N-30D 1 a02-419.txt INTERNATIONAL (EXEM) FUND ANNUAL REPORT DTD 3/31/02 Annual Report [GRAPHIC OMITTED] MARCH 31, 2002 TEMPLETON INTERNATIONAL (EX EM) FUND [logo omitted] FRANKLIN TEMPLETON INVESTMENTS THANK YOU FOR INVESTING WITH FRANKLIN TEMPLETON. WE ENCOURAGE OUR INVESTORS TO MAINTAIN A LONG-TERM PERSPECTIVE, AND REMEMBER THAT ALL SECURITIES MARKETS MOVE BOTH UP AND DOWN, AS DO MUTUAL FUND SHARE PRICES. WE APPRECIATE YOUR PAST SUPPORT AND LOOK FORWARD TO SERVING YOUR INVESTMENT NEEDS IN THE YEARS AHEAD. [PHOTO OMITTED] LISA F. MYERS, CFA PORTFOLIO MANAGER TEMPLETON INTERNATIONAL (EX EM) FUND [GRAPHIC OMITTED] FRANKLINTEMPLETON.COM Electronic delivery is a convenient alternative to receiving these reports through the mail. Visit franklintempleton.com today, click on Account Services and sign up. SHAREHOLDER LETTER -------------------------------------------------------------------------------- YOUR FUND'S GOAL: TEMPLETON INTERNATIONAL (EX EM) FUND SEEKS LONG-TERM CAPITAL APPRECIATION. UNDER NORMAL MARKET CONDITIONS, THE FUND WILL INVEST AT LEAST 75% OF ITS TOTAL ASSETS IN THE EQUITY SECURITIES OF COMPANIES LOCATED IN ANY DEVELOPED COUNTRY OUTSIDE THE U.S. -------------------------------------------------------------------------------- Dear Shareholder: This annual report of Templeton International (Ex EM) Fund covers the fiscal year ended March 31, 2002. During the 12 months under review, collapsing corporate profits, declining interest rates and slowing global economic growth were overshadowed by the September 11 tragedies. Terrorism and the uncertainty of ensuing military action exacerbated the global slowdown in early fall 2001. Not surprisingly, the U.S. responded, and other nations quickly followed, by lowering interest rates substantially and implementing other fiscal incentives. By fourth quarter 2001, global monetary stimulus and rapid progress in the war on terrorism contributed to a rally in many equity markets around the world. Consumers and investors, appearing confident that 2002 would be a year of recovery, pushed up many share prices ahead of actual fundamental improvements in sales and corporate earnings. Consequently, some of those gains were given back in early 2002 after disappointing corporate earnings announcements and many managements' continued The dollar value, number of shares or principal value, and complete legal titles of all portfolio holdings are listed in the Fund's Statement of Investments (SOI). The SOI begins on page 13. CONTENTS Shareholder Letter ................ 1 Performance Summary ............... 6 Financial Highlights & Statement of Investments .......... 10 Financial Statements .............. 17 Notes to Financial Statements .............. 20 Independent Auditors' Report .................. 24 Tax Designation ................... 25 Trustees and Officers ............. 26 [GRAPHIC OMITTED] FUND CATEGORY Global Growth Growth & Income Income Tax-free Income [GRAPHIC OMITTED] GEOGRAPHIC DISTRIBUTION Based on Total Net Assets 3/31/02 Europe 65.1% Asia 12.5% North America 5.3% Australia & New Zealand 3.6% Short-Term Investments & Other Net Assets 13.5% projections of difficult times. Within this uncertain economic environment, Templeton International (Ex EM) Fund - Class A posted a 1.02% cumulative total return for the one-year period ended March 31, 2002, as shown in the Performance Summary beginning on page 6, outperforming the Morgan Stanley Capital International (MSCI) Europe Australasia Far East (EAFE) Index, which produced a cumulative total return of -8.22% during the same period. 1 We attribute the Fund's out-performance relative to the MSCI EAFE Index mainly to our focus on what we believed were economically defensive, undervalued securities. Throughout the period, our largest regional weighting continued to be Europe, representing 65.1% of the Fund's total net assets on March 31, 2002, and where eight of the Fund's top ten holdings are located. Within Europe, stock selection was key to overall performance, as our defensive positions generally held up well. Our holdings in consumer staples Unilever and J. Sainsbury, defense companies BAE Systems and Saab, as well as utilities like the large, German firm, E.On, each performed well. Throughout the period, we continued to focus on stocks with defensive qualities; however, we also took advantage of weakness and added what were in our opinion some high-quality, beaten-down European financial and telecommunications stocks, which we believed would perform well if interest rates continued to decline and global economic recovery became more visible. We added to our ING position and purchased UBS, two global financial companies with strong balance sheets that we believe may benefit from equity market recovery. In the telecommunications sector, we initiated a position in Telefonica, one of the highest quality global telecom- 1. Source: Standard & Poor's Micropal. The unmanaged MSCI EAFE Index measures the total returns (gross dividends are reinvested) of equity securities in the developed markets in Europe, Australasia and the Far East. Securities included in the index are market capitalization-weighted. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 2 munications companies, in our opinion. Despite its strong balance sheet and profitable growth in its home and ancillary markets, Telefonica's stock appears to have been penalized along with its debt-laden European telecommunications peers and other Latin American-exposed companies in jeopardy of large write-offs. In spite of investors' enthusiasm for cyclical consumer stocks, we remained cautious in this sector as we believe consumers may be stretched. Accordingly, we sought companies that used the difficult economic time in early 2001 to restructure inventories and cut costs to better leverage any sales recovery. In our view, Adidas-Salomon, the athletic footwear and apparel retailer, was one such disciplined company. We believe Adidas may not be solely dependent on strongly recovering consumer spending and could benefit from the apparent trend back to athletic footwear and the company's leadership in soccer in a World Cup year. The Fund's second-largest weighting at fiscal year-end was Asia, at 12.5% of the Fund's total net assets. Although the Fund was substantially underweighted in the region relative to the benchmark MSCI EAFE Index, it was overweighted in Hong Kong at 6.6% of total net assets. In our opinion, Hong Kong may benefit from a U.S. recovery in 2002, as well as China's recent entry into the World Trade Organization. We believe well-managed Hong Kong companies, with close proximity to and years of experience doing business in China, could have a distinct competitive edge in the initial stages of penetrating the Chinese market. In contrast to the overweighted Hong Kong position, we remained notably underweighted in Japan relative to the MSCI EAFE Index. We have not found Japanese stock valuations compelling in view of the persistently weak economic environment and the need for significant structural reform that we believe the country must undergo before it will TOP 10 COUNTRIES Based on Equity Investments 3/31/02 % OF TOTAL NET ASSETS ----------------------------- U.K. 19.7% Germany 8.6% Netherlands 7.4% Hong Kong 6.6% Spain 6.3% Japan 5.9% Sweden 4.6% France 4.2% Switzerland 4.2% Finland 4.1% TOP 10 SECTORS/INDUSTRIES Based on Equity Investments 3/31/02 % OF TOTAL NET ASSETS -------------------------------------------------------- Banks 11.3% Insurance 7.5% Oil & Gas 7.5% Electric Utilities 5.8% Diversified Financials 4.5% Chemicals 4.4% Diversified Telecommunication Services 4.1% Aerospace & Defense 3.8% Machinery 3.6% Food Products 3.6% 3 TOP 10 EQUITY HOLDINGS 3/31/02 COMPANY SECTOR/INDUSTRY, % OF TOTAL COUNTRY NET ASSETS ------------------------------------------------------- Eni SpA 2.5% OIL & GAS, ITALY Koninklijke Philips Electronics NV 2.5% HOUSEHOLD DURABLES, NETHERLANDS Unilever PLC 2.4% FOOD PRODUCTS, U.K. Cheung Kong Holdings Ltd. 2.2% REAL ESTATE, HONG KONG E.On AG 2.1% ELECTRIC UTILITIES, GERMANY TransCanada PipeLines Ltd. 2.1% GAS UTILITIES, CANADA BAE Systems PLC 2.1% AEROSPACE & DEFENSE, U.K. J. Sainsbury PLC 1.9% FOOD & DRUG