sales charge will be adjusted upward, depending on
the actual amount purchased (less redemptions) during the period. You will need
to send Distributors an amount equal to the difference in the actual dollar
amount of sales charge paid and the amount of sales charge that would have
applied to the total purchases if the total of the purchases had been made at
one time. Upon payment of this amount, the reserved shares held for your account
will be deposited to an account in your name or delivered to you or as you
direct. If within 20 days after written request the difference in sales charge
is not paid, we will redeem an appropriate number of reserved shares to realize
the difference. If you redeem the total amount in your account before you
fulfill your LOI, we will deduct the additional sales charge due from the sale
proceeds and forward the balance to you.
For LOIs filed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the LOI. These plans are not subject to the requirement to reserve 5% of
the total intended purchase or to the policy on upward adjustments in sales
charges described above, or to any penalty as a result of the early termination
of a plan, nor are these plans entitled to receive retroactive adjustments in
price for investments made before executing the LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class A
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
A qualified group generally does not include a 403(b) plan that only allows
salary deferral contributions, although any such plan that purchased the fund's
Class A shares at a reduced sales charge under the group purchase privilege
before February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be purchased
without an initial sales charge or contingent deferred sales charge (CDSC) by
investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund. The
distributions generally must be reinvested in the same share class. Certain
exceptions apply, however, to Class C shareholders who chose to reinvest their
distributions in Class A shares of the fund before November 17, 1997, and to
Advisor Class or Class Z shareholders of a Franklin Templeton Fund who may
reinvest their distributions in the fund's Class A shares. This waiver
category also applies to Class C shares.
o Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death benefit
proceeds, if the annuity contract offers as an investment option the Franklin
Templeton Variable Insurance Products Trust or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any tax
consequences that may apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or a
Franklin Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date the CD matures,
including any rollover, or the date you redeem your money fund shares.
o Redemption proceeds from the sale of Class A shares of any of the Templeton
Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton Global
Strategy Fund, a new CDSC will apply to your purchase of fund shares and the
CDSC holding period will begin again. We will, however, credit your fund account
with additional shares based on the CDSC you previously paid and the amount of
the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton money
fund, you may reinvest them as described above. The proceeds must be reinvested
within 365 days from the date they are redeemed from the money fund.
o Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without an
initial sales charge or CDSC by various individuals and institutions due to
anticipated economies in sales efforts and expenses, including:
o Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal
funds received by the close of business on the next business day following
the order.
o Any state or local government or any instrumentality, department, authority or
agency thereof that has determined the fund is a legally permissible
investment and that can only buy fund shares without paying sales charges.
Please consult your legal and investment advisors to determine if an
investment in the fund is permissible and suitable for you and the effect, if
any, of payments by the fund on arbitrage rebate calculations.
o Broker-dealers, registered investment advisors or certified financial planners
who have entered into an agreement with Distributors for clients participating
in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer or
service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their family
members, as allowed by the internal policies of their employer
o Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
o Any investor who is currently a Class Z shareholder of Franklin Mutual Series
Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31, 1996,
or who sold his or her shares of Mutual Series Class Z within the past 365
days
o Investment companies exchanging shares or selling assets pursuant to a merger,
acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting distributions
from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under
"Retirement plans" below
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without an initial sales charge.
Retirement plans that are not qualified retirement plans (employer sponsored
pension or profit-sharing plans that qualify under section 401 of the Internal
Revenue Code, including 401(k), money purchase pension, profit sharing and
defined benefit plans), SIMPLEs (savings incentive match plans for employees) or
SEPs (employer sponsored simplified employee pension plans established under
section 408(k) of the Internal Revenue Code) must also meet the group purchase
requirements described above to be able to buy Class A shares without an initial
sales charge. We may enter into a special arrangement with a securities dealer,
based on criteria established by the fund, to add together certain small
qualified retirement plan accounts for the purpose of meeting these
requirements.
For retirement plan accounts opened on or after May 1, 1997, a CDSC may apply if
the retirement plan is transferred out of the Franklin Templeton Funds or
terminated within 365 days of the retirement plan account's initial purchase in
the Franklin Templeton Funds.
