TEMPLETON INSTITUTIONAL FUNDS, INC.
THIS STATEMENT OF ADDITIONAL INFORMATION DATED
MAY 1, 1995, IS NOT A PROSPECTUS.
IT SHOULD BE READ IN CONJUNCTION WITH THE
PROSPECTUS OF TEMPLETON INSTITUTIONAL FUNDS, INC.
DATED MAY 1, 1995, WHICH MAY BE OBTAINED WITHOUT
CHARGE UPON REQUEST TO THE PRINCIPAL UNDERWRITER,
FRANKLIN TEMPLETON DISTRIBUTORS, INC.,
700 CENTRAL AVENUE, P.O. BOX 33030,
ST. PETERSBURG, FLORIDA 33733-8030
TOLL FREE TELEPHONE: (800) 292-9293.
TABLE OF CONTENTS
General Information and History. . . . . . . . .1
Investment Objectives and
Policies . . . . . . . . . . . . . . . . . . .1
-Investment Policies. . . . . . . . . . . . . .1
-Repurchase Agreements. . . . . . . . . . . . .2
-Debt Securities. . . . . . . . . . . . . . . 2
-Futures Contracts. . . . . . . . . . . . . . .4
-Options on Securities
or Indices . . . . . . . . . . . . . . . . . .5
-Foreign Currency Hedging
Transactions . . . . . . . . . . . . . . . . .7
-Investment Restrictions. . . . . . . . . . . .8
-Risk Factors . . . . . . . . . . . . . . . . 10
-Trading Policies . . . . . . . . . . . . . . 13
-Personal Securities
Transactions. . . . . . . . . . . . . . . . 13
Management of the Company. . . . . . . . . . . 14
Director Compensation. . . . . . . . . . . . . 21
Principal Shareholders . . . . . . . . . . . . 22
Investment Management and Other
Services . . . . . . . . . . . . . . . . . . 23
- -Investment Management
Agreements . . . . . . . . . . . . . . . . . 23
-Management Fees. . . . . . . . . . . . . . . 25
-The Investment Managers. . . . . . . . . . . 25
-Business Manager . . . . . . . . . . . . . . 26
-Custodian and Transfer Agent . . . . . . . . 28
-Legal Counsel. . . . . . . . . . . . . . . . 28
-Independent Accountants. . . . . . . . . . . 28
-Reports to Shareholders. . . . . . . . . . . 28
Brokerage Allocation . . . . . . . . . . . . . 28
Purchase, Redemption and
Pricing of Shares. . . . . . . . . . . . . . 32
-Ownership and Authority
Disputes . . . . . . . . . . . . . . . . . . 32
Tax Status . . . . . . . . . . . . . . . . . . 33
Principal Underwriter. . . . . . . . . . . . . 38
Description of Shares. . . . . . . . . . . . . 39
Performance Information. . . . . . . . . . . . 39
Financial Statements . . . . . . . . . . . . . 43
GENERAL INFORMATION AND HISTORY
Templeton Institutional Funds, Inc. (the "Company") was organized as a
Maryland corporation on July 6, 1990, and is registered under the Investment
Company Act of 1940 (the "1940 Act") as an open-end management investment
company. The Company currently offers five series of Shares: Growth Series,
Foreign Equity Series, Emerging Markets Series, Global Fixed Income Series and
Foreign Equity (South Africa Free) Series (collectively, the "Funds").
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INVESTMENT OBJECTIVES AND POLICIES
Investment Policies. The Funds' Investment Objectives and Policies are
described in the Prospectus under the heading "Investment Objectives and
Policies." Each Fund may invest a portion of its assets, and may invest
without limit for defensive purposes, in commercial paper which, at the date
of investment, must be rated A-1 by Standard & Poor's Corporation ("S&P") or
Prime-1 by Moody's Investors Service, Inc. ("Moody's") or, if not rated, be
issued by a company which at the date of investment has an outstanding debt
issue rated AAA or AA by S&P or Aaa or Aa by Moody's.
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. Each Fund's
investment manager (Templeton Investment Counsel, Inc. ("TICI") in the case of
Growth Series, Foreign Equity Series and Foreign Equity (South Africa Free)
Series; Templeton Investment Management (Hong Kong) Limited ("Templeton (Hong
Kong)") in the case of Emerging Markets Series; and the Templeton Global Bond
Managers division of TICI ("TGBM") in the case of Global Fixed Income Series)
(collectively, the "Investment Managers") 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 Company's Directors, i.e., banks or broker-dealers
which have been determined by a Fund's Investment Manager to present no
serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
Debt Securities. Each of the Funds may invest a portion of its assets
in debt securities, including bonds, notes, debentures, commercial paper,
certificates of deposit, time deposits and bankers' acceptances. Debt
securities purchased by a Fund may be rated as low as C by S&P or Moody's or,
if unrated, of comparable quality as determined by the Fund's Investment
Manager. As an operating policy, which may be changed by the Board of
Directors without Shareholder approval, each Fund will limit its investment in
debt securities rated lower than BBB by S&P or Baa by Moody's to 5% of its
total assets. The Board may consider a change in this operating policy if, in
its judgment, economic conditions change such that a higher level of
investment in high risk, lower quality debt securities would be consistent
with the interests of the Funds and their Shareholders. Commercial paper
purchased by the Funds will meet the credit quality criteria set forth under
"Investment Policies" above.
The market value of debt securities generally varies in response to
changes in interest rates and the financial condition of each issuer. During
periods of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the Funds' net asset value.
Although they may offer higher yields than do higher rated securities,
low rated and unrated debt securities generally involve greater volatility of
price and risk of principal and income, including the possibility of default
by, or bankruptcy of, the issuers of the securities. In addition, the markets
in which low rated and unrated debt securities are traded are more limited
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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 objective 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 to seek recovery.
The Funds may accrue and report interest on high yield bonds structured
as zero coupon bonds or pay-in-kind securities as income even though it
receives no corresponding cash payment until a later time, generally the
security's maturity date. In order to qualify for beneficial tax treatment, a
Fund must distribute substantially all of its net investment income to
shareholders on an annual basis (see "Tax Status"). Thus, a Fund may have to
dispose of its portfolio securities under disadvantageous circumstances to
generate cash, or leverage itself by borrowing cash, so that it may satisfy
the distribution requirement.
Congressional legislation, which requires federally insured savings and
loan associations to divest their investments in low rated debt securities,
may have a material adverse effect on a Fund's net asset value and investment
practices.
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.
The Funds may also buy and sell index futures contracts with respect to
any stock index traded on a recognized stock exchange or board of trade. An
index futures contract is a contract to buy or sell units of an index at a
specified future date at a price agreed upon when the contract is made. The
stock index futures contract specifies that no delivery of the actual stocks
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making up the index will take place. Instead, settlement in cash must occur
upon the termination of the contract, with the settlement being the difference
between the contract price and the actual level of the stock index at the
expiration of the contract.
At the time 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 futures 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, a portfolio with a
volatility substantially similar to that of the index on which the futures
contract is based), or holding a call option permitting the Fund to purchase
the same futures contract at a price no higher than the price of the contract
written by the Fund (or at a higher price if the difference is maintained in
liquid assets with the Fund's Custodian).
Options on Securities or Indices. The Funds may write (i.e., sell)
covered put and call options and purchase put and call options on securities
or securities indices that are traded on United States and foreign exchanges
or in the over-the-counter markets.
An option on a security is a contract that gives the purchaser of the
option, in return for the premium paid, the right to buy a specified security
(in the case of a call option) or to sell a specified security (in the case of
a put option) from or to the writer of the option at a designated price during
the term of the option. An option on a securities index gives the purchaser
of the option, in return for the premium paid, the right to receive from the
seller cash equal to the difference between the closing price of the index and
the exercise price of the option.
A Fund may write a call or put option only if the option is "covered."
A call option on a security written by a Fund is "covered" if the Fund owns
the underlying security covered by the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its Custodian)
upon conversion or exchange of other securities held in its portfolio. A call
option on a security is also covered if a Fund holds a call on the same
security and in the same principal amount as the call written where the
exercise price of the call held (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 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 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 stock indices that it writes by owning
securities whose price changes, in the opinion of the Fund's Investment
Manager, are expected to be similar to those of the index, or in such other
manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations. Nevertheless, where a
Fund covers a call option on a stock index through ownership of securities,
such securities may not match the composition of the index. In that event, a
<PAGE>
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 stock indices that it writes by segregating assets equal to the
option's exercise price, or in such other manner as may be in accordance with
the rules of the exchange on which the option is traded and applicable laws
and regulations.
A Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised
or is closed out at a profit. If the value of a security or an index on which
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 or
index rises, however, a Fund will realize a loss in its call option position,
which will reduce the benefit of any unrealized appreciation in the Fund's
investments. By writing a put option, a Fund assumes the risk of a decline in
the underlying security or index. To the extent that the price changes of the
portfolio securities being hedged correlate with changes in the value of the
underlying security or index, writing covered put options on indices or
securities will increase 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.
A 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 or index and the changes in value of a Fund's security holdings being
hedged.
A Fund may purchase call options on individual securities to hedge
against an increase in the price of securities that the Fund anticipates
purchasing in the future. Similarly, 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 or index
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, the Fund may experience losses
in some cases as a result of such inability.
Foreign Currency Hedging Transactions. In order to hedge against
foreign currency exchange rate risks, the 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. The
Funds may also conduct their foreign currency exchange transactions on a spot
<PAGE>
(i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market.