RETAILING, U.K. Akzo Nobel NV 1.9% CHEMICALS, NETHERLANDS Telefonica SA 1.8% DIVERSIFIED TELECOMMUNICATION SERVICES, SPAIN experience a sustained economic recovery. Continued government posturing with little action or results kept us skeptical of any impending change. As a result, we remained focused on identifying actual corporate restructuring situations like NEC, Hitachi and Nippon Telegraph & Telephone. As we entered 2002, with possible economic recovery in the distance, we remained positive about Templeton International (Ex EM) Fund's structure. We began to see solid performance among our holdings in companies that tend to participate in the early to middle part of a cyclical recovery; however, we are still cautious about valuations that have run ahead of improvements in corporate earnings. Consequently, we will focus on identifying companies that we believe have strong defensive characteristics that may also benefit from an economic recovery. We continue to find a number of stocks around the world we believe have compelling valuations and have the potential to weather current market volatility and perform significantly in a global economic upturn. Of course, there are special risks involved with international investing related to market, currency, economic, social, political and other factors. Investing in certain foreign markets means accepting a certain amount of volatility and, in some cases, the consequences of severe market corrections. These risks and considerations are discussed in the Fund's prospectus. 4 Thank you for investing in Templeton International (Ex EM) Fund. We welcome your comments and suggestions and look forward to serving you in the future. Sincerely, /S/SIGNATURE Lisa F. Myers, CFA /S/SIGNATURE Jeffrey A. Everett, CFA Portfolio Management Team Templeton International (Ex EM) Fund -------------------------------------------------------------------------------- This discussion reflects our views, opinions and portfolio holdings as of March 31, 2002, the end of the reporting period. The information provided is not a complete analysis of every aspect of any country, industry, security or the Fund. Our strategies and the Fund's portfolio composition will change depending on market and economic conditions. Although historical performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- A NOTE ABOUT DUPLICATE MAILINGS YOU WILL RECEIVE THE FUND'S SHAREHOLDER REPORT EVERY SIX MONTHS. TO REDUCE FUND EXPENSES, WE TRY TO IDENTIFY RELATED SHAREHOLDERS IN A HOUSEHOLD AND SEND ONLY ONE COPY OF THE REPORT. THIS PROCESS, CALLED "HOUSEHOLDING," WILL CONTINUE INDEFINITELY UNLESS YOU INSTRUCT US OTHERWISE. IF YOU PREFER NOT TO HAVE THESE DOCUMENTS HOUSEHOLDED, PLEASE CALL US AT 1-800/632-2301. AT ANY TIME YOU MAY VIEW CURRENT SHAREHOLDER REPORTS ON OUR WEBSITE. -------------------------------------------------------------------------------- 5 PERFORMANCE SUMMARY AS OF 3/31/02 DISTRIBUTIONS AND RETURNS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE LEVEL OF OPERATING EXPENSES FOR EACH CLASS. ALL TOTAL RETURNS INCLUDE REINVESTED DISTRIBUTIONS AT NET ASSET VALUE. THE PERFORMANCE TABLE AND GRAPHS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PRICE AND DISTRIBUTION INFORMATION CLASS A CHANGE 3/31/02 3/31/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.03 $11.48 $11.51 DISTRIBUTIONS (4/1/01-3/31/02) Dividend Income $0.1458 CLASS C CHANGE 3/31/02 3/31/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.04 $11.34 $11.38 DISTRIBUTIONS (4/1/01-3/31/02) Dividend Income $0.0806 ADVISOR CLASS CHANGE 3/31/02 3/31/01 -------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.04 $11.51 $11.55 DISTRIBUTIONS (4/1/01-3/31/02) Dividend Income $0.1876 Past performance does not guarantee future results. -------------------------------------------------------------------------------- CLASS A: Subject to the maximum 5.75% initial sales charge.* CLASS C: Subject to 1% initial sales charge and 1% contingent deferred sales charge for shares redeemed within 18 months of investment. These shares have higher annual fees and expenses than Class A shares.* ADVISOR CLASS: No initial sales charge or Rule 12b-1 fees and are available to a limited class of investors.* *Past expense reductions by the Fund's manager increased the Fund's total returns. Without these reductions, the Fund's total returns would have been lower. -------------------------------------------------------------------------------- 6 PERFORMANCE SUMMARY (CONT.) PERFORMANCE INCEPTION CLASS A 1-YEAR 5-YEAR (5/8/95) -------------------------------------------------------------------------------- Cumulative Total Return 1 1.02% 27.43% 61.13% Average Annual Total Return 2 -4.77% 3.74% 6.24% Value of $10,000 Investment 3 $9,523 $12,014 $15,187 INCEPTION CLASS C 1-YEAR 5-YEAR (5/8/95) -------------------------------------------------------------------------------- Cumulative Total Return 1 0.37% 23.60% 54.13% Average Annual Total Return 2 -1.57% 4.13% 6.32% Value of $10,000 Investment 3 $9,843 $12,240 $15,260 INCEPTION ADVISOR CLASS 4 1-YEAR 5-YEAR (5/8/95) -------------------------------------------------------------------------------- Cumulative Total Return 1 1.30% 29.80% 65.97% Average Annual Total Return 2 1.30% 5.36% 7.62% Value of $10,000 Investment 3 $10,130 $12,980 $16,597 For updated performance figures, see "Prices and Performance" at franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236. Past performance does not guarantee future results. 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include sales charges. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes the applicable, maximum sales charge(s) for that class. 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include the applicable, maximum sales charge(s) for that class. 4. Effective 1/2/97, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 1/2/97, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 1/2/97 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were 38.79% and 6.45%. -------------------------------------------------------------------------------- Ongoing stock market volatility can dramatically change the Fund's short-term performance; current results may differ. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, currency volatility and the social, economic and political climates of countries where the Fund invests. You may have a gain or loss when you sell your shares. -------------------------------------------------------------------------------- 7 PERFORMANCE SUMMARY (CONT.) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT TOTAL RETURN REPRESENTS THE CHANGE IN VALUE OF AN INVESTMENT OVER THE PERIODS SHOWN. IT INCLUDES THE APPLICABLE, MAXIMUM SALES CHARGE(S), FUND EXPENSES, ACCOUNT FEES AND REINVESTED DISTRIBUTIONS. THE UNMANAGED INDEX INCLUDES REINVESTED DIVIDENDS. IT DIFFERS FROM THE FUND IN COMPOSITION AND DOES NOT PAY MANAGEMENT FEES OR EXPENSES. ONE CANNOT INVEST DIRECTLY IN AN INDEX. CLASS A (5/8/95-3/31/02) [GRAPHIC OMITTED] EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS: Templeton International Date (Ex EM) Fund-Class A MSCI EAFE Index 5 05/08/95 $9,425 $10,000 06/30/95 $9,416 $9,742 09/30/95 $9,312 $10,156 12/31/95 $9,284 $10,575 03/31/96 $9,793 $10,889 06/30/96 $10,170 $11,069 09/30/96 $10,445 $11,064 12/31/96 $11,271 $11,248 03/31/97 $11,918 $11,080 06/30/97 $12,493 $12,527 09/30/97 $13,597 $12,447 12/31/97 $13,033 $11,480 03/31/98 $15,284 $13,177 06/30/98 $15,280 $13,326 09/30/98 $12,524 $11,441 12/31/98 $13,757 $13,814 03/31/99 $14,196 $14,016 06/30/99 $15,433 $14,382 09/30/99 $15,857 $15,023 12/31/99 $16,946 $17,585 03/31/00 $15,560 $17,576 06/30/00 $15,990 $16,891 09/30/00 $15,174 $15,538 12/31/00 $16,548 $15,131 03/31/01 $15,033 $13,064 06/30/01 $15,633 $12,950 09/30/01 $13,514 $11,144 12/31/01 $14,671 $11,921 03/31/02 $15,187 $11,989 AVERAGE ANNUAL TOTAL RETURN CLASS A 3/31/02 -------------------------------- 1-Year -4.77% 5-Year 3.74% Since Inception (5/8/95) 6.24% CLASS C (5/8/95-3/31/02) [GRAPHIC OMITTED] EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS: Templeton International Date (Ex EM) Fund-Class C MSCI EAFE Index 5 05/08/95 $9,901 $10,000 06/30/95 $9,881 $9,742 09/30/95 $9,762 $10,156 12/31/95 $9,713 $10,575 03/31/96 $10,218 $10,889 06/30/96 $10,599 $11,069 09/30/96 $10,847 $11,064 12/31/96 $11,692 $11,248 03/31/97 $12,346 $11,080 06/30/97 $12,917 $12,527 09/30/97 $14,035 $12,447 12/31/97 $13,468 $11,480 03/31/98 $15,748 $13,177 06/30/98 $15,709 $13,326 09/30/98 $12,852 $11,441 12/31/98 $14,088 $13,814 03/31/99 $14,530 $14,016 06/30/99 $15,772 $14,382 09/30/99 $16,185 $15,023 12/31/99 $17,262 $17,585 03/31/00 $15,837 $17,576 06/30/00 $16,240 $16,891 09/30/00 $15,389 $15,538 12/31/00 $16,753 $15,131 03/31/01 $15,203 $13,064 06/30/01 $15,778 $12,950 09/30/01 $13,627 $11,144 12/31/01 $14,762 $11,921 03/31/02 $15,260 $11,989 AVERAGE ANNUAL TOTAL RETURN CLASS C 3/31/02 ------------------------------- 1-Year -1.57% 5-Year 4.13% Since Inception (5/8/95) 6.32% Past performance does not guarantee future results. 