TEMPLETON INSTITUTIONAL FUNDS, INC.
THIS STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1995,
AS SUPPLEMENTED JUNE 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
Investment Objectives and Policies
-Investment Policies
-Repurchase Agreements
-Debt Securities
-Futures Contracts
-Options on Securities or Indices
-Foreign Currency Hedging Transactions
-Investment Restrictions
-Risk Factors
-Trading Policies
-Personal Securities Transactions
Management of the Company
Director Compensation
Principal Shareholders
Investment Management and Other Services
-Investment Management Agreements
-Management Fees
-The Investment Managers
-Business Manager
-Custodian and Transfer Agent
-Legal Counsel
-Independent Accountants
-Reports to Shareholders
Brokerage Allocation
Purchase, Redemption and Pricing of Shares
-Ownership and Authority Disputes
Tax Status
Principal Underwriter
Description of Shares
Performance Information
Financial Statements
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").
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 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
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 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 (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.
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 investment trusts which invest in real
estate or interests therein); invest in other open-end
investment companies except as permitted by the 1940
Act; invest in interests (other than debentures or
equity stock interests) in oil, gas or other mineral
exploration or development programs; or purchase or
sell commodity contracts (except futures contracts as
described in 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 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 securities 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 margin 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 evidences 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).
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 developing.
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
("NYSE"), 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
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.
Investments in Eastern European countries may 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.
Investing in Russian companies involves a high degree of
risk and special considerations not typically associated with
investing in the United States securities markets, and should be
considered highly speculative. Such risks include: (1) delays
in settling portfolio transactions and risk of loss arising out
of Russia's system of share registration and custody; (2) the
risk that it may be impossible or more difficult than in other
countries to obtain and/or enforce a judgment; (3) pervasiveness
of corruption and crime in the Russian economic system; (4)
currency exchange rate volatility and the lack of available
currency hedging instruments; (5) higher rates of inflation
(including the risk of social unrest associated with periods of
hyper-inflation); (6) controls on foreign investment and local
practices disfavoring foreign investors and limitations on
repatriation of invested capital, profits and dividends, and on a
Fund's ability to exchange local currencies for U.S. dollars; (7)
the risk that the government of Russia or other executive or
legislative bodies may decide not to continue to support the
economic reform programs implemented since the dissolution of the
Soviet Union and could follow radically different political
and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain
industries at the expense of other sectors or investors, or a
return to the centrally planned economy that existed prior to the
dissolution of the Soviet Union; (8) the financial condition of
Russian companies, including large amounts of inter-company debt
which may create a payments crisis on a national scale; (9)
dependency on exports and the corresponding importance of
international trade; (10) the risk that the Russian tax system
will not be reformed to prevent inconsistent, retroactive and/or
exorbitant taxation; and (11) possible difficulty in identifying
a purchaser of securities held by a Fund due to the
underdeveloped nature of the securities markets.
There is little historical data on Russian securities
markets because they are relatively new and a substantial
proportion of securities transactions in Russia are privately
negotiated outside of stock exchanges. Because of the recent
formation of the securities markets as well as the underdeveloped
state of the banking and telecommunications systems, settlement,
clearing and registration of securities transactions are subject
to significant risks. Ownership of shares (except where shares
are held through depositories that meet the requirements of the
1940 Act) is defined according to entries in the company's share
register and normally evidenced by extracts from the register or
by formal share certificates. However, there is no central
registration system for shareholders and these services are
carried out by the companies themselves or by registrars located
throughout Russia. These registrars are not necessarily subject
to effective state supervision and it is possible for the Fund to
lose its registration through fraud, negligence or even mere
oversight. While each Fund will endeavor to ensure that its
interest continues to be appropriately recorded either itself or
through a custodian or other agent inspecting the share register
and by obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability and it
is possible that subsequent illegal amendment or other fraudulent
act may deprive the Fund of its ownership rights or improperly
dilute its interests. In addition, while applicable Russian
regulations impose liability on registrars for losses resulting
from their errors, it may be difficult for a Fund to enforce any
rights it may have against the registrar or issuer of the
securities in the event of loss of share registration.
Furthermore, although a Russian public enterprise with more than
1,000 shareholders is required by law to contract out the
maintenance of its shareholder register to an independent entity
that meets certain criteria, in practice this regulation has not
always been strictly enforced. Because of this lack of
independence, management of a company may be able to exert
considerable influence over who can purchase and sell the
company's shares by illegally instructing the registrar to refuse
to record transactions in the share register. This practice may
prevent a Fund from investing in the securities of certain
Russian companies deemed suitable by the Investment Manager.
Further, this also could cause a delay in the sale of Russian
company securities by a Fund if a potential purchaser is deemed
unsuitable, which may expose the Fund to potential loss on the
investment.