A Fund may enter into forward foreign currency exchange contracts
("forward contracts") to attempt to minimize the risk to the Fund from adverse
changes in the relationship between the U.S. dollar and foreign currencies. A
forward contract is an obligation to purchase or sell a specific currency for
an agreed price at a future date which is individually negotiated and
privately traded by currency traders and their customers. A Fund may enter
into a forward contract, for example, when it enters into a contract for the
purchase or sale of a security denominated in a foreign currency in order to
"lock in" the U.S. dollar price of the security. In addition, for example,
when a Fund believes that a foreign currency may suffer a substantial decline
against the U.S. dollar, it may enter into a forward contract to sell an
amount of that foreign currency approximating the value of some or all of the
Fund's portfolio securities denominated in such foreign currency, or when a
Fund believes that the U.S. dollar may suffer a substantial decline against a
foreign currency, it may enter into a forward contract to buy that foreign
currency for a fixed dollar amount. This second investment practice is
generally referred to as "cross-hedging." Because in connection with a Fund's
forward foreign currency transactions an amount of the Fund's assets equal to
the amount of the purchase will be held aside or segregated to be used to pay
for the commitment, a Fund will always have cash, cash equivalents or high
quality debt securities available sufficient to cover any commitments under
these contracts or to limit any potential risk. 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 ("CFTC"), the CFTC may
in the future assert authority to regulate forward contracts. In such event,
a Fund's ability to utilize forward contracts in the manner set forth above
may be restricted. Forward contracts may limit potential gain from a positive
change in the relationship between the U.S. dollar and foreign currencies.
Unanticipated changes in currency prices may result in poorer overall
performance for a Fund than if it had not engaged in such contracts.
The Funds 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 a Fund's
position, the Fund may forfeit the entire amount of the premium plus related
transaction costs. Options on foreign currencies to be written or purchased
by a Fund will be traded on U.S. and foreign exchanges or over-the-counter.
The Funds 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 a Fund's
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.
<PAGE>
Investment Restrictions. Each Fund has imposed upon itself certain
Investment Restrictions set forth below, which, together with its Investment
Objective are fundamental policies. No changes in a Fund's Investment
Objective or these Investment Restrictions can be made without the approval of
the Fund's Shareholders. For this purpose, the provisions of the 1940 Act
require the affirmative vote of the lesser of either (A) 67% or more of the
Shares of a Fund present at a Shareholder's meeting at which more than 50% of
the outstanding Shares are present or represented by proxy or (B) more than
50% of the outstanding Shares of the Fund.
Each Fund will not:
1. Invest in real estate or mortgages on real estate (although a
fund may invest in marketable securities secured by real
estate or interests therein or issued by companies or invest-
ment trusts which invest in real estate or interests therein)
invest in other open-end investment companies except as per-
mitted by the 1940 Act; invest in interests (other than de-
bentures 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 the Prospectus).
2. Purchase or retain securities of any company in which
Directors or officers of the Company or of the 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.
3. Purchase any security (other than obligations of the U.S.
Government, its agencies or instrumentalities) if, as a
result, as to 75% of the Fund's total assets (i) more than 5%
of the Fund's total assets would then be invested in securit-
ies of any single issuer, or (ii) 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
the Global Fixed Income Series.
4. Act as an underwriter; issue senior securities except as set
forth in investment restriction 6 below; or purchase on mar-
gin or sell short (but a Fund may make margin payments in
connection with options on securities or securities indices
and foreign currencies; futures contracts and related options;
and forward contracts and related options).
5. Loan money apart from the purchase of a portion of an issue of
publicly distributed bonds, debentures, notes and other evid-
ences of indebtedness, although a Fund may buy from a bank or
broker-dealer United States government obligations with a
simultaneous agreement by the seller to repurchase them
within no more than seven days at the original purchase price
plus accrued interest and loan its portfolio securities.
6. Borrow money, except that a Fund may borrow money from banks
in an amount not exceeding 33-1/3% of the value of its total
assets (including the amount borrowed).
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7. 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.
8. Invest more than 5% of its total assets in warrants, whether or
not listed on the New York or American Stock Exchange, including
no more than 2% of its total assets which may be invested in
warrants that are not listed on those exchanges. Warrants
acquired by the Fund in units or attached to securities are not
included in this Restriction.
9. Invest more than 25% of its total assets in a single industry.
10. Participate on a joint or a joint and several basis in any
trading account in securities. (See "Investment Objectives
and Policies -- Trading Policies" as to transactions in the
same securities for a Fund and/or other mutual funds with the
same or affiliated advisers.)
In addition, the Company has undertaken with a state securities
commission, as a non-fundamental policy which may be changed without
shareholder approval, to limit the investment by each Series in illiquid and
restricted securities (excluding securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933) to no more than 15% of the Series'
net assets at the time of purchase.
Whenever any Investment Policy or Investment Restriction states a
maximum percentage of a Fund's assets which may be invested in any security or
other property, it is intended that such maximum percentage limitation be
determined immediately after and as a result of a Fund's acquisition of such
security or property. Assets are calculated as described in the Prospectus
under the heading "Purchase of Shares." 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 3 or 9 above, it will not
constitute a violation if, prior to receipt of securities upon exercise of
such rights, and after announcement of such rights, the Fund has sold at least
as many securities of the same class and value as it would receive on exercise
of such rights.
Risk Factors. Each Fund has the right to purchase securities in any
foreign country, developed or underdeveloped. Investors 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 United
States. Foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards, and auditing practices and
requirements may not be comparable to those applicable to United States
companies. The Funds, 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, and securities of some foreign companies are less liquid and more
volatile than securities of comparable United States companies. Commission
rates in foreign countries, which are generally fixed rather than subject to
negotiation as in the United States, are likely to be higher. In many foreign
<PAGE>
countries there is less government supervision and regulation of stock
exchanges, brokers and listed companies than in the United States.
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) the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property;
(v) the absence, until recently in certain Eastern European countries, of a
capital market structure or market-oriented economy; and (vi) the possibility
that recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries.
In addition, many countries in which the Funds may invest have
experienced substantial, and in some periods extremely high, rates of
inflation for many years. Inflation and rapid fluctuations in inflation rates
have had and may continue to have negative effects on the economies and
securities markets of certain countries. Moreover, the economies of some
developing countries may differ favorably or unfavorably from the United
States economy in such respects as growth of gross domestic product, rate of
inflation, currency depreciation, capital reinvestment, resources self-
sufficiency and balance of payments position.
Despite the recent dissolution of the Soviet Union, the Communist Party
may continue to exercise a significant or, in some countries, dominant role in
certain Eastern European countries. To the extent of the Communist Party's
influence, investments in such countries will involve risks of
nationalization, expropriation and confiscatory taxation. The communist
governments of a number of Eastern European countries expropriated large
amounts of private property in the past, in many cases without adequate
compensation, and there can be no assurance that such expropriation will not
occur in the future. In the event of such expropriation, a Fund could lose a
substantial portion of any investments it has made in the affected countries.
Finally, even though certain Eastern European currencies may be convertible
into U.S. dollars, the conversion rates may be artificial to the actual market
values and may be adverse to Fund Shareholders. Further, no accounting
standards exist in Eastern European countries.
Each Fund 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 or social instability or diplomatic developments which could affect
investments in securities of issuers in foreign nations.
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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 a Fund's
portfolio securities are denominated may have a detrimental impact on that
Fund. 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
investments of the Funds.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove
profitable and others may not. No assurance can be given that profits, if
any, will exceed losses.
The Directors consider at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions which
would affect the liquidity of the Funds' assets maintained with custodians in
foreign countries, as well as the degree of risk from political acts of
foreign governments to which such assets may be exposed. They also consider
the degree of risk involved through the holding of portfolio securities in
domestic and foreign securities depositories (see "Investment Management and
Other Services -- Custodian and Transfer Agent"). However, in the absence of
willful misfeasance, bad faith or gross negligence on the part of a Fund's
Investment Manager, any losses resulting from the holding of a Fund's
portfolio securities in foreign countries and/or with securities depositories
will be at the risk of the Shareholders. No assurance can be given that the
Directors' appraisal of the risks will always be correct or that such exchange
control restrictions or political acts of foreign governments will not occur.
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 stock index futures and related options for hedging may involve risks
because of imperfect correlations between movements in the prices of the
futures or related options and movements in the prices of the securities being
hedged. Successful use of futures and related options by a Fund for hedging
purposes also depends upon the ability of that Fund's Investment Manager's to
predict correctly movements in the direction of the market, as to which no
assurance can be given.
Trading Policies. The Investment Managers and their affiliated
companies serve as investment advisers to other investment companies and
private clients. Accordingly, the respective portfolios of these funds and
clients may contain many or some of the same securities. When any two or more
of these funds or clients are engaged simultaneously in the purchase or sale
of the same security, the transactions are placed for execution in a manner
designed to be equitable to each party. The larger size of the transaction
may affect the price of the security and/or the quantity which may be bought
or sold for each party. If the transaction is large enough, brokerage
<PAGE>
commissions in certain countries may be negotiated below those otherwise
chargeable.
Sale or purchase of securities, without payment of brokerage
commissions, fees (except customary transfer fees) or other remuneration in
connection therewith, may be effected between any of these funds, or between
funds and private clients, under procedures adopted by the Company's Board of
Directors pursuant to Rule 17a-7 under the 1940 Act.