8 PERFORMANCE SUMMARY (CONT.) ADVISOR CLASS (5/8/95-3/31/02) [GRAPHIC OMITTED] EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS: Templeton International (Ex EM) Date Fund-Advisor Class MSCI EAFE Index 5 05/08/95 $10,000 $10,000 06/30/95 $9,990 $9,742 09/30/95 $9,880 $10,156 12/31/95 $9,850 $10,575 03/31/96 $10,390 $10,889 06/30/96 $10,791 $11,069 09/30/96 $11,082 $11,064 12/31/96 $11,959 $11,248 03/31/97 $12,655 $11,080 06/30/97 $13,285 $12,527 09/30/97 $14,479 $12,447 12/31/97 $13,915 $11,480 03/31/98 $16,310 $13,177 06/30/98 $16,322 $13,326 09/30/98 $13,389 $11,441 12/31/98 $14,715 $13,814 03/31/99 $15,207 $14,016 06/30/99 $16,542 $14,382 09/30/99 $17,020 $15,023 12/31/99 $18,184 $17,585 03/31/00 $16,712 $17,576 06/30/00 $17,193 $16,891 09/30/00 $16,332 $15,538 12/31/00 $17,831 $15,131 03/31/01 $16,216 $13,064 06/30/01 $16,874 $12,950 09/30/01 $14,609 $11,144 12/31/01 $15,870 $11,921 03/31/02 $16,597 $11,989 AVERAGE ANNUAL TOTAL RETURN ADVISOR CLASS 6 3/31/02 ------------------------------- 1-Year 1.30% 5-Year 5.36% Since Inception (5/8/95) 7.62% 5. Source: Standard & Poor's Micropal. The MSCI EAFE Index measures the total returns (gross dividends are reinvested) of equity securities in the developed markets in Europe, Australasia and the Far East. Securities included in the index are market capitalization-weighted. 6. Effective 1/2/97, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 1/2/97, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Past performance does not guarantee future results. 9 TEMPLETON INTERNATIONAL (EX EM) FUND Financial Highlights
CLASS A ------------------------------------------------- YEAR ENDED MARCH 31, ------------------------------------------------- 2002 2001 2000 1999 1998 ------------------------------------------------- PER SHARE OPERATING PERFORMANCE+ (for a share outstanding throughout the year) Net asset value, beginning of year ...................... $11.51 $12.91 $12.61 $14.26 $12.35 ------------------------------------------------- Income from investment operations: Net investment income .................................. .19 .23 .27 .21 .23 Net realized and unrealized gains (losses) ............. (.07) (.64) .94 (1.24) 2.99 ------------------------------------------------- Total from investment operations ........................ .12 (.41) 1.21 (1.03) 3.22 ------------------------------------------------- Less distributions from: Net investment income .................................. (.15) (.24) (.29) (.22) (.23) Net realized gains ..................................... -- (.75) (.62) (.40) (1.08) ------------------------------------------------- Total distributions ..................................... (.15) (.99) (.91) (.62) (1.31) ------------------------------------------------- Net asset value, end of year ............................ $11.48 $11.51 $12.91 $12.61 $14.26 ================================================= Total return* ........................................... 1.02% (3.38)% 9.61% (7.12)% 28.25% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ......................... $32,586 $35,486 $40,201 $39,509 $19,455 Ratios to average net assets: Expenses ............................................... 1.82% 1.82% 1.86% 1.73% 1.85% Expenses, excluding waiver and payments by affiliate ... 1.82% 1.82% 1.86% 1.73% 2.41% Net investment income .................................. 1.69% 1.85% 2.03% 1.91% 2.04% Portfolio turnover rate ................................. 31.28% 42.06% 61.73% 38.57% 27.59%
*Total return does not reflect sales commissions. +Based on average weighted shares outstanding effective year ended March 31, 2000. 10 TEMPLETON INTERNATIONAL (EX EM) FUND Financial Highlights (CONTINUED)
CLASS C ------------------------------------------------- YEAR ENDED MARCH 31, ------------------------------------------------- 2002 2001 2000 1999 1998 ------------------------------------------------- PER SHARE OPERATING PERFORMANCE+ (for a share outstanding throughout the year) Net asset value, beginning of year ...................... $11.38 $12.78 $12.49 $14.16 $12.27 ------------------------------------------------- Income from investment operations: Net investment income .................................. .11 .15 .18 .11 .12 Net realized and unrealized gains (losses) ............. (.07) (.64) .95 (1.22) 3.01 ------------------------------------------------- Total from investment operations ........................ .04 (.49) 1.13 (1.11) 3.13 ------------------------------------------------- Less distributions from: Net investment income .................................. (.08) (.16) (.22) (.16) (.16) Net realized gains ..................................... -- (.75) (.62) (.40) (1.08) ------------------------------------------------- Total distributions ..................................... (.08) (.91) (.84) (.56) (1.24) ------------------------------------------------- Net asset value, end of year ............................ $11.34 $11.38 $12.78 $12.49 $14.16 ================================================= Total return* ........................................... .37% (4.00)% 8.99% (7.73)% 27.55% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ......................... $16,243 $11,756 $14,051 $14,222 $5,929 Ratios to average net assets: Expenses ............................................... 2.46% 2.46% 2.49% 2.37% 2.50% Expenses, excluding waiver and payments by affiliate ... 2.46% 2.46% 2.49% 2.37% 3.05% Net investment income .................................. .97% 1.25% 1.34% 1.26% 1.31% Portfolio turnover rate ................................. 31.28% 42.06% 61.73% 38.57% 27.59%
*Total return does not reflect sales commissions or the contingent deferred sales charge. +Based on average weighted shares outstanding effective year ended March 31, 2000. 11 TEMPLETON INTERNATIONAL (EX EM) FUND Financial Highlights (CONTINUED)
ADVISOR CLASS ------------------------------------------------- YEAR ENDED MARCH 31, ------------------------------------------------- 2002 2001 2000 1999 1998 ------------------------------------------------- PER SHARE OPERATING PERFORMANCE+ (for a share outstanding throughout the year) Net asset value, beginning of year ...................... $11.55 $12.95 $12.66 $14.30 $12.36 ------------------------------------------------- Income from investment operations: Net investment income .................................. .22 .39 .26 .74 .56 Net realized and unrealized gains (losses) ............. (.07) (.75) 1.00 (1.73) 2.73 ------------------------------------------------- Total from investment operations ........................ .15 (.36) 1.26 (.99) 3.29 ------------------------------------------------- Less distributions from: Net investment income .................................. (.19) (.29) (.35) (.25) (.27) Net realized gains ..................................... -- (.75) (.62) (.40) (1.08) ------------------------------------------------- Total distributions ..................................... (.19) (1.04) (.97) (.65) (1.35) ------------------------------------------------- Net asset value, end of year ............................ $11.51 $11.55 $12.95 $12.66 $14.30 ================================================= Total return ............................................ 1.30% (2.97)% 9.90% (6.76)% 28.88% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ......................... $334 $261 $544 $265 $83 Ratios to average net assets: Expenses ............................................... 1.47% 1.47% 1.51% 1.38% 1.50% Expenses, excluding waiver and payments by affiliate ... 1.47% 1.47% 1.51% 1.38% 2.06% Net investment income .................................. 1.96% 3.19% 1.93% 2.49% 2.38% Portfolio turnover rate ................................. 31.28% 42.06% 61.73% 38.57% 27.59%