Any retirement plan that does not meet the requirements to buy Class A shares
without an initial sales charge and that was a shareholder of the fund on or
before February 1, 1995, may buy shares of the fund subject to a maximum initial
sales charge of 4% of the offering price, 3.2% of which will be retained by
securities dealers.
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, each fund's shares are available to these banks' trust accounts without a
sales charge. The banks may charge service fees to their customers who
participate in the trusts. A portion of these service fees may be paid to
Distributors or one of its affiliates to help defray expenses of maintaining a
service office in Taiwan, including expenses related to local literature
fulfillment and communication facilities.
Each fund's Class A shares may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class A
shares of each fund except the Americas Government Securities Fund may be
offered with the following schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE (%)
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Under $30,000 3.0
$30,000 but less than $50,000 2.5
$50,000 but less than $100,000 2.5
$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, Class A shares of the
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 3.0
$30,000 but less than $100,000 2.0
$100,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION Securities dealers may at times receive the entire sales
charge. A securities dealer who receives 90% or more of the sales charge may be
deemed an underwriter under the Securities Act of 1933, as amended. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the dealer compensation table in the funds'
prospectus.
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 A shares of $1 million or
more: 1% on sales of $1 million to $2 million, plus 0.80% on sales over $2
million to $3 million, plus 0.50% on sales over $3 million to $50 million, plus
0.25% on sales over $50 million to $100 million, plus 0.15% on sales over $100
million.
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.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors or one of its affiliates may pay up to 1%, out of its own
resources, to securities dealers who initiate and are responsible for purchases
of Class A shares by certain retirement plans without an initial sales charge.
These payments may be made 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.
In addition to the payments above, Distributors and/or its affiliates may
provide financial support to 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 and/or total assets with the Franklin Templeton Group of Funds.
The amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a securities dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a securities dealer's support of, and
participation in, Distributors' marketing programs; a securities dealer's
compensation programs for its registered representatives; and the extent of a
securities dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to securities dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain securities dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the rules of the National Association of Securities Dealers,
Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity discount
or letter of intent programs, a CDSC may apply on any shares you sell within 12
months of purchase. For Class C shares, a CDSC may apply if you sell your shares
within 18 months of purchase. The CDSC is 1% of the value of the shares sold or
the net asset value at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class A shares without an initial sales charge also may be
subject to a CDSC if the retirement plan is transferred out of the Franklin
Templeton Funds or terminated within 365 days of the account's initial purchase
in the Franklin Templeton Funds.
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Account fees
o Sales of Class A shares purchased without an initial sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997,
or (ii) the securities dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the securities dealer of
record has entered into a supplemental agreement with Distributors
o Redemptions of Class A shares by investors who purchased $1 million or more
without an initial sales charge if the securities dealer of record waived
its commission in connection with the purchase
o Redemptions by the fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12% annually of
your account's net asset value depending on the frequency of your plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans or
employee benefit plans serviced by ValuSelect(R)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy
o Returns of excess contributions (and earnings, if applicable) from retirement
plan accounts
o Participant initiated distributions from employee benefit plans or participant
initiated exchanges among investment choices in employee benefit plans
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
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 goals exist
immediately. This money will then be withdrawn from the short-term,
interest-bearing money market instruments and invested in portfolio securities
in as orderly a manner as is possible when attractive investment opportunities
arise.
The proceeds from the sale of shares of an investment company are generally not
available until the seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh day. The sale of fund shares to complete an exchange will be effected at
net asset value at the close of business on the day the request for exchange is
received in proper form.
SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows
you to sell your shares and receive regular payments from your account on a
monthly, quarterly, semiannual or annual basis. The value of your account must
be at least $5,000 and the minimum payment amount for each withdrawal must be at
least $50. For retirement plans subject to mandatory distribution requirements,
the $50 minimum will not apply. There are no service charges for establishing or
maintaining a systematic withdrawal plan.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day. When you sell your shares under a
systematic withdrawal plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan also may be
subject to a CDSC.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. The funds may discontinue a systematic withdrawal plan by
notifying you in writing and will automatically discontinue a systematic
withdrawal plan if all shares in your account are withdrawn or if the fund
receives notification of the shareholder's death or incapacity.