Personal Securities Transactions. Access persons of the Franklin
Templeton Group, as defined in SEC Rule 17(j) under the 1940 Act, who are
employees of Franklin Resources, Inc. or their subsidiaries, are permitted to
engage in personal securities transaction subject to the following general
restrictions and procedures: (1) The trade must receive advance clearance
from a Compliance Officer and must be completed within 24 hours after this
clearance; (2) Copies of all brokerage confirmations must be sent to the
Compliance Officer and within 10 days after the end of each calendar quarter,
a report of all securities transactions must be provided to the Compliance
Officer; (3) In addition to items (1) and (2), access persons involved in
preparing and making investment decisions must file annual reports of their
securities holdings each January and also 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 OF THE COMPANY
The name, address, principal occupation during the past five years and
other information with respect to each of the Directors and principal
executive officers of the Company is as follows:
NAME, ADDRESS AND OFFICES WITH COMPANY
PRINCIPAL OCCUPAITON DURING THE PAST
FIVE YEARS
CHARLES B. JOHNSON*
777 Mariners Island Blvd.
San Mateo, California
Director and Vice President
President, chief executive officer, and director, Franklin Resources, Inc.;
chairman of the board and director of Franklin Templeton Distributors, Inc.
and Franklin Advisers, Inc.; director, Franklin Administrative Services, Inc.,
General Host Corporation and Templeton Global Investors, Inc.; and director,
officer and/trustee of other Templeton Funds; and officer and director,
trustee or managing partner, as the case may be, of most other subsidiaries of
Franklin and of most of the investment companies in the Franklin Group of
Funds.
WILLIAM YOUNG BOYD II**
Apartado Postal 805
Panama 1, Panama
Director
Owner and operator of Boyd Steamship Corporation.
<PAGE>
CONSTANTINE DEAN TSERETOPOULOS
Lyford Cay Hospital
P.O. Box N-7776
Nassau, Bahamas
Director
Physician, Lyford Cay Hospital (July 1987-present); Cardiology Fellow,
University of Maryland (July 1985-July 1987); Internal Medicine Intern,
Greater Baltimore Medical Center (July 1982-July 1985).
FRANK J. CROTHERS
P.O. Box N-3238
Nassau, Bahamas
Director
President and chief executive officer, Atlantic Equipment & Power Ltd; vice
chairman of Caribbean Utilities Co., Ltd.; president of Provo Power
Corporation; director of various other business and non-profit organizations.
HARRIS J. ASHTON
Metro Center, 1 Station Place
Stamford, Connecticut
Director
Chairman of the board, president and chief executive officer of General Host
Corporation (nursery and craft centers); director of RBC Holdings Inc. (a bank
holding company) and Bar-S Foods.
S. JOSEPH FORTUNATO
200 Campus Drive
Florham Park, New Jersey
Director
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director of General
Host Corporation.
FRED R. MILLSAPS
2665 N.E. 37th Drive
Fort Lauderdale, Florida
Director
Manager of personal investments (1978-present); chairman and chief executive
officer of Landmark Banking Corporation (1969-1978); financial vice president
of Florida Power and Light (1965-1969); vice president of Federal Reserve Bank
of Atlanta (1958-1965); and director of various business and nonprofit
organizations.
JOHN G. BENNETT, JR.
3 Radnor Corporate Center
Suite 150
100 Matsonford Road
Radnor, Pennsylvania
Director
Founder, chairman of the board and president of New Era Philanthropy, Inc.;
chairman of Human Service Systems, Inc.; president of The Foundation For New
Era Philanthropy; a director or trustee of many national and international
organizations, including universities and grant-making foundations; member of
the Public Policy Committee of the Advertising Counsel.
ANDREW H. HINES, JR.
150 2nd Avenue N.
St. Petersburg, Florida
Director
Consultant, Triangle Consulting Group; chairman of the board and chief
executive officer of Florida Progress Corporation (1982-February 1990) and
director of various of its subsidiaries; chairman and director of Precise
Power Corporation; Executive-in-Residence of Eckerd College (1991-present);
director of Checkers Drive-In Restaurants, Inc.
<PAGE>
GORDON S. MACKLIN
8212 Burning Tree Road
Bethesda, Maryland
Director
Chairman of White River Corporation (information services); director of Fund
America Enterprise Holdings, Inc., Lockheed Martin Marietta Corporation, MCI
Communications Corporation and Medimmune, Inc.; formerly: chairman, Hambrecht
and Quist Group; director, H&Q Healthcare Investors; and president, National
Association of Securities Dealers, Inc.
NICHOLAS F. BRADY *
102 East Dover Street
Easton, Maryland
Director
Chairman and president of Darby Overseas Investments, Ltd. (an investment
firm) since 1994; director of the H. J. Heinz Company, Amerada Hess
Corporation, Capital Cities/ABC, Inc. and the Christiana Companies; Secretary
of the United States Department of the Treasury from 1988 to January, 1993;
chairman of the board of Dillon, Read & Co. Inc. (investment banking) prior
thereto.
DONALD F. REED
4 King Street West
Toronto, Ontario
Canada
President
Executive vice president of Templeton Worldwide, Inc.; president of Templeton
Investment Counsel, Inc.; president and chief executive officer of Templeton
Management Limited; co-founder and director of International Society of
Financial Analysts; chairman, Canadian Council of Financial Analysts;
formerly, president and director, Reed Monahan Nicolishen Investment Counsel
(1982-1989).
MARK G. HOLOWESKO
Lyford Cay
Nassau, Bahamas
Vice President
President, chief executive officer and director of Templeton, Galbraith &
Hansberger Ltd.; director of global equity research for Templeton Worldwide,
Inc.; president or vice president of the Templeton Funds; investment
administrator with Roy West Trust Corporation (Bahamas) Limited (1984-1985).
MARTIN L. FLANAGAN
777 Mariners Island Blvd.
San Mateo, California
Vice President
Senior vice president, treasurer and chief financial officer of Franklin
Resources, Inc.; director, chief executive officer and executive vice
president of Templeton Investment Counsel, Inc. and director, president and
chief executive officer of Templeton Global Investors, Inc.; director or
trustee and president or vice president of the Templeton Funds; accountant,
Arthur Andersen & Company (1982-1983); member of the International Society of
Financial Analysts and the American Institute of Certified Public Accountants.
<PAGE>
DANIEL L. JACOBS
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President
Executive vice president and director of Templeton Investment Counsel, Inc.;
director of Templeton Global Investors, Inc.; president or vice president of
certain of the Templeton Funds.
JAMES E. CHANEY
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President
Vice President, Portfolio Management/Research, Templeton Investment Counsel,
Inc.; formerly, vice president of equities, GE Investments (1987-1991);
consulting engineer and project manager, Camp, Dresser & McKee, Inc. (January
1985-July 1985) and American British Consultants (1983-1984).
J. MARK MOBIUS
Two Exchange Square
Hong Kong
Vice President
Director and executive vice president of Templeton, Galbraith & Hansberger
Ltd.; managing director of Templeton Investment Management (Hong Kong)
Limited; president of International Investment Trust Company Limited
(investment manager of Taiwan R.O.C. Fund) (1986-1987); director of Vickers de
Costa, Hong Kong (1983-1986).
THOMAS LATTA
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President
Vice President of the Templeton Global Bond Managers division of Templeton
Investment Counsel, Inc.; vice president of certain of the Templeton Funds;
formerly, portfolio manager, Forester & Hairston (1988-1991); investment
adviser, Merrill Lynch, Pierce, Fenner & Smith Inc. (1981-1988).
JOHN R. KAY
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President
Vice President of the Templeton Funds; vice president and treasurer of
Templeton Global Investors, Inc. and Templeton Worldwide, Inc.; assistant vice
president of Franklin Templeton Distributors, Inc.; formerly, vice president
and controller of the Keystone Group, Inc.
THOMAS M. MISTELE
700 Central Avenue
St. Petersburg, Florida
Secretary
Senior vice president of Templeton Global Investors, Inc.; vice president of
Franklin Templeton Distributors, Inc.; secretary of the Templeton Funds;
attorney, Dechert Price & Rhoads (1985-1988) and Freehill, Hollingdale & Page
(1988); judicial clerk, U.S. District Court (Eastern District of Virginia)
(1984-1985).
<PAGE>
JAMES R. BAIO
500 East Broward Blvd.
Fort Lauderdale, Florida
Treasurer
Certified public accountant; treasurer of the Templeton Funds; senior vice
president of Templeton Worldwide, Inc., Templeton Global Investors, Inc., and
Templeton Funds Trust Company; formerly, senior tax manager of Ernst & Young
(certified public accountants) (1977-1989).
JACK L. COLLINS
700 Central Avenue
St. Petersburg, Florida
Assistant Treasurer
Assistant treasurer of the Templeton Funds; assistant vice president of
Franklin Templeton Distributors, Inc.; former partner, Grant Thornton
(international certified public accountants).
JEFFREY L. STEELE
1500 K Street, N.W.
Washington, D.C.
Assistant Secretary
Partner, Dechert Price & Rhoads.
________________________
* Messrs. Johnson and Brady are Directors who are "interested
persons" of the Fund as that term is defined in the 1940 Act.
Mr. Brady and Franklin Resources, Inc. are limited partners of
Darby Overseas Partners, L.P. ("Darby Overseas"). Mr. Brady
established Darby Overseas in February, 1994, and is Chairman
and a shareholder of the corporate general partner of Darby
Overseas. In addition, Darby Overseas and Templeton,
Galbraith & Hansberger, Ltd. are limited partner of Darby
Emerging Markets Fund, L.P.
** Mr. Boyd tendered his resignation as a director on February 24, 1995. A
special meeting of shareholders of the Fund has been called for May 4,
1995, for the purpose of electing Directors of the Fund. Betty P.