Each Fund 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.
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. The Directors 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 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 Principal Occupation
Offices with Company During the Past Five Years
HARRIS J. ASHTON Chairman of the Board, president
Metro Center and chief executive officer of
1 Station Place General Host Corporation (nursery
Stamford, Connecticut and craft centers); and a
Director director of RBC Holdings (U.S.A.)
Inc. (a bank holding company) and
Bar-S Foods.
NICHOLAS F. BRADY* Chairman of Templeton Emerging
102 East Dover Street Markets Investment Trust PLC;
Easton, Maryland chairman of Templeton Latin
Director America Investment Trust PLC;
chairman of Darby Overseas
Investments, Ltd. (an investment
firm) (1994-present); director of
the Amerada Hess Corporation,
Capital Cities/ABC, Inc.,
Christiana Companies, and the
H.J. Heinz Company; Secretary of
the United States Department of
the Treasury (1988-January 1993);
and chairman of the board of
Dillion, Read & Co. Inc.
(investment banking) prior
thereto.
FRANK J. CROTHERS President and chief executive
P.O. Box N-3238 officer of Atlantic Equipment &
Nassau, Bahamas Power Ltd; vice chairman of
Director Caribbean Utilities Co., Ltd.;
president of Provo Power
Corporation; and a director of
various other business and
nonprofit organizations.
S. JOSEPH FORTUNATO Member of the law firm of Pitney,
200 Campus Drive Hardin, Kipp & Szuch; and a
Florham Park, New Jersey director of General Host
Director Corporation.
JOHN Wm. GALBRAITH President of Galbraith
360 Central Avenue Properties, Inc. (personal
Suite 1300 investment company); director of
St. Petersburg, Florida Gulfwest Banks, Inc. (bank
Director holding company) (1995-present)
and Mercantile Bank (1991-
present); vice chairman of
Templeton, Galbraith & Hansberger
Ltd. (1986-1992); and chairman of
Templeton Funds Management, Inc.
(1974-1991).
ANDREW H. HINES, JR. Consultant for the Triangle
150 2nd Avenue N. Consulting Group; chairman of the
St. Petersburg, Florida board and chief executive officer
Director 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); and a director of
Checkers Drive-In Restaurants,
Inc.
CHARLES B. JOHNSON* President, chief executive
777 Mariners Island Blvd. officer, and director of Franklin
San Mateo, California Resources, Inc.; chairman of the
Chairman of the Board board and director of Franklin
and Vice President Advisers, Inc. and Franklin
Templeton Distributors, Inc.;
director of Franklin
Administrative Services, Inc.,
General Host Corporation, and
Templeton Global Investors, Inc.;
and officer and director, trustee
or managing general partner, as
the case may be, of most other
subsidiaries of Franklin and of
55 of the investment companies in
the Franklin Templeton Group.
BETTY P. KRAHMER Director or trustee of various
2201 Kentmere Parkway civic associations; formerly,
Wilmington, DE economic analyst, U.S.
Trustee Government.
GORDON S. MACKLIN Chairman of White River
8212 Burning Tree Road Corporation (information
Bethesda, Maryland services); director of Fund
Director America Enterprises Holdings,
Inc., Lockheed Martin
Corporation, MCI Communications
Corporation, Fusion Systems
Corporation, Infovest
Corporation, and Medimmune, Inc.;
formerly, chairman of Hambrecht
and Quist Group; director of H&Q
Healthcare Investors; and
president of the National
Association of Securities
Dealers, Inc.
FRED R. MILLSAPS Manager of personal investments
2665 N.E. 37th Drive (1978-present); chairman and
Fort Lauderdale, Florida chief executive officer of
Director Landmark Banking Corporation
(1969-1978); financial vice
president of Florida Power and
Light (1965-1969); vice president
of The Federal Reserve Bank of
Atlanta (1958-1965); and a
director of various business and
nonprofit organizations.
CONSTANTINE DEAN TSERETOPOULOS Physician, Lyford Cay Hospital
Lyford Cay Hospital (July 1987-present); Cardiology
P.O. Box N-7776 Fellow, University of Maryland
Nassau, Bahamas (July 1985-July 1987); Internal
Director Medicine Intern, Greater
Baltimore Medical Center (July
1982-July 1985).
DONALD F. REED Executive vice president of
4 King Street West Templeton Worldwide, Inc.;
Toronto, Ontario president of Templeton Investment
Canada Counsel, Inc.; president and
President chief executive officer of
Templeton Management Limited; co-
founder and director of
International Society of
Financial Analysts; chairman of
Canadian Council of Financial
Analysts; formerly, president and
director, Reed Monahan Nicolishen
Investment Counsel (1982-1989).