REDEMPTIONS IN KIND 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 U.S. Securities and Exchange
Commission (SEC). In the case of redemption requests in excess of these amounts,
the board reserves the right to make payments in whole or in part in securities
or other assets of the fund, in case of an emergency, or if the payment of such
a redemption in cash would be detrimental to the existing shareholders of the
fund. In these circumstances, the securities distributed would be valued at the
price used to compute the fund's net assets and you may incur brokerage fees in
converting the securities to cash. Redemptions in kind are taxable transactions.
The fund does not intend to redeem illiquid securities in kind. If this happens,
however, you may not be able to recover your investment in a timely manner.
SHARE CERTIFICATES We will credit your shares to your fund account. We do not
issue share certificates unless you specifically request them. This eliminates
the costly problem of replacing lost, stolen or destroyed certificates. If a
certificate is lost, stolen or destroyed, you may have to pay an insurance
premium of up to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to 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.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.
The wiring of redemption proceeds is a special service that we make available
whenever possible. By offering this service to you, the funds are not bound to
meet any redemption request in less than the seven day period prescribed by law.
Neither the funds nor their agents shall be liable to you or any other person
if, for any reason, a redemption request by wire is not processed as described
in the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay certain
financial institutions that maintain omnibus accounts with 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, the fund may
reimburse Investor Services an amount not to exceed the per account fee that the
fund normally pays Investor Services. These financial institutions also may
charge a fee for their services directly to their clients.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. If you sell shares through your securities
dealer, it is your dealer's responsibility to transmit the order to the fund in
a timely fashion. Your redemption proceeds will not earn interest between the
time we receive the order from your dealer and the time we receive any required
documents. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority to
control your account, each fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a notice of levy.
PRICING SHARES
- ----------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the net
asset value (NAV) per share plus any applicable sales charge, calculated to two
decimal places using standard rounding criteria. When you sell shares, you
receive the NAV minus any applicable CDSC.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of shares
outstanding.
Each fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The funds do not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, each fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The fund values over-the-counter portfolio securities within
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the fund
values them according to the broadest and most representative market as
determined by the manager.
Each fund values portfolio securities underlying actively traded call options at
their market price as determined above. The current market value of any option
the fund holds is its last sale price on the relevant exchange before the fund
values its assets. If there are no sales that day or if the last sale price is
outside the bid and ask prices, the fund values options within the range of the
current closing bid and ask prices if the fund believes the valuation fairly
reflects the contract's market value.
Trading in securities on Latin American, 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
Latin American, 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 funds' NAVs are not calculated.
Thus, the calculation of the funds' NAVs does not take place contemporaneously
with the determination of the prices of many of the portfolio securities used in
the calculation and, if events materially affecting the values of these foreign
securities occur, the securities will be valued at fair value as determined by
management and approved in good faith by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the NAV
is determined as of such times. Occasionally, events affecting the values of
these securities may occur between the times at which they are determined and
the close of the NYSE that will not be reflected in the computation of the NAV.
If events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the board.
Other securities for which market quotations are readily available are
valued at the current market price, which may be obtained from a pricing
service, based on a variety of factors including recent trades, institutional
size trading in similar types of securities (considering yield, risk and
maturity) and/or developments related to specific issues. Securities and other
assets for which market prices are not readily available are valued at fair
value as determined following procedures approved by the board. With the
approval of the board, a fund may use a pricing service, bank or securities
dealer to perform any of the above described functions.