Krahmer has been nominated to stand for election as a director at that
meeting to succeed Mr. Boyd.
DIRECTOR COMPENSATION
All of the Company's officers and Directors also hold positions with
other investment companies in the Franklin Templeton Group. No compensation
is paid by the Company to any officer or director who is an officer, director
or employee of the Investment Managers or their affiliates. Each Templeton
Fund pays its independent directors and trustees and Mr. Brady an annual
retainer and/or fees for attendance at Board and Committee meetings, the
amount of which is based on the level of assets in each fund. Accordingly,
based upon the assets of the Funds as of December 31, 1994, the Company will
pay the independent Directors and Mr. Brady an annual retainer of $6000.00 and
a fee of $500.00 per meeting attended of the Board and its Committees. The
independent Directors and Mr. Brady are reimbursed for any expenses incurred
in attending meetings, paid pro rata by each Franklin Templeton Fund in which
they serve. No pension or retirement benefits are accrued as part of Company
expenses.
<PAGE>
The following table shows the total compensation paid to the Directors
by the Company and by all investment companies in the Franklin Templeton Group
for the fiscal year ended December 31, 1994:
<TABLE>
<CAPTION>
Number of Total Compensation
Aggregate Franklin Templeton from all Funds in
Name of Compensation Fund Boards on Which Franklin Templeton
Director from the Company Director Serves Group
<S> <C> <C> <C>
Harris J. Ashton $3,500 54 $319,925
John G. Bennett 3,300 23 105,625
Nicholas F. Brady 3,500 23 86,125
Frank J. Crothers 4,000 4 12,850
S. Joseph Fortunato 3,500 56 336,065
Andrew H. Hines, Jr. 3,300 23 106,125
William Young Boyd, II 1,000 4 4,000
Gordon S. Macklin 3,500 51 303,695
Fred R. Millsaps 3,300 23 106,125
Constantine D.
Tseretopoulos 4,000 4 12,850
</TABLE>
PRINCIPAL SHAREHOLDERS
As of March 31, 1995, there were 17,837,898 Shares of Growth Series
outstanding, of which no Shares were owned beneficially, directly or in-
directly, by Directors or officers of the Company. As of March 31, 1995,
there were 95,750,540 Shares of Foreign Equity Series outstanding, of which
no Shares were owned beneficially, directly or indirectly, by the Directors
or officers of the Company. As of March 31, 1995, there were 55,341,061
Shares of Emerging Markets Series outstanding, of which no Shares were owned
beneficially, directly or indirectly, by the Directors or officers of the
Company. As of March 31, 1995, there were 12,398 Shares of Global Fixed
Income Series outstanding, of which no Shares were owned beneficially,
directly or indirectly, by the Directors or officers of the Company. As of
March 31, 1995, there were 4,652,327 Shares of Foreign Equity (South Africa
Free) Series outstanding, of which no Shares were owned beneficially,
directly or indirectly, by the Directors or officers of the Company.
Set forth below is information regarding persons who owned 5% or more
of the outstanding Shares of Foreign Equity Series as of March 31, 1995: CC
Penco, 200 Barrister Bldg., 155 E. Market Street, Indianapolis, IN 46204-
3294, owned 7,184,330 Shares (7% of the outstanding Shares). As of March 31,
1995, the following persons owned 5% or more of the outstanding Shares of
Growth Series: Princeton Theological Seminary, P.O. Box 821, Princeton, New
Jersey 08542-0803, owned 13,280,212 Shares (74% of the outstanding Shares)
and Peter Norton, on behalf of the Norton Family Trust, 225 Arizona Avenue,
Santa Monica, California 90401-1210, owned 1,064,250 Shares (5% of the out-
standing Shares). As of March 31, 1995, the following persons owned 5% or
more of the outstanding Shares of Emerging Markets Series: Northern
<PAGE>
Trust Company, on behalf of Utah Retirement Systems, P.O. Box 92956, Chicago,
Illinois 60675, owned 5,255,585 Shares (9% of the outstanding Shares); The Re-
gents of the University of California, 300 Lakeside Drive, 17th Floor, Oakland,
California, owned 3,956,917 Shares (6% of outstanding Shares); New York State
Common Retirement Fund, Alfred E. Smith State Office Building, Sixth Floor,
Albany, New York 12236, owned 8,746,042 Shares (15% of the outstanding
Shares); and Bankers Trust Company, on behalf of American National Can Master
Retirement Trust, P.O. Box 1742, Church Street Station, New York, New York
10008, owned 3,055,375 Shares (5% of the outstanding Shares). As of March
31, 1995, the following persons owned 5% or more of the outstanding Shares of
Global Fixed Income Series: Templeton Global Investors, Inc., 500 East
Broward Blvd., Fort Lauderdale, Florida 33394-3091, owned 12,398 Shares (100%
of the outstanding Shares). As of March 31, 1995, the following persons
owned 5% or more of outstanding Shares of Foreign Equity (South Africa Free)
Series: Mott Children's Health Center, 806 Tuuri Place, Flint, Michigan 48503,
owned 1,208,826 Shares (25% of the outstanding Shares); Northern Trust Company,
F/B/O Dallas Museum of Art, P.O. Box 92956, Chicago, IL 60675-2956, owned
650,546 Shares (13% of the outstanding Shares); Wachovia Bank of North
Carolina, on behalf of Atlanta Gas Light Company Retirement Plan, 301 North
Main Street, Winston-Salem, North Carolina 27150, owned 1,008,793 Shares (21%
of the outstanding Shares); Lutheran Charities Foundation, 709 S. Laclede
Station Road, St. Louis, MO 63119 owned 436,789 Shares (9% of the outstand-
ing Shares); The Childrens Hospital Foundation, 1129 East 17th Avenue,
Denver, CO 80218 owned 803,497 Shares (17% of the outstanding Shares); and
Promedica Health Care Foundation, 2142 North Cove Boulevard, Toledo, OH
43606, owned 335,105 Shares (7% of the outstanding Shares).
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Agreements. The Investment Manager of Growth Series,
Foreign Equity Series and Foreign Equity (South Africa Free) Series is Templeton
Investment Counsel, Inc., a Florida corporation with offices at Broward
Financial Centre, Fort Lauderdale, Florida 33394-3091. The Investment
anagement Agreement between TICI and the Company on behalf of Foreign Equity
Series, dated October 30, 1992, and amended and restated on February 25,
1994, was approved by Templeton Funds Management, Inc. ("TFM"), as sole
Shareholder of that Fund, on October 30, 1992, and was last approved by the
Board of Directors at a meeting held on February 24, 1995, to run through
April 30, 1996. The Investment Management Agreement between TICI and
the Company on behalf of Growth Series and Foreign Equity (South Africa Free)
Series, dated May 3, 1993, was approved by Templeton Global Investors, Inc.
("TGI"), as sole Shareholder of each of those Funds, on April 30, 1993, and
amended and restated on February 25, 1994, and was last approved by the Board
of Directors at a meeting held on February 24, 1995, to run through April 30,
1996.
The Investment Manager of Emerging Markets Series is Templeton Investment
Management (Hong Kong) Limited, a Hong Kong corporation with offices at Two
Exchange Square, Hong Kong. The Investment Management Agreement between
Templeton (Hong Kong) and the Company on behalf of Emerging Markets Series,
dated May 3, 1993, and amended and restated on February 25, 1994, was
approved by TGI as sole shareholder of Emerging Markets Series on April 30,
1993, and was last approved by the Board of Directors on February 24, 1995
to run through April 30, 1996.
The Investment Manager of Global Fixed Income Series is TICI through its
Templeton Global Bond Managers division. The Investment Management Agreement
between TGBM and the Company on behalf of Global Fixed Income Series, dated
May 3, 1993, and amended and restated on February 25, 1994 was approved by
TGI, as sole Shareholder of Global Fixed Income Series, on April 30, 1993,
and was last approved by the Board of Directors on February 24, 1995 to run
through April 30, 1996.
Each of the Investment Management Agreements will continue from year to year
after its initial term, subject to approval annually by the Board of
Directors or by vote of a majority of the outstanding Shares of each Fund (as
defined in the 1940 Act) and also, in either event, with the approval of a
majority of those Directors
<PAGE>
who are not parties to the Agreement or interested persons of any such party in
person at a meeting called for the purpose of voting on such approval.
Each Investment Management Agreement requires a Fund's Investment Manager to
manage the investment and reinvestment of each Fund's assets. In so doing,
without cost to the Funds, the Investment Managers may receive certain re-
search services described below. The Investment Managers are not required to
furnish any personnel, overhead items or facilities for the Fund, including
daily pricing or trading desk facilities.
Each Investment Management Agreement provides that a Fund's Investment Manager
will select brokers and dealers for execution of the Fund's portfolio
transactions consistent with the Fund's brokerage policy (see "Brokerage
Allocation"). Although the services provided by broker-dealers in accordance
with the brokerage policy incidentally may help reduce the expenses of or
otherwise benefit the Investment Managers and other investment advisory
clients of the Investment Managers and of their affiliates, as well as the
Funds, the value of such services is indeterminable, and the Investment
Managers' fees are not reduced by any offset arrangement by reason thereof.
When the Investment Manager of a Fund determines to buy or sell the same
securities for the Fund that the Investment Manager or one or more of its
affiliates has selected for one or more of its other clients or for clients
of its affiliates, the orders for all such securities transactions are placed
for execution by methods determined by the Investment Manager, with approval
by the Board of Directors, to be impartial and fair, in order to seek good
results for all parties (see "Investment Objectives and Policies -- Trading
Policies"). Records of securities transactions of persons who know when
orders are placed by the Funds are available for inspection at least four
times annually by the compliance officer of the Company so that the non-
interested Directors (as defined in the 1940 Act) can be satisfied that the
procedures are generally fair and equitable for all parties.