+Based on average weighted shares outstanding effective year ended March 31, 2000. See notes to financial statements. 12 TEMPLETON INTERNATIONAL (EX EM) FUND STATEMENT OF INVESTMENTS, MARCH 31, 2002
SHARES/ COUNTRY RIGHTS VALUE ------------------------------------------------------------------------------------------------------------- COMMON STOCKS 85.1% AEROSPACE & DEFENSE 3.8% BAE Systems PLC ......................................... United Kingdom 215,414 $ 1,027,607 Rolls-Royce PLC ......................................... United Kingdom 214,747 576,430 Saab AB, B .............................................. Sweden 21,920 255,002 ----------- 1,859,039 ----------- AIR FREIGHT & COURIERS 1.3% Deutsche Post AG ....................................... Germany 39,060 584,063 Deutsche Post AG, 144A .................................. Germany 3,800 56,821 ----------- 640,884 ----------- AIRLINES .2% Qantas Airways Ltd. ..................................... Australia 38,500 92,258 ----------- BANKS 11.3% Australia & New Zealand Banking Group Ltd. .............. Australia 77,710 736,991 Banca Nazionale del Lavoro SpA .......................... Italy 229,140 512,749 Banco Popular Espanol SA ................................ Spain 16,946 638,657 Foreningssparbanken AB, A ............................... Sweden 46,710 559,174 Gjensidige Norway Sparebank ............................. Norway 20,000 674,842 HSBC Holdings PLC ....................................... Hong Kong 63,000 726,946 Lloyds TSB Group PLC .................................... United Kingdom 74,490 764,789 National Australia Bank Ltd. ............................ Australia 17,549 320,033 Nordea AB ............................................... Sweden 66,420 378,326 UBS AG .................................................. Switzerland 5,190 255,519 ----------- 5,568,026 ----------- BUILDING PRODUCTS 2.3% Heywood Williams Group PLC .............................. United Kingdom 175,700 587,960 Novar PLC ............................................... United Kingdom 270,528 566,289 ----------- 1,154,249 ----------- CHEMICALS 4.4% Akzo Nobel NV ........................................... Netherlands 20,000 935,215 BASF AG ................................................. Germany 19,450 789,023 Imperial Chemical Industries PLC ........................ United Kingdom 93,160 453,695 ----------- 2,177,933 ----------- COMPUTERS & PERIPHERALS .7% NEC Corp. ............................................... Japan 39,000 324,865 ----------- CONSTRUCTION MATERIALS .9% Hanson PLC .............................................. United Kingdom 60,070 453,358 -----------
13 TEMPLETON INTERNATIONAL (EX EM) FUND STATEMENT OF INVESTMENTS, MARCH 31, 2002 (CONT.)
SHARES/ COUNTRY RIGHTS VALUE ------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) DIVERSIFIED FINANCIALS 4.5% ING Groep NV ............................................ Netherlands 31,010 $ 844,060 Nomura Holdings Inc. .................................... Japan 46,000 596,627 Rodamco Europe NV ....................................... Netherlands 9,270 351,388 Swire Pacific Ltd., A ................................... Hong Kong 79,000 427,424 ----------- 2,219,499 ----------- DIVERSIFIED TELECOMMUNICATION SERVICES 4.1% Cable & Wireless PLC .................................... United Kingdom 87,691 279,400 Nippon Telegraph & Telephone Corp. ...................... Japan 172 660,565 Telecom Corp. of New Zealand Ltd. ....................... New Zealand 75,978 162,861 Telefonica SA ........................................... Spain 78,020 874,633 *Telefonica SA, rts., 4/06/02 ............................ Spain 78,020 17,697 ----------- 1,995,156 ----------- ELECTRIC UTILITIES 5.8% CLP Holdings Ltd. ....................................... Hong Kong 178,800 733,562 E.On AG ................................................. Germany 20,710 1,049,719 Endesa SA ............................................... Spain 30,725 457,018 Iberdrola SA, Br. ....................................... Spain 46,430 605,964 ----------- 2,846,263 ----------- ELECTRONIC EQUIPMENT & INSTRUMENTS 2.5% Hitachi Ltd. ............................................ Japan 100,000 731,136 Laird Group PLC ......................................... United Kingdom 186,500 478,035 ----------- 1,209,171 ----------- FOOD & DRUG RETAILING 1.9% J. Sainsbury PLC ........................................ United Kingdom 166,328 946,216 ----------- FOOD PRODUCTS 3.6% Kikkoman Corp. .......................................... Japan 20,000 108,801 Nestle SA ............................................... Switzerland 2,070 460,328 Unilever PLC ............................................ United Kingdom 147,460 1,180,100 ----------- 1,749,229 ----------- GAS UTILITIES 2.1% TransCanada PipeLines Ltd. .............................. Canada 77,270 1,046,153 ----------- HOUSEHOLD DURABLES 2.5% Koninklijke Philips Electronics NV ...................... Netherlands 39,710 1,211,469 ----------- INDUSTRIAL CONGLOMERATES .8% Smiths Group PLC ........................................ United Kingdom 35,540 410,437 -----------
14 TEMPLETON INTERNATIONAL (EX EM) FUND STATEMENT OF INVESTMENTS, MARCH 31, 2002 (CONT.)
SHARES/ COUNTRY RIGHTS VALUE ------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) INSURANCE 7.5% AXA SA .................................................. France 26,490 $ 597,854 Sampo-Leonia OYJ, A ..................................... Finland 84,410 721,667 Scor SA ................................................. France 13,060 415,752 Swiss Reinsurance Co. ................................... Switzerland 8,680 798,686 XL Capital Ltd., A ...................................... Bermuda 7,000 653,450 Zurich Financial Services AG ............................ Switzerland 2,277 528,024 ----------- 3,715,433 ----------- MACHINERY 3.6% Invensys PLC ............................................ United Kingdom 256,050 452,121 METSO OYJ ............................................... Finland 38,109 462,125 VA Technologie AG, Br. .................................. Austria 4,900 134,527 Volvo AB, B ............................................. Sweden 36,142 715,289 ----------- 1,764,062 ----------- MEDIA 1.8% United Business Media PLC ............................... United Kingdom 64,290 559,362 Wolters Kluwer NV ....................................... Netherlands 14,965 313,332 ----------- 872,694 ----------- METALS & MINING 1.6% Barrick Gold Corp. ...................................... Canada 18,310 334,547 BHP Billiton PLC ........................................ Australia 80,310 457,730 ----------- 792,277 ----------- MULTILINE RETAIL .9% Marks & Spencer Group PLC ............................... United Kingdom 78,450 430,372 ----------- OIL & GAS 7.5% Eni SpA ................................................. Italy 84,110 1,232,747 Husky Energy Inc. ....................................... Canada 55,041 589,947 Norsk Hydro ASA ......................................... Norway 7,641 369,864 Repsol YPF SA ........................................... Spain 40,000 504,249 Shell Transport & Trading Co. PLC ....................... United Kingdom 71,020 528,921 Total Fina Elf SA, B .................................... France 2,900 447,804 ----------- 3,673,532 ----------- PAPER & FOREST PRODUCTS 2.4% Holmen Aktiebolag AB, B ................................. Sweden 15,081 362,531 Stora Enso OYJ, R (EUR/FIM Traded) ...................... Finland 33,470 423,390 UPM-Kymmene Corp. ....................................... Finland 12,230 418,244 ----------- 1,204,165 ----------- PHARMACEUTICALS 2.1% Aventis SA .............................................. France 3,070 212,119 Merck KGAA .............................................. Germany 27,180 825,174 ----------- 1,037,293 -----------