THE UNDERWRITER
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Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the funds' shares. Distributors
is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions
Distributors received in connection with the offering of the fund's shares, the
net underwriting discounts and commissions Distributors retained after
allowances to dealers, and the amounts Distributors received in connection with
redemptions or repurchases of shares for the last three fiscal years ended March
31:
AMOUNT
RECEIVED IN
CONNECTION
WITH
TOTAL AMOUNT REDEMPTIONS
COMMISSIONS RETAINED BY AND
RECEIVED DISTRIBUTORS REPURCHASES
($) ($) ($)
- ----------------------------------------------------------------------------
1999
Americas Government
Securities Fund 130,003 7,152 0
International Fund 403,559 33,785 19,819
Latin America Fund 86,804 24,218 6,936
1998
Americas Government
Securities Fund 167,684 13,743 0
International Fund 323,121 19,388 3,342
Latin America Fund 496,868 75,850 6,014
1997
Americas Government
Securities Fund 62,167 5,018 0
International Fund 96,312 15,811 6,203
Latin America Fund 215,273 35,174 852
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Each class has a separate distribution or
"Rule 12b-1" plan. Under each plan, the fund shall pay or may reimburse
Distributors or others for the expenses of activities that are primarily
intended to sell shares of the class. These expenses may include, among others,
distribution or service fees paid to securities dealers or others who have
executed a servicing agreement with the fund, Distributors or its affiliates; a
prorated portion of Distributors' overhead expenses; and the expenses of
printing prospectuses and reports used for sales purposes, and preparing and
distributing sales literature and advertisements.
The distribution and service (12b-1) fees charged to each class are based only
on the fees attributable to that particular class.
THE CLASS A PLAN. Payments by the funds under the Class A plan may not exceed
0.35% per year of Class A's average daily net assets, payable quarterly.
Expenses not reimbursed in any quarter may be reimbursed in future quarters or
years. This includes expenses not reimbursed because they exceeded the
applicable limit under the plan. As of March 31, 1999, expenses under the Class
A plan that may be reimbursable in future quarters or years were as follows:
REIMBURSABLE
EXPENSES ($)
- -------------------------------------------------------------------------------
Americas Government Securities Fund 78,761
International Fund 225,324
Latin America Fund 210,910
THE CLASS C PLAN. Under the Class C plan, the fund pays Distributors up to 0.75%
per year of the class's average daily net assets, payable quarterly, to pay
Distributors or others for providing distribution and related services and
bearing certain expenses. All distribution expenses over this amount will be
borne by those who have incurred them. The fund also may pay a servicing fee of
up to 0.25% per year of the class's average daily net assets, payable quarterly.
This fee may be used to pay securities dealers or others for, among other
things, helping to establish and maintain customer accounts and records, helping
with requests to buy and sell shares, receiving and answering correspondence,
monitoring dividend payments from the fund on behalf of customers, and similar
servicing and account maintenance activities.
The expenses relating to the Class C plan also are used to pay Distributors for
advancing the commission costs to securities dealers with respect to the initial
sale of Class C shares.
THE CLASS A AND C PLANS. The terms and provisions of each plan relating to
required reports, term, and approval are consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the National Association of Securities Dealers, Inc.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the board, including a majority vote
of the board members who are not interested persons of the fund and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such board members be done by the noninterested
members of the fund's board. The plans and any related agreement may be
terminated at any time, without penalty, by vote of a majority of the
noninterested board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with the manager or by
vote of a majority of the outstanding shares of the class. The Class A plan also
may be terminated by any act that constitutes an assignment of the underwriting
agreement with Distributors. Distributors or any dealer or other firm also may
terminate their respective distribution or service agreement at any time upon
written notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the noninterested board
members, cast in person at a meeting called for the purpose of voting on any
such amendment.
Distributors is required to report in writing to the board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the board with such other information as may
reasonably be requested in order to enable the board to make an informed
determination of whether the plans should be continued.
For the fiscal year ended March 31, 1999, Distributors' eligible expenditures
for advertising, printing, and payments to underwriters and broker-dealers
pursuant to the plans and the amounts the fund paid Distributors under the plans
were:
DISTRIBUTORS' AMOUNT
ELIGIBLE PAID BY THE
EXPENSES ($) FUND ($)
- ----------------------------------------------------------------------------
Americas Government Securities Fund 136,851 77,033
International Fund - Class A 187,754 147,854
International Fund - Class C 162,657 128,946
Latin America Fund - Class A 74,959 58,986
Latin America Fund - Class C 51,109 43,776
PERFORMANCE
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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 the funds are
based on the standardized methods of computing performance mandated by the SEC.