Each Investment Management Agreement further provides that a Fund's Investment
Manager shall have no liability for any error of judgment, mistake of law, or
any loss arising out of any investment or other act or omission in the per-
formance by the Investment Manager of its duties under the Investment Manage-
ment Agreement or for any loss or damage resulting from the imposition by any
government of exchange control restrictions which might affect the liquidity
of the Fund's assets, or from acts or omissions of custodians or securities
depositories, or from any wars or political acts of any foreign governments
to which such assets might be exposed, except for any liability, loss or
damage resulting from willful misfeasance, bad faith or gross negligence on
the Investment Manager's part or reckless disregard of its duties under the
Investment Management Agreement. Each Investment Management Agreement will
terminate automatically in the event of its assignment, and may be terminated
by the Company on behalf of a Fund at any time without payment of any penalty
on 60 days' written notice, with the approval of a majority of the Directors
of the Company in office at the time or by vote of a majority of the outstanding
Shares of the affected Fund (as defined in the 1940 Act).
Management Fees. Growth Series, Foreign Equity Series and Foreign Equity
(South Africa Free) Series each pays TICI a monthly fee equal on an annual
basis to 0.70% of its average daily net assets during the year. During the
fiscal years ended December 31, 1994, 1993 and 1992, TICI (and, prior to
October 30, 1992, Templeton, Galbraith & Hansberger Ltd., the previous
investment manager of Foreign Equity Series) received from Foreign Equity
Series fees of $5,740,479, $1,000,116 and $7,796, respectively. During the
fiscal year ended December 31, 1994 and for the period from May 3, 1993
(commencement of operations) to December 31, 1993, TICI received from Growth
Series fees of $1,365,883 and $573,848, respectively. During the fiscal year
ended December 31, 1994 and for the period from May 3, 1993 (commencement of
operations) to December 31, 1994, TICI received from Foreign Equity (South
Africa Free) Series fees of $485,980 and $404,511, respectively. Emerging
Markets Series pays Templeton (Hong Kong) a monthly fee equal on an annual
basis to 1.25% of its average daily net assets during the year. This fee is
higher than
<PAGE>
advisory fees paid by most other U.S. investment companies, primarily because
investing in equity securities of companies in emerging markets, which are not
widely followed by professional analysts, requires Templeton (Hong Kong) to
invest additional time and incur added expense in developing specialized re-
sources, including research facilities. During the fiscal year ended Dec-
ember 31, 1994 and during the period from May 3, 1993 (commencement of
operations) to December 31, 1993, Hong Kong received from Emerging Markets
Series fees of $6,669,935 and $1,578,353, respectively. Global Fixed Income
Series pays TGBM a monthly fee equal on an annual basis to 0.55% of its
average daily net assets during the year. During the fiscal year ended Dec-
ember 31, 1994 and during the period from May 3, 1993 (commencement of
operations) to December 31, 1993, TGBM received from Global Fixed Income
Series fees of $2,453 and $1,974, respectively. Each of the Investment
Managers will comply with any applicable state regulations which may require
it to make reimbursements to a Fund in the event that the Fund's aggregate
operating expenses, including the management fee, but generally excluding
interest, taxes, brokerage commissions and extraordinary expenses, are in
excess of specific applicable limitations. The strictest rule currently
applicable to the Funds is 2.5% of the first $30,000,000 of net assets, 2% of
the next $70,000,000 of net assets and 1.5% of the remainder.
The Investment Managers. The Investment Mangers are indirect wholly owned
subsidiaries of Franklin Resources, Inc. ("Franklin"), a publicly traded company
whose shares are listed on the New York Stock Exchange. Charles B. Johnson (an
officer of the Fund), Rupert H. Johnson, Jr. and R. Martin Wiskemann are
principal shareholders of Franklin and own, respectively, approximately 20%,
16% and 9.2% of its outstanding shares. Messrs. Charles B. Johnson and
Rupert H. Johnson, Jr. are brothers.
Business Manager. Templeton Global Investors, Inc. performs certain
administrative functions for the Company including:
o providing office space, telephone, office equipment and
supplies for the Company;
o paying all compensation of the Company's officers;
o authorizing expenditures and approving bills for payment on
behalf of the Company;
o supervising preparation of annual and semiannual reports to
Shareholders, notices of dividends, capital gains distrib-
utions and tax credits, and attending to routine correspond-
dence and other communications with individual Shareholders;
o daily pricing of the Funds' investment portfolios and pre-
paring and supervising publication of daily quotations of the
bid and asked prices of the Funds' Shares, earnings reports
and other financial data;
o providing trading desk facilities for the Funds;
o monitoring relationships with organizations serving the Company,
including custodians, transfer agents and printers;
o supervising compliance by the Company with recordkeeping re-
quirements under the 1940 Act and regulations thereunder and
with state regulatory requirements, maintaing books and
records for the Funds (other than thos maintained by the
custodian and transfer agent); and preparing and filing tax
reports other than the Funds' income tax returns; and
o providing executive, clerical and secretarial help needed to
carry out these responsibilities.
<PAGE>
For its services, the Business Manager receives a monthly fee equal on an
annual basis to 0.15% of the first $200,000,000 of the combined average daily
net assets of the Funds, reduced to 0.135% annually of such net assets in
excess of $200,000,000, further reduced to 0.1% annually of such net assets
in excess of $700,000,000, and further reduced to 0.075% annually of such net
assets in excess of $1,200,000,000. Since the Business Manager's fee covers
services often provided by investment advisers to other funds, the Funds'
combined expenses for advisory and administrative services (except those of
Global Fixed Income Series) are higher than those of most other investment
companies. During the fiscal years ended December 31, 1994, 1993 and 1992, the
Business Manager (and, prior to April 1, 1993, Templeton Funds Management,
Inc., the Company's previous business manager) received fee of $912,500,
$201,527 and $1,671, respectively for business management services to
Foreign Equity Series. During the fiscal year ended December 31, 1994 and for
the period of May 3, 1993 (commencement of operations) to December 31, 1993, the
Business Manager received fees of $216,577 and $114,812, respectively, for
business management services to Growth Series. For the fiscal year ended
December 31, 1994 and for the period of May 3, 1993 (commencement of opera-
tions) to December 31, 1993, the Business Manager received fees of $589,648
and $176,839, respectively, for business management services to Emerging
Markets Series. For the fiscal year ended December 31, 1994
and for the period of May 3, 1993 (commencement of operations) to
December 31, 1993, the Business Manager received $495 and $503, respectively for
business management services to Global Fixed Income Series. For the fiscal year
ended December 31, 1994 and for the period of May 3, 1993 (commencement of
operations) to December 31, 1993, the Business Manager received $77,383 and
$81,019, respectively, for business management services to Foreign Equity
(South Africa Free) Series.
The Business Manager has voluntarily agreed to limit the total expenses
(excluding interest, taxes, brokerage commissions and extraordinary expenses) of
each Fund to an annual rate of 1% (1.6% for Emerging Markets Series) of the
Fund's average net assets until December 31, 1994. As long as this temporary
expense limitation continues, it may lower each Fund's expenses and increase
its total return. The expense limitation may be terminated or revised at any
time after December 31, 1994, at which time each Fund's expenses may increase
and its total return may be reduced, depending on the total assets of the Fund.
The Business Manager is relieved of liability to the Company and to the Funds
for any act or omission in the course of its performance under the Business
Management Agreement in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of its duties and obligations. The Business
Management Agreement may be terminated by the Company at any time on 60 days'
written notice without payment of penalty, provided that such termination by the
Company shall be directed or approved by vote of a majority of the Directors
of the Company in office at the time or by vote of a majority of the out-
standing voting securities of the Funds (as defined in the 1940 Act), and
shall terminate automatically and immediately in the event of its assignment.
The Business Manager is an indirect wholly owned subsidiary of Franklin.
Custodian and Transfer Agent. The Chase Manhattan Bank, N.A. serves as
Custodian of the Funds' assets, which are maintained at the Custodian's
principal office, MetroTech Center, Brooklyn, New York 11245, and at the
offices of its branches and agencies throughout the world. The Custodian has
entered into agreements with foreign sub-custodians approved by the Directors
pursuant to Rule 17f-5 under the 1940 Act. The Custodian, its branches and
sub-custodians generallydo not hold certificates for the securitis in their
custody, but instead have book records with domestic and foreign securities
depositories, which in turn have book records with the transfer agents of the
issuers of the securities. Compensation for to services of the Custodian
is based on a schedule of charges agreed on from time to time.
<PAGE>
Franklin Templeton Investor Services, Inc. serves as the Funds' Transfer
Agent. Services performed by the Transfer Agent include processing purchase,
transfer and redemption orders; making dividend payments, capital gains
distributions and reinvestments; and handling all routine communications with
Shareholders. The Transfer Agent receives from each Fund an annual fee of
$13.74 per Shareholder account ($14.77 per Shareholder Account for Global
Fixed Income Series) plus out-of-pocket expenses, such fee to be adjusted
each year to reflect changes in the Department of Labor Consumer Price Index.
Legal Counsel. Dechert Price & Rhoads, Washington, D.C., is legal
counsel for the Company.