15 TEMPLETON INTERNATIONAL (EX EM) FUND STATEMENT OF INVESTMENTS, MARCH 31, 2002 (CONT.)
SHARES/ COUNTRY RIGHTS VALUE ------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) REAL ESTATE 3.0% Cheung Kong Holdings Ltd. ............................... Hong Kong 122,000 $ 1,090,996 Union du Credit Bail Immobilier Unibail ................. France 6,960 369,780 ----------- 1,460,776 ----------- ROAD & RAIL .9% Nippon Express Co. Ltd. ................................. Japan 111,000 454,770 ----------- TEXTILES & APPAREL .5% Adidas-Salomon AG ....................................... Germany 3,460 247,518 ----------- TRANSPORTATION INFRASTRUCTURE .6% Hong Kong Aircraft Engineering Co. Ltd. ................. Hong Kong 139,950 274,526 ----------- TOTAL COMMON STOCKS (COST $44,928,554) 41,831,623 ----------- PREFERRED STOCKS (COST $573,828) 1.4% Volkswagen AG, pfd. ..................................... Germany 20,260 699,925 PRINCIPAL AMOUNT** ------------- BONDS (COST $8,396) BAE Systems PLC, 7.45%, 11/29/03 ........................ United Kingdom 8,532 GBP 5,710 ----------- SHORT TERM INVESTMENTS (COST $5,930,951) 12.1% U.S. Treasury Bills, 1.581% to 1.833%, with maturities to 6/27/02 ................................... United States 5,951,000 5,931,426 ----------- TOTAL INVESTMENTS (COST $51,441,729) 98.6% .............. 48,468,684 OTHER ASSETS, LESS LIABILITIES 1.4% ..................... 694,712 ----------- TOTAL NET ASSETS 100.0% ................................. $49,163,396 ===========
CURRENCY ABBREVIATIONS: EUR -- European Unit FIM -- Finnish Markka GBP -- British Pound *Non-income producing. **Securities denominated in U.S. dollars unless otherwise indicated. See notes to financial statements. 16 TEMPLETON INTERNATIONAL (EX EM) FUND Financial Statements STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 2002
Assets: Investments in securities, at value (cost $51,441,729) .................................. $48,468,684 Cash .................................................................................... 202,439 Receivables: Investment securities sold ............................................................. 308,327 Fund shares sold ....................................................................... 446,023 Dividends and interest ................................................................. 225,714 ------------ Total assets ....................................................................... 49,651,187 ------------ Liabilities: Payables: Fund shares redeemed ................................................................... 346,401 To affiliates .......................................................................... 89,420 Accrued expenses ........................................................................ 51,970 ------------ Total liabilities .................................................................. 487,791 ------------ Net assets, at value ..................................................................... $49,163,396 ============ Net assets consist of: Undistributed net investment income ..................................................... $ 192,365 Net unrealized depreciation ............................................................. (2,974,739) Accumulated net realized loss ........................................................... (4,545,218) Beneficial shares ....................................................................... 56,490,988 ------------ Net assets, at value ..................................................................... $49,163,396 ============ CLASS A: Net asset value per share ($32,585,888 / 2,837,994 shares outstanding) .................. $11.48 ============ Maximum offering price per share ($11.48 / 94.25%) ...................................... $12.18 ============ CLASS C: Net asset value per share ($16,243,686 / 1,432,231 shares outstanding)* ................. $11.34 ============ Maximum offering price per share ($11.34 / 99.00%) ...................................... $11.45 ============ ADVISOR CLASS: Net asset value and maximum offering price per share ($333,822 / 29,001 shares outstanding) $11.51 ============
*Redemption price per share is equal to net asset value less any applicable sales charge. See notes to financial statements. 17 TEMPLETON INTERNATIONAL (EX EM) FUND Financial Statements (CONTINUED) STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 2002
Investment Income: (net of foreign taxes of $186,904) Dividends ..................................................................... $1,587,627 Interest ...................................................................... 89,733 ---------- Total investment income .................................................. $1,677,360 Expenses: Management fees (Note 3) ...................................................... 360,718 Administrative fees (Note 3) .................................................. 72,143 Distribution fees (Note 3) Class A ...................................................................... 121,311 Class C ...................................................................... 130,899 Transfer agent fees (Note 3) .................................................. 139,200 Custodian fees ................................................................ 18,150 Reports to shareholders ....................................................... 17,350 Registration and filing fees .................................................. 47,865 Professional fees ............................................................. 29,385 Trustees' fees and expenses ................................................... 21,300 ---------- Total expenses ........................................................... 958,321 ------------ Net investment income ............................................... 719,039 ------------ Realized and unrealized gains (losses): Net realized loss from: Investments .................................................................. (2,943,812) Foreign currency transactions ................................................ (52,783) ---------- Net realized loss ........................................................ (2,996,595) Net unrealized appreciation (depreciation) on: Investments .................................................................. 2,501,409 Translation of assets and liabilities denominated in foreign currencies ...... (1,694) ---------- Net unrealized appreciation .............................................. 2,499,715 ------------ Net realized and unrealized loss ............................................... (496,880) ------------ Net increase in net assets resulting from operations ........................... $ 222,159 ============
See notes to financial statements. 18 TEMPLETON INTERNATIONAL (EX EM) FUND Financial Statements (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED MARCH 31, 2002 AND 2001
2002 2001 ------------------------- Increase (decrease) in net assets: Operations: Net investment income ...................................................... $ 719,039 $ 875,852 Net realized loss from investments and foreign currency transactions ....... (2,996,595) (870,124) Net unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies ... 2,499,715 (1,112,511) ------------------------- Net increase (decrease) in net assets resulting from operations ........ 222,159 (1,106,783) Distributions to shareholders from: Net investment income: Class A ................................................................... (445,149) (600,668) Class C ................................................................... (100,767) (179,555) Advisor Class ............................................................. (4,319) (7,543) Net realized gains: Class A ................................................................... -- (1,981,813) Class C ................................................................... -- (818,812) Advisor Class ............................................................. -- (30,681) ------------------------- Total distributions to shareholders ........................................ (550,235) (3,619,072) Beneficial share transactions (Note 2): Class A ................................................................... (2,555,906) (1,482,505) Class C ................................................................... 4,480,592 (796,503) Advisor Class ............................................................. 63,304 (287,879) ------------------------- Total beneficial share transactions ........................................ 1,987,990 (2,566,887) Net increase (decrease) in net assets .................................. 1,659,914 (7,292,742) Net assets: Beginning of year ........................................................... 47,503,482 54,796,224 ------------------------- End of year ................................................................. $49,163,396 $47,503,482 ========================= Undistributed net investment income included in net assets: End of year ................................................................. $ 192,365 $ 68,802 =========================
See notes to financial statements. 19 TEMPLETON INTERNATIONAL (EX EM) FUND Notes to Financial Statements 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Templeton International (Ex EM) Fund (the Fund), formerly Templeton International Fund, is a separate, diversified series of Templeton Global Investment Trust (the Trust), which is an open-end investment company registered under the Investment Company Act of 1940. The Fund seeks long-term capital appreciation. Under normal market conditions, the Fund will invest at least 75% of its total assets in the equity securities of companies located in any developed country outside the United States. The following summarizes the Fund's significant accounting policies. A. SECURITY VALUATION Securities listed or traded on a recognized national exchange or NASDAQ are valued at the latest reported sales price. Over-the-counter securities and listed securities for which no sale is reported are valued within the range of the latest quoted bid and asked prices. Securities for which market quotations are not readily available are valued at fair value as determined by management in accordance with procedures established by the Board of Trustees. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities and income items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments. Realized foreign exchange gains or losses arise from sales of foreign currencies, gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes, and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. FOREIGN CURRENCY CONTRACTS When the Fund purchases or sells foreign securities it may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate on a specified date. Realized and unrealized gains and losses are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts. D. INCOME TAXES No provision has been made for income taxes because the Fund's policy is to qualify as a regulated investment company under the Internal Revenue Code and to distribute all of its taxable income. 20 TEMPLETON INTERNATIONAL (EX EM) FUND Notes to Financial Statements (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.) E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Certain income from foreign securities is recorded as soon as information is available to the Fund. Interest income and estimated expenses are accrued daily. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Common expenses incurred by the Trust are allocated among the funds comprising the Trust based on the ratio of net assets of each fund to the combined net assets. Other expenses are charged to each fund on a specific identification basis. F. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expense during the reporting period. Actual results could differ from those estimates. G. REDEMPTION FEES Effective September 17, 2001, the Fund charges a 2% redemption fee to market timers who redeem shares held for less than 90 days. Such fees are retained by the Fund and accounted for as additional paid in capital. 2. BENEFICIAL SHARES The Fund offers three classes of shares: Class A, Class C, and Advisor Class shares. Each class of shares differs by its initial sales load, distribution fees, voting rights on matters affecting a single class and its exchange privilege. At March 31, 2002, there were an unlimited number of shares of beneficial interest authorized ($0.01 par value). Transactions in the Fund's shares were as follows:
YEAR ENDED MARCH 31, -------------------------------------------------------- 2002 2001 -------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT -------------------------------------------------------- CLASS A SHARES: Shares sold ....................................... 7,606,081 $ 86,057,791 37,720,970 $ 468,372,358 Shares issued on reinvestment of distributions .... 35,268 400,939 197,642 2,368,087 Shares redeemed ................................... (7,885,092) (89,014,636) (37,950,553) (472,222,950) -------------------------------------------------------- Net decrease ...................................... (243,743) $ (2,555,906) (31,941) $ (1,482,505) ========================================================