Performance figures reflect Rule 12b-1 fees from the date of the plan's
implementation. An explanation of these and other methods used by the 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.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by finding
the average annual rates of return over the periods indicated below that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes the maximum initial sales charge is deducted from the
initial $1,000 purchase, and income dividends and capital gain distributions are
reinvested at net asset value. The quotation assumes the account was completely
redeemed at the end of each period and the deduction of all applicable charges
and fees. If a change is made to the sales charge structure, historical
performance information will be restated to reflect the maximum initial sales
charge currently in effect.
When considering the average annual total return quotations, you should keep in
mind that the maximum initial sales charge reflected in each quotation is a one
time fee charged on all direct purchases, which will have its greatest impact
during the early stages of your investment. This charge will affect actual
performance less the longer you retain your investment in the fund. The average
annual total returns for the indicated periods ended March 31, 1999, were:
SINCE
INCEPTION 1 YEAR 5 YEARS INCEPTION
DATE (%) (%) (%)
- ----------------------------------------------------------------------------
CLASS A
Americas Government
Securities Fund 6/27/94 -6.65 -- 7.52
International Fund 5/8/95 -12.46 -- 9.40
Latin America Fund 5/8/95 -38.17 -- -5.05
SINCE
INCEPTION 1 YEAR INCEPTION
DATE (%) (%)
- ----------------------------------------------------------------------------
CLASS C
International Fund 5/8/95 -9.51 10.06
Latin America Fund 5/8/95 -36.11 -4.49
The following SEC formula was used to calculate these figures:
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 initial sales charge is deducted from the initial
$1,000 purchase, income dividends and capital gain distributions are reinvested
at net asset value, the account was completely redeemed at the end of each
period and the deduction of all applicable charges and fees. Cumulative total
return, however, is based on the actual return for a specified period rather
than on the average return over the periods indicated above. The cumulative
total returns for the indicated periods ended March 31, 1999, were:
SINCE
INCEPTION 1 YEAR 5 YEARS INCEPTION
DATE (%) (%) (%)
- -------------------------------------------------------------------------------
CLASS A
Americas Government
Securities Fund 6/27/94 -6.65 -- 41.18
International Fund 5/8/95 -12.46 -- 41.96
Latin America Fund 5/8/95 -38.17 -- -18.29
SINCE
INCEPTION 1 YEAR INCEPTION
DATE (%) (%)
- ----------------------------------------------------------------------------
CLASS C
International Fund 5/8/95 -9.51 45.30
Latin America Fund 5/8/95 -36.11 -16.39
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, 1999, was 8.30%.
The following SEC formula was used to calculate these figures:
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 by a class 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, 1999, was 0.59%.
VOLATILITY Occasionally statistics may be used to show a fund's volatility or
risk. Measures of volatility or risk are generally used to compare the fund's
net asset value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities in
which the fund invests. A beta of more than 1.00 indicates volatility greater
than the market and a beta of less than 1.00 indicates volatility less than the
market. Another measure of volatility or risk is standard deviation. Standard
deviation is used to measure variability of net asset value or total return
around an average over a specified period of time. The idea is that greater
volatility means greater risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS A fund also may quote the performance of shares
without a sales charge. Sales literature and advertising may quote a cumulative
total return, average annual total return and other measures of performance with
the substitution of net asset value for the public offering price.
Sales literature referring to the use of a fund as a potential investment for
IRAs, business retirement plans, and other tax-advantaged retirement plans may
quote a total return based upon compounding of dividends on which it is presumed
no federal income tax applies.
A fund may include in its advertising or sales material information relating to
investment goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Franklin Resources, Inc. is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS To help you better evaluate how an investment in a fund may satisfy
your investment goal, advertisements and other materials about the fund may
discuss certain measures of fund performance as reported by various financial
publications. Materials also may compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
(i) unmanaged indices so that you may compare the fund's results with those of a
group of unmanaged securities widely regarded by investors as representative of
the securities market in general; (ii) other groups of mutual funds tracked by
Lipper Analytical Services, Inc., a widely used independent research firm that
ranks mutual funds by overall performance, investment goals and assets, or
tracked by other services, companies, publications, or persons who rank mutual
funds on overall performance or other criteria; and (iii) the Consumer Price
Index (measure for inflation) to assess the real rate of return from an
investment in the fund. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
From time to time, the funds and the managers also may refer to the following
information:
o The managers' and their affiliates' market share of international equities
managed in mutual funds prepared or published by Strategic Insight or a
similar statistical organization.