Independent Accountants. The firm of McGladrey & Pullen, LLP, 555 Fifth
Avenue, New York, New York 10017, serves as independent accountants for the
Company. In addition to reporting annually on the financial statements of
the Funds, the accountants review certain filings of the Funds with the
Securities and Exchange Commission and prepare the Company's Federal and
state corporation tax returns.
Reports to Shareholders. The Company's fiscal year ends on December 31.
Shareholders will be provided at least semiannually with reports showing the
portfolios of the Funds and other information, including an annual report with
financial statements audited by independent accountants.
BROKERAGE ALLOCATION
The Investment Management Agreement for each Fund provides that the Fund's
Investment Manager is responsible for selecting members of securities exchanges,
brokers and dealers (such members, brokers and dealers being hereinafter
referred to as "brokers") for the execution of the Fund's portfolio trans-
actions and, when applicable, the negotiation of commissions in connection
therewith. It is not the duty of a Fund's Investment Manager, nor does it
have any obligation, to provide a trading desk for the Fund's portfolio
transactions. All decisions and placements are made in accordance with the
following principles:
1. Purchase and sale orders will usually be placed with brokers who are
selected by the Investment Managers as able to achieve "best execution"
of such orders. "Best execution" means prompt and reliable execution at
the most favorable securities price, taking into account the other
provisions hereinafter set forth. The determination of what may
constitute best execution and price in the execution of a securities
transaction by a broker involves a number of considerations, including,
without limitation, the overall direct net economic result to the Funds
(involving both price paid or received and any commissions and other
costs paid), the efficiency with which the transaction is effected, the
ability to effect the transaction at all where a large block is
involved, availability of the broker to stand ready to execute possibly
difficult transactions in the future, and the financial strength and
stability of the broker. Such considerations are judgmental and are
weighed by the Investment Managers in determining the overall
reasonableness of brokerage commissions.
2. In selecting brokers for portfolio transactions, each Fund's Investment
Manager takes into account its past experience as to brokers qualified
to achieve "best execution," including brokers who specialize in any
foreign securities held by the Fund.
3. The Investment Managers are authorized to allocate brokerage business to
brokers who have provided brokerage and research services, as such
services are defined in Section 28(e) of the Securities Exchange Act of
1934 (the "1934 Act"), for the Funds and/or other accounts, if any, for
which the Investment Managers exercise investment discretion (as defined
in Section 3(a)(35) of the 1934 Act) and, as to transactions as to which
<PAGE>
fixed minimum commission rates are not applicable, to cause a Fund to
pay a commission for effecting a securities transaction in excess of the
amount another broker would have charged for effecting that transaction,
if the Investment Manager for that Fund determines in good faith that
such amount of commission is reasonable in relation to the value of the
brokerage and research services provided by such broker, viewed in terms
of either that particular transaction or the Investment Manager's
overall responsibilities with respect to the Fund and the other
accounts, if any, as to which it exercises investment discretion. In
reaching such determination, the Investment Managers are not required to
place or attempt to place a specific dollar value on the research or
execution services of a broker or on the portion of any commission
reflecting either of said services. In demonstrating that such
determinations were made in good faith, the Investment Manager of a Fund
shall be prepared to show that all commissions were allocated and paid
for purposes contemplated by the Fund's brokerage policy; that
commissions were paid only for products or services which provide lawful
and appropriate assistance to the Investment Manager in the performance
of its investment decision-making responsibilities; and that the
commissions paid were within a reasonable range. The determination that
commissions were within a reasonable range shall be based on any
available information as to the level of commissions known to be charged
by other brokers on comparable transactions, but there shall be taken
into account the Company's policies that (i) obtaining a low commission
is deemed secondary to obtaining a favorable securities price, since it
is recognized that usually it is more beneficial to the Funds to obtain
a favorable price than to pay the lowest commission; and (ii) the
quality, comprehensiveness and frequency of research studies which are
provided for the Funds and the Investment Managers are useful to the
Investment Managers in performing advisory services under their
Investment Management Agreements with the Company. Research services
provided by brokers to the Investment Managers are considered to be in
addition to, and not in lieu of, services required to be performed by
the Investment Managers under their Agreements. Research furnished by
brokers through whom the Funds effect securities transactions may be
used by the Investment Managers for any of their accounts, and not all
such research may be used by the Investment Managers for the Funds.
When execution of portfolio transactions is allocated to brokers trading
on exchanges with fixed brokerage commission rates, account may be taken
of various services provided by the broker, including quotations outside
the United States for daily pricing of foreign securities held in the
Funds' portfolios.
4. Purchases and sales of portfolio securities within the United States
other than on a securities exchange shall be executed with primary
market makers acting as principal except where, in the judgment of a
Fund's Investment Manager, better prices and execution may be obtained
on a commission basis or from other sources.
5. Sales of the Funds' Shares (which shall be deemed to include also shares
of other investment companies registered under the 1940 Act which have
either the same investment adviser or an investment adviser affiliated
with any Fund's Investment Manager) made by a broker are one factor
among others to be taken into account in deciding to allocate portfolio
transactions (including agency transactions, principal transactions,
purchases in underwritings or tenders in response to tender offers) for
the account of a Fund to that broker; provided that the broker shall
furnish "best execution" as defined in paragraph 1 above, and that such
allocation shall be within the scope of the Fund's policies as stated
above; and provided further, that in every allocation made to a broker
in which the sale of Shares is taken into account there shall be no
increase in the amount of the commissions or other compensation paid to
such broker beyond a reasonable commission or other compensation
determined, as set forth in paragraph 3 above, on the basis of best
execution alone or best execution plus research services, without taking
account of or placing any value upon such sale of Shares.
<PAGE>
Insofar as known to management, no Director or officer of the Company,
nor the Investment Managers or the Principal Underwriter or any person af-
filiated with any of them, has any material direct or indirect interest in
any broker employed by or on behalf of the Fund. Franklin Templeton
Distributors, Inc., the Principal Underwriter for the Funds, is a registered
broker-dealer, but has never executed any purchase or sale transactions for a
Fund's portfolio or participated in commissions on any such transactions, and
has no intention of doing so in the future.
During the fiscal years ended December 31, 1994, 1993 and 1992,
Foreign Equity Series paid brokerage commissions of $1,856,075, $1,220,225,
and $0, respectively. During the fiscal year ended December 31, 1994 and for
the period from May 3, 1993 (commencement of operations) to December 31,
1993, Growth Series paid brokerage commissions of $196,751 and $324,895,
respectively. For the fiscal year ended December 31, 1994 and for the period
from May 3, 1993 (commencement of operations) to December 31, 1993, Emerging
Markets Series paid brokerage commissions of $1,442,148 and $1,111,391,
respectively. For the fiscal year ended December 31, 1994 and for the period
from May 3, 1993 (commencement of operations) to December 31, 1993, Global
Fixed Income Series paid brokerage commissions of $ 0 and $0, respectively.
For the fiscal year ended December 31, 1994 and for the period May 3, 1993
(commencement of operations) to December 31, 1993, Foreign Equity
(South Africa Free) Series paid brokerage commissions of $129,880 and $208,358,
respectively. There is no fixed method used in determining which broker-dealers
receive which order or how many orders.
PURCHASE, REDEMPTION AND PRICING OF SHARES
The Prospectus describes the manner in which the Funds' Shares may be
purchased and redeemed. See "How to Buy Shares of the Funds," "How to Sell
Shares of the Funds" and "Exchange Privilege."
Net asset value per Share is determined as of the scheduled closing time of
the New York Stock Exchange (generally, 4:00 p.m., New York time) every Monday
through Friday (exclusive of national business holidays). The Company's offices
will b closed, and net asset value will not be calculated, on those days on
which the New York Stock Exchange is closed, which currently are: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of
business in New York on each day on which the New York Stock Exchange is
open. Trading of European or Far Eastern securities generally, or in a
particular country or countries, may not take place on every New York
business day. Furthermore, trading takes place in various foreign markets on
days which are not business days in New York and on which each Fund's net
asset value is not calculated. The Funds calculate net asset value per
Share, and therefore effect sales and redemptions of their Shares, as of the
close of the New York Stock Exchange once on each day on which that Exchange
is open. Such calculation does not take place contemporaneously
with the determination of the prices of many of the portfolio securities used in
such calculation, and if events occur which materially affect the value of those
foreign securities, they will be valued at fair market value as determined by
the management and approved in good faith by the Board of Directors.
The Board of Directors may establish procedures under which the Company may
suspend the determination of net asset value for the whole or any part of any
period during which (1) the New York Stock Exchange is closed other than for
customary weekend and holiday closings, (2) trading on the New York Stock
Exchange is restricted, (3) an emergency exists as a result of which disposal
of securities owned by a Fund is not reasonably practicable or it is not
reasonably practicable for a Fund fairly to determine the value of its net
assets, or (4) for such other period as the Securities and Exchange Com-
mission may by order permit for the protection of the holders of a Fund's
Shares.
<PAGE>
Ownership and Authority Disputes. In the event of disputes involving multiple
claims of ownership or authority to control a shareholder's 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, prior to executing instructions
regarding the account; or(b)interplead disputed funds or accounts with a
court of competent jurisdiction. Moreover, the Fund may surrender ownership
of all or a portion of an account to the Internal Revenue Service in response
to a Notice of Levy.