21 TEMPLETON INTERNATIONAL (EX EM) FUND Notes to Financial Statements (CONTINUED) 2. BENEFICIAL SHARES (CONT.)
YEAR ENDED MARCH 31, -------------------------------------------------------- 2002 2001 -------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT -------------------------------------------------------- CLASS C SHARES: Shares sold ........................................ 1,645,906 $ 18,581,572 895,260 $ 10,678,582 Shares issued on reinvestment of distributions ..... 7,621 84,475 73,243 868,299 Shares redeemed .................................... (1,254,416) (14,185,455) (1,035,154) (12,343,384) -------------------------------------------------------- Net increase (decrease) ............................ 399,111 $ 4,480,592 (66,651) $ (796,503) ========================================================
YEAR ENDED MARCH 31, -------------------------------------------------------- 2002 2001 -------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT -------------------------------------------------------- ADVISOR CLASS SHARES: Shares sold ........................................ 185,134 $ 2,047,173 333,736 $ 4,037,506 Shares issued on reinvestment of distributions ..... 290 3,316 2,849 34,128 Shares redeemed .................................... (179,066) (1,987,185) (355,981) (4,359,513) -------------------------------------------------------- Net increase (decrease) ............................ 6,358 $ 63,304 (19,396) $ (287,879) ========================================================
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES Certain officers of the Fund are also officers or directors of Templeton Global Advisors Ltd. (TGAL), Franklin Templeton Services, LLC (FT Services), Franklin/Templeton Distributors, Inc. (Distributors) and Franklin/Templeton Investor Services, LLC (Investor Services), the Fund's investment manager, administrative manager, principal underwriter and transfer agent, respectively. The Fund pays an investment management fee to TGAL of 0.75% per year of the average daily net assets of the Fund. The Fund pays its allocated share of an administrative fee to FT Services based on the Trust's aggregate average daily net assets as follows: ANNUALIZED FEE RATE AVERAGE DAILY NET ASSETS -------------------------------------------------------------------------------- 0.150% First $200 million 0.135% Over $200 million, up to and including $700 million 0.100% Over $700 million, up to and including $1.2 billion 0.075% Over $1.2 billion The Fund reimburses Distributors for costs incurred in marketing the Fund's shares up to 0.35% and 1.00% per year of the average daily net assets of Class A and Class C shares, respectively. Under the Class A distribution plan, costs exceeding the maximum may be reimbursed in subsequent periods. At March 31, 2002, the unreimbursed costs were $440,280. Distributors received net commissions from sales of the Fund's shares and received contingent deferred sales charges for the period of $36,543 and $11,019, respectively. 22 TEMPLETON INTERNATIONAL (EX EM) FUND Notes to Financial Statements (CONTINUED) 4. INCOME TAXES At March 31, 2002, the cost of investments, net unrealized depreciation, and undistributed ordinary income for income tax purposes were as follows: Cost of investments $51,712,612 ------------ Unrealized appreciation 3,830,788 Unrealized depreciation (7,074,716) ------------ Net unrealized depreciation $(3,243,928) ============ Distributable earnings - ordinary income $ 192,365 ============ The tax character of distributions paid during the year ended March 31, 2002, was the same for financial statements and tax purposes. At March 31, 2002, the Fund had tax basis capital losses of $2,844,998, which may be carried over to offset future capital gains. Such losses expire in 2010. Net realized losses differ for financial statement and tax purposes primarily due to differing treatments of wash sales and losses realized subsequent to October 31 on the sale of securities and foreign currencies. At March 31, 2002, the Fund had deferred capital and currency losses occurring subsequent to October 31, 2001 of $1,421,975 and $7,363, respectively. For tax purposes, such losses will be reflected in the year ending March 31, 2003. 5. INVESTMENT TRANSACTIONS Purchases and sales of securities (excluding short-term securities) for the year ended March 31, 2002 aggregated $13,898,279 and $17,531,316, respectively. 23 TEMPLETON INTERNATIONAL (EX EM) FUND INDEPENDENT AUDITORS' REPORT To the Board of Trustees and Shareholders of Templeton International (Ex EM) Fund In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Templeton International (Ex EM) Fund (the "Fund") at March 31, 2002, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the three years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at March 31, 2002 by correspondence with the custodian, provide a reasonable basis for our opinion. The financial highlights for each of the periods prior to April 1, 1999 were audited by other independent accountants whose report dated April 30, 1999 expressed an unqualified opinion on those statements. PricewaterhouseCoopers LLP San Francisco, California April 26, 2002 24 TEMPLETON INTERNATIONAL (EX EM) FUND Tax Designation At March 31, 2002, more than 50% of the Templeton International Fund total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from dividends paid to the fund on these investments. The Fund intends to make an election under Section 853 of the Internal Revenue Code. This election will allow shareholders to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The following table provides a breakdown by country of foreign source income and foreign taxes paid, as designated by the Fund, to shareholders in May 2002.