o The performance of U.S. equity and debt markets relative to foreign markets
prepared or published by Morgan Stanley Capital International(R) or a
similar financial organization.
o The capitalization of U.S. and foreign stock markets as prepared or published
by the International Finance Corporation, Morgan Stanley Capital
International(R) or a similar financial organization.
o The geographic and industry distribution of a fund's portfolio and the fund's
top ten holdings.
o The gross national product and populations, including age characteristics,
literacy rates, foreign investment improvements due to a liberalization of
securities laws and a reduction of foreign exchange controls, and improving
communication technology, of various countries as published by various
statistical organizations.
o To assist investors in understanding the different returns and risk
characteristics of various investments, a fund may show historical returns
of various investments and published indices (E.G., Ibbotson Associates,
Inc. Charts and Morgan Stanley EAFE Index).
o The major industries located in various jurisdictions as published by the
Morgan Stanley Index.
o Rankings by DALBAR Surveys, Inc. with respect to mutual fund shareholder
services.
o Allegorical stories illustrating the importance of persistent long-term
investing.
o A fund's portfolio turnover rate and its ranking relative to industry
standards as published by Lipper Analytical Services, Inc. or Morningstar,
Inc.
o A description of the Templeton organization's investment management philosophy
and approach, including its worldwide search for undervalued or "bargain"
securities and its diversification by industry, nation and type of stocks
or other securities.
o Comparison of the characteristics of various emerging markets, including
population, financial and economic conditions.
o Quotations from the Templeton organization's founder, Sir John Templeton,*
advocating the virtues of diversification and long-term investing.
- ------------------
*Sir John Templeton sold the Templeton organization to Franklin
Resources, Inc. in October 1992 and resigned from the board on April 16, 1995.
He is no longer involved with the investment management process.
From time to time, advertisements or information for a fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information also may compare a fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in a 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 the 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 a fund's performance, you should keep in mind that
the composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the fund to calculate its figures. In addition,
there can be no assurance that the fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
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The funds may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
funds cannot guarantee that these goals will be met.
The funds are members of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of the
oldest mutual fund organizations and now services more than 4 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined forces
with Templeton, a pioneer in international investing. The Mutual Series team,
known for its value-driven approach to domestic equity investing, became part of
the organization four years later. Together, the Franklin Templeton Group has
over $223 billion in assets under management for more than 7 million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers 112 U.S. based open-end investment companies to the public. The
fund may identify themselves by their NASDAQ symbols or CUSIP numbers.
Currently, there are more mutual funds than there are stocks listed on the New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the fund are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has already
begun making necessary software changes to help the computer systems that
service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues to
seek reasonable assurances from all major hardware, software or data-services
suppliers that they will be Year 2000 compliant on a timely basis. Resources is
also beginning to develop a contingency plan, including identification of those
mission critical systems for which it is practical to develop a contingency
plan. However, in an operation as complex and geographically distributed as
Resources' business, the alternatives to use of normal systems, especially
mission critical systems, or supplies of electricity or long distance voice and
data lines are limited.
DESCRIPTION OF RATINGS
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CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds rated Aa are judged to be high quality by all standards. Together with
the Aaa group, they comprise what are generally known as high-grade bonds. They
are rated lower than the best bonds because margins of protection may not be as
large, fluctuation of protective elements may be of greater amplitude, or there
may be other elements present that make the long-term risks appear somewhat
larger.
A: Bonds rated A possess many favorable investment attributes and are considered
upper medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
Ba: Bonds rated Ba are judged to have predominantly speculative elements
and their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and, thereby, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca: Bonds rated Ca represent obligations that are speculative to a high degree.
These issues are often in default or have other marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S CORPORATION (S&P)
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Bonds rated C are typically subordinated debt to senior debt that is assigned
an actual or implied CCC- rating. The C rating also may reflect the filing of a
bankruptcy petition under circumstances where debt service payments are
continuing. The C1 rating is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
SHORT-TERM DEBT AND COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted. 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 for both short-term debt and
commercial paper, 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.