TAX STATUS
Each Fund intends normally to pay a dividend at least once annually
representing substantially all of its net investment income and to distribute at
least annually any net realized capital gains. By so doing and meeting certain
diversification of assets and other requirements of the Internal Revenue Code of
1986, as amended (the "Code"), each Fund intends to qualify as a regulated
investment company under the Code. The status of a Fund as a regulated
investment company does not involve government supervision of management or
of its investment practices or policies. As a regulated investment company,
a Fund generally will be relieved of liability for United States Federal
income tax on that portion of its net investment income and net realized
capital gains which it distributes to its Shareholders. Amounts not distri-
buted on a timely basis in accordance with a calendar year distribution
requirement also are subject to a nondeductible 4% excise
tax. To prevent application of the excise tax, the Funds intend to make
distributions in accordance with the calendar year distribution requirement.
Dividends of net investment income and of short-term capital gains (the
excess of net short-term capital gains over net long-term capital losses) are
taxable to Shareholders as ordinary income. Distributions from the Funds are
not expected to qualify for the corporate dividends-received deduction.
Distributions of net long-term capital gains (the excess of net long-term
capital gains over net short-term capital losses) designated by a Fund as
capital gain dividends are taxable to Shareholders as long-term capital
gains, regardless of the length of time the Fund's Shares have been held by a
Shareholder, and are not eligible for the dividends-received deduction. All
dividends and distributions are taxable to Shareholders, whether or not
reinvested in Shares of a Fund. Any distributions that are not from a Fund's
investment company taxable income or net capital gain may be characterized
as a return of capital to shareholders or, in some cases, capital gain.
Shareholders will be notified annually as to the Federal tax status of
dividends and distributions they receive and any tax withheld thereon.
Income received by a Fund from sources within a foreign country may be subject
to withholding taxes and other taxes imposed by that country. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes.
If, at the close of any fiscal year, more than 50% of the value of a Fund's
total assets is invested in securities of foreign corporations (as to which no
assurance can be given), the Fund generally may elect pursuant to Section 853
of the Code to pass through to its Shareholders the foreign income and
similar taxes paid by the Fund in order to enable such Shareholders to take a
credit (or deduction) for foreign income taxes paid by the Fund. In that
case, a Shareholder must include in his gross income on his Federal income
tax return both dividends received by him from the Fund and the amount which
the Fund advises him is his pro rata portion of foreign income taxes paid
with respect to, or withheld from, dividends, interest, or other income
of the Fund from its foreign investments. The Shareholder may then
subtract from his Federal income tax the amount of such taxes withheld, or else
treat such foreign taxes as an itemized deduction from his gross income;
however, the above-described tax credit and deduction are subject to certain
limitations. Foreign taxes may not be deducted in computing alternative
taxable income and may at most offset (as a credit) 90% of the alternative
minimum tax. The foregoing is only a general description of the foreign tax
credit. Because application of the credit depends on the particular cir-
cumstances of each Shareholder, Shareholders are advised to contact their own
tax advisers.
<PAGE>
The Funds may invest in shares of foreign corporations which may be classified
under the Code as passive foreign investment companies ("PFICs"). In general, a
foreign corporation is classified as a PFIC for a taxable year if at least one-
half of its assets constitute investment-type assets or 75% or more of its
gross income is investment-type income. If a Fund receives a so-called
"excess distribution" with respect to PFIC stock, the Fund itself may be
subject to a tax on a portion of the excess distribution, whether or not the
corresponding income is distributed by the Fund to Shareholders. In general,
under the PFIC rules, an excess distribution is treated as having been rea-
lized ratably over the period during which a Fund held the PFIC shares.
A Fund itself will be subject to tax on the portion, if any, of an excess
distribution that is so allocated to prior Fund taxable years and an interest
factor will be added to the tax, as if the tax had been payable in such prior
taxable years. Certain distributions from a PFIC as well as gain from the
sale of PFIC shares are treated as excess distributions. Excess distribu-
tions are characterized as ordinary income even though, absent application of
the PFIC rules, certain excess distributions might have been classified as
capital gain.
The Funds may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some circum-
stances, a Fund generally would be required to include in its gross income
its share of the earnings of a PFIC on a current basis, regardless of whether
distributions are received from the PFIC in a given year. If this election
were made, the special rules, discussed above, relating to the taxation of
excess distributions, would not apply. In addition, another election may be
available that would involve marking to market each Fund's PFIC shares at the
end of each taxable year (and on certain other dates prescribed in the Code),
with the result that unrealized gains are treated as though they were rea-
lized. If this election were made, tax at the fund level under
the PFIC rules would generally be eliminated, but the Funds could, in limited
circumstances, incur nondeductible interest charges. Each Fund's intention to
qualify annually as a regulated investment company may limit its elections with
respect to PFIC shares.
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC stock, as well as subject a Fund
itself to tax on certain income from PFIC stock, the amount that must be
distributed to Shareholders, and which will be taxed to Shareholders as
ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not invest in PFIC stock.
Under the Code, gains or losses attributable to fluctuations in foreign
currency exchange rates which occur between the time a Fund accrues income or
other receivables or accrues expenses or other liabilities denominated in a
foreign currency and the time the Fund actually collects such receivables or
pays such liabilities generally are treated as ordinary income or ordinary
loss. Similarly, on disposition of debt securities denominated in a foreign
currency and on disposition of certain financial contracts and options, gains
or losses attributable to fluctuations in the value of foreign currency bet-
ween the date of acquisition of the security or contract and the date of dis-
position also are treated as ordinary gain or loss. These gains and losses,
referred to under the Code as "section 988" gains and losses, may increase or
decrease the amount of a Fund's net investment income to be distributed to
its Shareholders as ordinary income. For example, fluctuations in exchange
rates may increase the amount of income that a Fund must distribute in order
to qualify for treatment as a regulated investment company and to prevent
application of an excise tax on undistributed income. Alternatively,
fluctuations in exchange rates may decrease or eliminate income available for
distribution. If section 988 losses exceed other net investment income during a
taxable year, a Fund generally would not be able to make ordinary dividend
distributions, or distributions made before the losses were realized would be
recharacterized as return of capital to Shareholders for Federal income tax
purposes, rather than as an ordinary dividend, reducing each Shareholder's
basis in his Fund Shares.
<PAGE>
Certain options, futures contracts and forward contracts in which the Funds
may invest are "section 1256 contracts." Gains or losses on section 1256
contracts generally are considered 60% long-term and 40% short-term capital
gains or losses ("60/40"); however, foreign currency gains or losses (as
discussed above) arising from certain section 1256 contracts may be treated
as ordinary income or loss. Also, section 1256 contracts held by a Fund at
the end of each taxable year (and, in some cases, for purposes of the 4%
excise tax, on October 31 of each year) are "marked-to-market" with the
result that unrealized gains or losses are treated as though they were realized.
The hedging transactions undertaken by the Funds may result in "straddles" for
Federal income tax purposes. The straddle rules may affect the character of
gains (or losses) realized by a Fund. In addition, losses realized by a Fund
on positions that are part of a straddle may be deferred under the straddle
rules, rather than being taken into account in calculating the taxable income
for the taxable year in which such losses are realized. Because only a few
regulations implementing the straddle rules have been promulgated, the tax
consequences to the Funds of hedging transactions are not entirely clear.
The hedging transactions may increase the amount of short-term capital gain
realized by the Funds which is taxed as ordinary income when distributed to
Shareholders.
Each Fund may make one or more of the elections available under the Code which
are applicable to straddles. If the Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary accord-
ing to the elections(s) made. The rules applicable under certain of the
elections may operate to accelerate the recognition of gains or losses from
the affected straddle positions.
Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to Share-
holders, and which will be taxed to Shareholders as ordinary income or long-
term capital gain, may be increased or decreased substantially as compared to
a fund that did not engage in such hedging transactions.
Rules governing the tax aspects of swap agreements are in a developing stage
and are not entirely clear in certain respects. Accordingly, while the
Global Fixed Income Series intends to account for such transactions in a
manner deemed by it to be appropriate, the Internal Revenue Service might not
necessarily accept such treatment. If it did not, the status of the Global
Fixed Income Series as a regulated investment company might be affected. The
Global Fixed Income Series intends to monitor developments in this area.
Certain requirements that must be met under the Code in order for the Global
Fixed Income Series to qualify as a regulated investment company may limit
the extent to which it will be able to engage in swap agreements.
Certain requirements that must be met under the Code in order for each Fund to
qualify as a regulated investment company may limit the extent to which a Fund
will be able to engage in transactions in options, futures, forward contracts
and swap agreements.
Some of the debt securities that may be acquired by the Funds may be subject
to the special rules for obligations issued or acquired at a discount.
Generally, under these rules, the amount of the discount is treated as
ordinary income and, depending upon the circumstances, the discount is
included in income (i) over the term of the debt security, even though
payment of the discount is not received until a later time, usually when the
debt security matures, or (ii) upon the disposition
of, and any partial payment of principal on, the debt security.
<PAGE>
A Fund generally will be required to distribute dividends to Shareholders
representing discount on debt securities that is currently includable in income,
even though cash representing such income may not have been received by the
Fund. Cash to pay such dividends may be obtained from sales proceeds of
securities held by the Fund or by borrowing.
Upon the sale or exchange of his Shares, a Shareholder generally will realize
a taxable gain or loss depending upon his basis in the Shares. Such gain or
loss will be treated as capital gain or loss if the Shares are capital assets
in the Shareholder's hands, and will be long-term if the Shareholder's hold-
ing period for the Shares is more than one year and generally otherwise will
be short-term. Any loss realized on a sale or exchange of a Fund's Shares
will be disallowed to the extent that the Shares disposed of are replaced
(including replacement through the reinvesting of dividends and capital gain
distributions in the Fund) within a period of 61 days beginning 30 days
before and ending 30 days after the disposition of the Shares. In such a
case, the basis of the Shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a Shareholder on the sale of Fund Shares
held by the Shareholder for six months or less will be treated for Federal
income tax purposes as a long-term capital loss to the extent of any distri-
butions of long-term capital gains (designated by the Fund as capital gain
dividends) received by the Shareholder with respect to such Shares.