CLASS A CLASS C ADVISOR CLASS ----------------------------------------------------------------------------------------------------- FOREIGN TAX PAID FOREIGN SOURCE FOREIGN TAX PAID FOREIGN SOURCE FOREIGN TAX PAID FOREIGN SOURCE COUNTRY PER SHARE INCOME PER SHARE PER SHARE INCOME PER SHARE PER SHARE INCOME PER SHARE ------------------------------------------------------------------------------------------------------------------- Australia ...... $0.0000 $0.0064 $0.0000 $0.0050 $0.0000 $0.0076 Austria ........ 0.0002 0.0006 0.0002 0.0005 0.0002 0.0007 Bermuda ........ 0.0000 0.0015 0.0000 0.0012 0.0000 0.0018 Canada ......... 0.0021 0.0073 0.0021 0.0057 0.0021 0.0087 Finland ........ 0.0067 0.0232 0.0067 0.0182 0.0067 0.0276 France ......... 0.0013 0.0065 0.0013 0.0051 0.0013 0.0078 Germany ........ 0.0033 0.0169 0.0033 0.0133 0.0033 0.0201 Hong Kong ...... 0.0000 0.0157 0.0000 0.0123 0.0000 0.0187 Italy .......... 0.0014 0.0050 0.0014 0.0039 0.0014 0.0059 Japan .......... 0.0010 0.0033 0.0010 0.0026 0.0010 0.0039 Netherlands .... 0.0034 0.0119 0.0034 0.0093 0.0034 0.0141 New Zealand .... 0.0007 0.0025 0.0007 0.0019 0.0007 0.0029 Norway ......... 0.0016 0.0055 0.0016 0.0043 0.0016 0.0066 Spain .......... 0.0026 0.0091 0.0026 0.0072 0.0026 0.0109 Sweden ......... 0.0046 0.0133 0.0046 0.0104 0.0046 0.0158 Switzerland .... 0.0015 0.0054 0.0015 0.0042 0.0015 0.0064 United Kingdom . 0.0117 0.0750 0.0117 0.0589 0.0117 0.0890 ----------------------------------------------------------------------------------------------------- TOTAL .......... $0.0421 $0.2091 $0.0421 $0.1640 $0.0421 $0.2485 =====================================================================================================
In January 2003, shareholders will receive Form 1099-DIV which will include their share of taxes withheld and foreign source income distributed during the calendar year 2002. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. 25 TRUSTEES AND OFFICERS The name, age and address of the officers and trustees, as well as their affiliations, positions held with the Trust, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton fund complex are shown below. Each trustee will serve until that person's successor is elected and qualified. INDEPENDENT TRUSTEES
NUMBER OF PORTFOLIOS IN FUND LENGTH OF COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY TRUSTEE* OTHER DIRECTORSHIPS HELD ------------------------------------------------------------------------------------------------------------------------------------ HARRIS J. ASHTON (69) Trustee Since 1994 138 Director, RBC Holdings, Inc. (bank holding company) 500 East Broward Blvd. and Bar-S Foods (meat packing company). Suite 1200 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). ------------------------------------------------------------------------------------------------------------------------------------ FRANK J. CROTHERS (57) Trustee Since 2001 19 None 500 East Broward Blvd. Suite 1200 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Caribbean Electric Utility Services Corporation and Atlantic Equipment & Power Ltd., Vice Chairman, Caribbean Utilities Co., Ltd.; and Director and President, Provo Power Company Ltd., and director of various other businesses and nonprofit organizations. ------------------------------------------------------------------------------------------------------------------------------------ S. JOSEPH FORTUNATO (69) Trustee Since 1994 139 None 500 East Broward Blvd. Suite 1200 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Member of the law firm of Pitney, Hardin, Kipp & Szuch. ------------------------------------------------------------------------------------------------------------------------------------ ANDREW H. HINES, JR. (79) Trustee Since 1994 30 None 500 East Broward Blvd. Suite 1200 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Consultant, Triangle Consulting Group; and Executive-in Residence, Eckerd College (1991-present); and FORMERLY, Chairman and Director, Precise Power Corporation (1990-1197); 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. ------------------------------------------------------------------------------------------------------------------------------------
26
NUMBER OF PORTFOLIOS IN FUND LENGTH OF COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY TRUSTEE* OTHER DIRECTORSHIPS HELD ------------------------------------------------------------------------------------------------------------------------------------ EDITH E. HOLIDAY (50) Trustee Since 1996 84 Director, Amerada Hess Corporation (exploration 500 East Broward Blvd. and refining of oil and gas); Hercules Suite 1200 Incorporated (chemicals, fibers and resins); Fort Lauderdale, FL 33394-3091 Beverly Enterprises, Inc. (health care); H.J. Heinz Company (processed foods and allied products); RTI International Metals, Inc. (manufacture and distribution of titanium); Digex Incorporated (web hosting provider); and Canadian National Railway (railroad). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, 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). ------------------------------------------------------------------------------------------------------------------------------------ BETTY P. KRAHMER (72) Trustee Since 1994 24 None 500 East Broward Blvd. Suite 1200 Fort Lauderdale, FL 33394-3091 Director or trustee of various civic associations; and FORMERLY, Economic Analyst, U.S. government. ------------------------------------------------------------------------------------------------------------------------------------ GORDON S. MACKLIN (73) Trustee Since 1994 138 Director, White Mountains Insurance Group, Ltd.; 500 East Broward Blvd. Martek Biosciences Corporation; WorldCom, Inc.; Suite 1200 (communications services); MedImmune, Inc. Fort Lauderdale, FL 33394-3091 (biotechnology); Overstock.com (Internet services); and Spacehab, Inc. (aerospace services). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company); and FORMERLY, Chairman, White River Corporation (financial services) (until 1998) and Hambrecht & Quist Group (investment banking) (until 1992); and President, National Association of Securities Dealers, Inc. (until 1987). ------------------------------------------------------------------------------------------------------------------------------------ FRED R. MILLSAPS (72) Trustee Since 1994 30 None 500 East Broward Blvd. Suite 1200 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various business and nonprofit organizations, and manager of personal investments (1978-present); and FORMERLY, Chairman and Chief Executive Officer, Landmark Banking Corporation (1969-1978); Financial Vice President, Florida Power and Light (1965-1969); and Vice President, Federal Reserve Bank of Atlanta (1958-1965). ------------------------------------------------------------------------------------------------------------------------------------ CONSTANTINE DEAN Trustee Since 2001 20 None TSERETOPOULOS 500 East Broward Blvd. Suite 1200 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Physician, Lyford Cay Hospital (1987-present); and director of various nonprofit organizations; and FORMERLY, Cardiology Fellow University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985). ------------------------------------------------------------------------------------------------------------------------------------
27 INTERESTED TRUSTEES AND OFFICERS
NUMBER OF PORTFOLIOS IN FUND LENGTH OF COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY TRUSTEE* OTHER DIRECTORSHIPS HELD ------------------------------------------------------------------------------------------------------------------------------------ **NICHOLAS F. BRADY (71) Trustee Since 1994 65 Director, Amerada Hess Corporation (exploration and 500 East Broward Blvd. refining of oil and gas), C2, Inc. (operatinng and Suite 1200 investment business), and H.J. Heinz Company Fort Lauderdale, FL 33394-3091 processed foods and allied products). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Templeton Emerging Markets Investment Trust PLC, Darby Overseas Investments, Ltd. and Darby Emerging Markets Investments LDC (investment firms)(1994-present); Director, Templeton Capital Advisors Ltd., and Franklin Templeton Investment Fund; and FORMERLY, Secretary of the United States Department of the Treasury (1988-1993), Chairman of the Board, Dillon, Read & Co., Inc. (investment banking)(until 1988) and U.S. Senator, New Jersey (April 1982-December 1982). ------------------------------------------------------------------------------------------------------------------------------------ **MARTIN L. FLANAGAN (41) Trustee and Since 1994 7 None One Franklin Parkway Vice San Mateo, CA 94403-1906 President PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Member - Office of the President, Chief Financial Officer and Chief Operating Officer, Franklin Resources, Inc.; Senior Vice President and Chief Financial Officer, Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive Vice President and Chief Operating Officer, Templeton Investment Counsel, LLC; Executive Vice President and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Investment Advisory Services, Inc. and Franklin Templeton Investor Services, LLC; Chief Financial Officer, Franklin Advisory Services, LLC; Chairman, Franklin Templeton Services, LLC; officer and/or director of some of the other subsidiaries of Franklin Resources, Inc.; and officer of 52 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ **CHARLES B. JOHNSON (68) Trustee and Since 1994 138 None One Franklin Parkway Vice Presient San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Chief Executive Officer, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; officer and/or director or trustee, as the case may be, of most of the other subsidiaries of Franklin Resources, Inc.; and officer of 48 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ HARMON E. BURNS (56) Vice Since 1996 Not Applicable None One Franklin Parkway President San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory 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 51 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ GARY R. CLEMONS (45) Vice Since 1995 Not Applicable None 500 East Broward Blvd. President Suite 1200 Ft. Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President, Templeton Investment Counsel, LLC; officer of other subsidiaries of Franklin Resources, Inc.; and FORMERLY, Research Analyst, Templeton Quantitative Advisors, Inc. ------------------------------------------------------------------------------------------------------------------------------------
28
NUMBER OF PORTFOLIOS IN FUND LENGTH OF COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY TRUSTEE* OTHER DIRECTORSHIPS HELD ------------------------------------------------------------------------------------------------------------------------------------ JEFFREY A. EVERETT (38) President Since 2001 Not Applicable None P.O. Box N-7759, Lyford Cay, Nassau, Bahamas PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Director, Templeton Global Advisors Limited; officer of 18 of the investment companies in Franklin Templeton Investments; and FORMERLY, Investment Officer, First Pennsylvania Investment Research (until 1989). ------------------------------------------------------------------------------------------------------------------------------------ DAVID P. GOSS (54) Vice Since 2000 Not Applicable None One Franklin Parkway President San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Associate General Counsel, Franklin Resources, Inc.; President, Chief Executive Officer and Director, Property Resources, Inc. and Franklin Properties, Inc.; officer and/or director of some of the other subsidiaries of Franklin Resources, Inc.; officer of 53 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer and Director, Franklin Real Estate Income Fund and Franklin Advantage Real Estate Income Fund (until 1996), Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000). ------------------------------------------------------------------------------------------------------------------------------------ BARBARA J. GREEN (54) Vice Vice President Not Applicable None One Franklin Parkway President since 2000 San Mateo, CA 94403-1906 and Secretary since 1996 Secretary PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President and Deputy General Counsel, Franklin Resources, Inc.; and Senior Vice President, Templeton Worldwide, Inc.; officer of 53 of the investment companies in Franklin Templeton Investments; 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 (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). ------------------------------------------------------------------------------------------------------------------------------------ CHARLES E. JOHNSON (45) Vice Since 1996 Not Applicable None One Franklin Parkway President San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Member - Officer of the President and Director, Franklin Resources, Inc.; Senior Vice President, Franklin Templeton Distributors, Inc.; President and Director, Templeton Worldwide, Inc. and Franklin Advisers, Inc.; Chairman of the Board, President and Director, Franklin Investment Advisory 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 34 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ **RUPERT H. JOHNSON, Vice Since 1994 Not Applicable None JR. (61) President One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of most of the other subsidiaries of Franklin Resources, Inc.; and of 51 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------
29
NUMBER OF PORTFOLIOS IN FUND LENGTH OF COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY TRUSTEE* OTHER DIRECTORSHIPS HELD ------------------------------------------------------------------------------------------------------------------------------------ JOHN R. KAY (61) Vice Since 1994 Not Applicable None 500 East Broward Blvd. President Suite 1200 Ft. Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin Templeton Distributors, Inc.; Senior Vice President, Franklin Templeton Services, LLC; officer of 23 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keyston Group, Inc. ------------------------------------------------------------------------------------------------------------------------------------ BRUCE S. ROSENBERG (40) Treasurer Since 2000 Not Applicable None 500 East Broward Blvd. President Suite 1200 Ft. Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; and officer of 19 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ MURRAY L. SIMPSON (64) Vice Since 2000 Not Applicable None One Franklin Parkway President San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director of some of the subsidiaries of Franklin Resources, Inc.; officer of 53 of the investment companies in Franklin Templeton Investments; and FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000); and Director, Templeton Asset Management Ltd. (until 1999). ------------------------------------------------------------------------------------------------------------------------------------
*We base the number of portfolios on each separate series of the registered investment companies comprising the Franklin Templeton Investments fund complex. These portfolios have a common investment adviser or affiliated investment advisers. **Charles B. Johnson is considered an interested person of the Fund under the federal securities laws due to his position as an officer and director and major shareholder of Franklin Resources, Inc., which is the parent company of the Fund's adviser and distributor. Mr. Flanagan's status as an interested person results from his position as an officer of Franklin Resources, Inc. 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). Mr. Brady is Chairman and shareholder of Darby Overseas Investments, Ltd., which is the corporate general partner of Darby Overseas. In addition, Darby Overseas and Templeton Global Advisors Limited are limited partners of Darby Emerging Markets Fund, L.P. (DEMF). Mr. Brady serves as Chairman of the corporate general partner of DEMF, and Darby Overseas and its general partner own 100% of the stock of the general partner of DEMF. Mr. Brady is also a director of Templeton Capital Advisors Ltd. (TCAL), which serves as investment manager to certain unregistered funds. TCAL and Templeton Global Advisors Limited are both indirect subsidiaries of Franklin Resources, Inc. Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively, of Charles E. Johnson. -------------------------------------------------------------------------------- The Statement of Additional Information (SAI) includes additional information about the board members and is available, without charge, upon request. Shareholders may call 1-800/DIAL-BEN (1-800/342-5236) to request the SAI. -------------------------------------------------------------------------------- 30 This page intentionally left blank This page intentionally left blank LITERATURE REQUEST For a brochure and prospectus, which contain more complete information, including charges and expenses, call Franklin Templeton Investments at 1-800/DIAL BEN(R) (1-800/342-5236). Please read the prospectus carefully before investing or sending money. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be determined by the presence of a regular beeping tone. FRANKLIN TEMPLETON INVESTMENTS GLOBAL GROWTH Franklin Global Aggressive Growth Fund Franklin Global Growth Fund Franklin Global Health Care Fund Mutual Discovery Fund Templeton Developing Markets Trust Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton International (Ex EM) Fund Templeton Latin America Fund Templeton Pacific Growth Fund Templeton World Fund GLOBAL GROWTH & INCOME Franklin Global Communications Fund Mutual European Fund Templeton Global Bond Fund GLOBAL INCOME Franklin Templeton Hard Currency Fund GROWTH Franklin Aggressive Growth Fund Franklin Biotechnology Discovery Fund Franklin Blue Chip Fund Franklin California Growth Fund Franklin Capital Growth Fund(1) Franklin DynaTech Fund Franklin Gold and Precious Metals Fund Franklin Growth Fund Franklin Large Cap Growth Fund Franklin Small-Mid Cap Growth Fund(2) Franklin Small Cap Growth Fund II(3) Franklin Technology Fund GROWTH & INCOME Franklin Balance Sheet Investment Fund(4) Franklin Convertible Securities Fund Franklin Equity Income Fund Franklin Income Fund Franklin Large Cap Value Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Rising Dividends Fund Franklin Small Cap Value Fund(5) Franklin Utilities Fund Mutual Beacon Fund Mutual Financial Services Fund Mutual Qualified Fund Mutual Shares Fund FUND ALLOCATOR SERIES Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund INCOME Franklin Adjustable U.S. Government Securities Fund(6) Franklin's AGE High Income Fund Franklin Floating Rate Daily Access Fund Franklin Floating Rate Trust(7) Franklin Short-Intermediate U.S. Government Securities Fund(6) Franklin Strategic Income Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund(6) Franklin Federal Money Fund(6,8) Franklin Money Fund(6,8) TAX-FREE INCOME(9) Double Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund(10) Tax-Exempt Money Fund(6,8) STATE-SPECIFIC TAX-FREE INCOME(9) Alabama Arizona California(11) Colorado Connecticut Florida(11) Georgia Kentucky Louisiana Maryland Massachusetts(10) Michigan(10) Minnesota(10) Missouri New Jersey New York(11) North Carolina Ohio(10) Oregon Pennsylvania Tennessee Texas Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust(12) 1. Formerly Franklin Growth and Income Fund. Effective 5/1/02, the fund's name changed; investment goal and strategy remained the same. 2. Formerly Franklin Small Cap Growth Fund I. Effective 9/1/01, the fund's name changed and its investment criteria expanded. 3. The fund is closed to most new investors, with the exception of retirement plan accounts and wrap program accounts. Existing shareholders can continue adding to their account. 4. Effective 5/1/02, the fund is closed to all new investors. Existing shareholders, however, will be able to continue adding to their accounts through exchanges and purchases. In addition, retirement plans with an existing account in the fund will be allowed to open new participant accounts. 5. Effective 4/1/02, the fund expanded its investment universe to include companies with market capitalizations up to $2.5 billion. 6. An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. 7. The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. 8. No assurance exists that the fund's $1.00 per share price will be maintained. 9. For investors subject to the alternative minimum tax, a small portion of these dividends may be taxable. Distributions of capital gains are generally taxable. 10. Portfolio of insured municipal securities. 11. These funds are available in two or more variations, including long-term portfolios, portfolios of insured securities, a high-yield portfolio (CA) and intermediate-term and money market portfolios (CA and NY). 12. The funds of the Franklin Templeton Variable Insurance Products Trust are generally only available as investment options in variable annuity or variable life insurance contracts. 05/02 [logo omitted] FRANKLIN TEMPLETON One Franklin Parkway INVESTMENTS San Mateo, CA 94403-1906 ---------------------- PRESORTED STANDARD US POSTAGE PAID SO. SAN FRANCISCO CA PERMIT NO. 655 ---------------------- ANNUAL REPORT TEMPLETON INTERNATIONAL (EX EM) FUND AUDITORS PricewaterhouseCoopers LLP 333 Market Street San Francisco, CA 94105 PRINCIPAL UNDERWRITER Franklin/Templeton Distributors, Inc. 1-800/DIAL BEN(R) franklintempleton.com SHAREHOLDER SERVICES 1-800/632-2301 This report must be preceded or accompanied by the current Templeton International (Ex EM) Fund prospectus, which contains more complete information including risk factors, charges and expenses. Like any investment in securities, the value of the Fund's portfolio will be subject to the risk of loss from market, currency, economic, political and other factors. The Fund and its investors are not protected from such losses by the Investment Manager. Therefore, investors who cannot accept this risk should not invest in shares of the Fund. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. 419 A2002 05/02 [GRAPHIC OMITTED] PRINTED ON RECYCLED PAPER