Each Fund generally will be required to withhold Federal income tax at a rate
of 31% ("backup withholding") from dividends paid, capital gain distributions,
and redemption proceeds to Shareholders if (1) the Shareholder fails to
furnish the Fund with the Shareholder's correct taxpayer identification
number or social security number and to make such certifications as the Fund
may require, (2) the Internal Revenue Service notifies the Shareholder or the
Fund that the Shareholder has failed to report properly certain interest and
dividend income to the Internal Revenue Service and to respond to notices to
that effect, or (3) when required to do so, the Shareholder fails to certify
that he is not subject to backup withholding. Any amounts withheld may be
credited against the Shareholder's Federal income tax liability.
Ordinary dividends and taxable capital gain distributions declared in October,
November or December with a record date in such month and paid during the
following January will be treated as having been paid by a Fund and received
by Shareholders on December 31 of the calendar year in which declared, rather
than the calendar year in which the dividends are actually received.
Distributions from the Funds and dispositions of Fund Shares also may be
subject to state and local taxes. Non-U.S. Shareholders may be subject to
U.S. tax rules that differ significantly from those summarized above. Share-
holders are advised to consult their own tax advisers for details with
respect to the particular tax consequences to them of an investment in the
Funds.
PRINCIPAL UNDERWRITER
Franklin Templeton Distributors, Inc. ("FTD" or the "Principal Underwriter"),
700 Central Avenue, P.O. Box 33030, St. Petersburg, Florida 33733-8030, toll
free telephone (800) 237-0738, is the Principal Underwriter of the Funds'
Shares. FTD is an indirect wholly owned subsidiary of Franklin.
The Underwriting Agreement provides that the Principal Underwriter will use
its best efforts to maintain a broad and continuous distribution of the Funds'
Shares among bona fide investors and may sign selling contracts with responsible
dealers, as well as sell to individual investors. The Shares are sold only
at net asset value next determined after receipt of the purchase order by
FTD. The Principal Underwriter in all cases buys Shares from the Funds
acting as principal for its own account.
Dealers generally act as principal for their own account in buying Shares
from the Principal Underwriter. No agency relationship exists between
any dealer and the Company or the Principal Underwriter.
<PAGE>
The Underwriting Agreement provides that the Funds shall pay the costs and
expenses incident to registering and qualifying their Shares for sale under the
Securities Act of 1933 and under the applicable Blue Sky laws of the juris-
dictions in which the Principal Underwriter desires to distribute such
Shares, and for preparing, printing and distributing prospectuses and reports
to Shareholders. The Principal Underwriter pays the cost of printing add-
itional copies of prospectuses and reports to Shareholders used for selling
purposes. (The Funds pays costs of preparation, set-up and initial supply of
the Prospectus for existing Shareholders.)
The Underwriting Agreement is subject to renewal from year to year in
accordance with the provisions of the 1940 Act and terminates automatically
in the event of its assignment. The Underwriting Agreement may be terminated
without penalty by either party upon 60 days' written notice to the other,
provided termination by the Company on behalf of a Fund shall be approved by
the Board of Directors or a majority (as defined in the 1940 Act) of the
Shareholders of that Fund. The Principal Underwriter is relieved of
liability for any act or omission in the course of its performance of the
Underwriting Agreement, in the absence of willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations.
FTD is the principal underwriter for the other Templeton Funds.
DESCRIPTION OF SHARES
The Shares have non-cumulative voting rights so that the holders of a
plurality of the Shares voting for the election of Directors at a meeting at
which 50% of the outstanding Shares are present can elect all the Directors
and in such event, the holders of the remaining Shares voting for the
election of Directors will not be able to elect any person or persons to
the Board of Directors.
The Company's Bylaws provide that the President or Secretary of the Company
will call a special meeting of Shareholders at the request in writing by
Shareholders owning 10% of the capital stock of the Company issued and out-
standing at the time of the call. In addition, the Company is required to
assist Shareholder communication in connection with the calling of Share-
holder meetings to consider removal of a Director.
PERFORMANCE INFORMATION
Each Fund may, from time to time, include its total return in advertisements
or reports to Shareholders or prospective investors. Quotations of average
annual total return for a Fund will be expressed in terms of the average
annual compounded rate of return for periods in excess of one year or the
total return for periods less than one year of a hypothetical investment in
the Fund over periods of 1, 5 or 10 years (up to the life of the Fund)
calculated pursuant to the following formula: P (1 + T)n = ERV (where P = a
hypothetical initial payment of $1,000, T = the average annual total return
for periods of one year or more or the total return for
periods of less than one year, n = the number of years, and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of the
period). All total return figures reflect the deduction of a proportional
share of Fund expenses on an annual basis, and assume that all dividends and
distributions are reinvested when paid. The average annual total return of
Foreign Equity Series for the one and three year periods ended December 31,
1994 and for the period from commencement of operations on October 18, 1990
to December 31, 1994 was .24%, 9.85% and 11.23%, respectively. The average
annual total return of Growth Series, for the one year period ending December
31, 1994 and for the period from commencement of operations on May 3, 1993 to
December 31, 1994 was -1.32% and 10.73%, respectively. The average annual
total return of the Emerging Markets Series for the one year period ending
December 31, 1994 and for the period from commencement of operations
on May 3, 1993 to December 31, 1994 was -11.39% and 10.35%, respectively. The
average annual total return for the Global Fixed Income Series for the one year
<PAGE>
period ending December 31, 1994 and for the period from commencement of
operations on May 3, 1993 to December 31, 1994 was -2.97% and -1.02%,
respectively. The average annual total return of the Foreign Equity (South
Africa Free) Series for the one year period ending December 31, 1994 and for
the period from commencement of operations on May 3, 1993 to December 31,
1994 was -1.94% and 15.12%, respectively.
Performance information for the Funds may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index, Dow Jones
Industrial Average, or other unmanaged indices, so that investors may compare a
Fund's results with those of a group of unmanaged securities widely regarded by
investors as representative of the securities market in general; (ii) other
groups of mutual funds tracked by Lipper Analytical Services, a widely used
independent research firm which ranks mutual funds by overall performance,
investment objectives and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall performance or
other criteria; and (iii) the Consumer Price Index (measure for inflation) to
assess the real rate of return from an investment in the Fund. Unmanaged
indices may assume the reinvestment of dividends but generally do not reflect
deductions for administrative and management costs and expenses.
Performance information for a Fund reflects only the performance of a
hypothetical investment in the Fund during the particular time period on
which the calculations are based. Performance information for a Fund should
be considered in light of the Fund's Investment Objective and Policies,
characteristics and quality of the portfolio and the market conditions during
the given time period, and should not be considered as a representation of
what may be achieved in the future.
From time to time, the Company and the Investment Managers may also refer to
the following information:
(1) The Investment Managers' and their affiliates' market share of
international equities managed in mutual funds prepared or published by
Strategic Insight or a similar statistical organization.
(2) The performance of U.S. equity and debt markets relative to foreign
markets prepared or published by Morgan Stanley Capital International or
a similar financial organization.
(3) The capitalization of U.S. and foreign stock markets as prepared or
published by the International Finance Corp., Morgan Stanley Capital
International or a similar financial organization.
(4) The geographic distribution of a Fund's portfolio.
(5) The gross national product and populations, including age
characteristics, of various countries as published by various
statistical organizations.
(6) 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).
(7) The major industries located in various jurisdictions as published by
the Morgan Stanley Index.
(8) Rankings by DALBAR Surveys, Inc. with respect to mutual fund shareholder
services.
(9) Allegorical stories illustrating the importance of persistent long-term
investing.
<PAGE>
(10) The Fund's portfolio turnover rate and its ranking relative to industry
standards as published by Lipper Analytical Services, Inc. or
Morningstar, Inc.
(11) 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.
(12) Quotations from the Templeton organization's founder, Sir John
Templeton<F1>, advocating the virtues of diversification and long-term
investing, including the following:
o "Never follow the crowd. Superior performance is possible only if
you invest differently from the crowd."
o "Diversify by company, by industry and by country."
o "Always maintain a long-term perspective."
o "Invest for maximum total real return."
o "Invest - don't trade or speculate."
o "Remain flexible and open-minded about types of investment."
o "Buy low."
o "When buying stocks, search for bargains among quality stocks."
o "Buy value, not market trends or the economic outlook."
o "Diversify. In stocks and bonds, as in much else, there is
safety in numbers."
o "Do your homework or hire wise experts to help you."
o "Aggressively monitor your investments."
o "Don't panic."
o "Learn from your mistakes."
o "Outperforming the market is a difficult task."
o "An investor who has all the answers doesn't even under-
stand all the questions."
o "There's no free lunch."
o "And now the last principle: Do not be fearful or negative too
often."
<F1> Sir John Templeton sold the Templeton organization to Franklin
Resources, Inc. in October, 1992 and resigned from the Fund's Board
on April 16, 1995. He is no longer involved with the investment
management process.
In addition, the Company and the Investment Managers may also refer to the
number of shareholders in a Fund or the aggregate number of shareholders in
the Franklin Templeton Group or the dollar amount of fund and private account
assets under management in advertising materials.
<PAGE>
FINANCIAL STATEMENTS
The financial statements contained in each Fund's Annual Report to
Shareholders dated December 31, 1994 are incorporated herein by reference.