MARK G. HOLOWESKO President, chief executive
Lyford Cay officer and director of
Nassau, Bahamas Templeton, Galbraith & Hansberger
Vice President Ltd.; director of global equity
research for Templeton Worldwide,
Inc.; president or vice president
of the Templeton Funds; formerly,
investment administrator with Roy
West Trust Corporation (Bahamas)
Limited (1984-1985).
MARTIN L. FLANAGAN Senior vice president, treasurer
777 Mariners Island Blvd. and chief financial officer of
San Mateo, California Franklin Resources, Inc.;
Vice President director and executive vice
president of Templeton Investment
Counsel, Inc.; director,
president and chief executive
officer of Templeton Global
Investors, Inc.; director or
trustee and president or vice
president of the Templeton Funds;
accountant with Arthur Andersen &
Company (1982-1983); and a member
of the International Society of
Financial Analysts and the
American Institute of Certified
Public Accountants.
DANIEL L. JACOBS Executive vice president and
500 East Broward Blvd. director of Templeton Investment
Fort Lauderdale, Florida Counsel, Inc.; director of
Vice President Templeton Global Investors, Inc.;
and president or vice president
of certain of the Templeton
Funds.
JAMES E. CHANEY Vice president, Portfolio
500 East Broward Blvd. Management/Research of Templeton
Fort Lauderdale, Florida Investment Counsel, Inc.;
Vice President 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 Managing director of Templeton
Two Exchange Square Investment Management (Hong Kong)
Hong Kong Limited; portfolio manager for
Vice President various Templeton advisory
affiliates; president of
International Investment Trust
Company Limited (investment
manager of Taiwan R.O.C. Fund)
(1986-1987); and a director of
Vickers de Costa, Hong Kong
(1983-1986).
THOMAS LATTA Vice president of the Templeton
500 East Broward Blvd. Global Bond Managers division of
Fort Lauderdale, Florida Templeton Investment Counsel,
Vice President Inc.; vice president of various
Templeton Funds; formerly,
portfolio manager, Forester &
Hairston (1988-1991); and
investment adviser, Merrill
Lynch, Pierce, Fenner & Smith
Inc. (1981-1988).
JOHN R. KAY Vice president of the Templeton
500 East Broward Blvd. Funds; vice president and
Fort Lauderdale, Florida treasurer of Templeton Global
Vice President 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 Senior vice president of
700 Central Avenue Templeton Global Investors, Inc.;
St. Petersburg, Florida vice president of Franklin
Secretary Templeton Distributors, Inc.;
secretary of the Templeton Funds;
formerly, attorney, Dechert Price
& Rhoads (1985-1988) and
Freehill, Hollingdale & Page
(1988); and judicial clerk, U.S.
District Court (Eastern District
of Virginia) (1984-1985).
JAMES R. BAIO Certified public accountant;
500 East Broward Blvd. treasurer of the Templeton Funds;
Fort Lauderdale, Florida senior vice president of
Treasurer Templeton Worldwide, Inc.,
Templeton Global Investors, Inc.,
and Templeton Funds Trust
Company; formerly, senior tax
manager with Ernst & Young
(certified public accountants)
(1977-1989).
JACK L. COLLINS Assistant treasurer of the
700 Central Avenue Templeton Funds; assistant vice
St. Petersburg, Florida president of Franklin Templeton
Assistant Treasurer Distributors, Inc.; formerly,
partner with Grant Thornton
(international certified public
accountants).
JEFFREY L. STEELE Partner, Dechert Price & Rhoads.
1500 K Street, N.W.
Washington, D.C.
Assistant Secretary
________________________
* These are Directors who are "interested persons" of the
Company 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.
There are no family relationships between any of the
Directors.
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, the Company currently pays 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.
The following table shows the total compensation paid to the
Directors by the Company and by all investment companies in the
Franklin Templeton Group:
Number of
Franklin Total
Aggregate Templeton Fund Compensation
Compensation Boards on from All Funds
from the Which Director in Franklin
Name of Director Company* Serves Templeton Group*
Harris J. Ashton $3,500 54 $319,925
Nicholas F. Brady 3,500 23 86,125
Frank J. Crothers 4,000 4 12,850
S. Joseph Fortunato 3,500 56 336,065
John Wm. Galbraith 0 22 0
Andrew H. Hines, Jr. 3,300 23 106,125
Betty P. Krahmer 0 23 75,275
Gordon S. Macklin 3,500 51 303,695
Fred R. Millsaps 3,300 23 106,125
Constantine Dean 4,000 4 12,850
Tseretopoulos
_______________
* For the fiscal year ended December 31, 1994.
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 indirectly, 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 outstanding Shares). As
of March 31, 1995, the following persons owned 5% or more of the
outstanding Shares of Emerging Markets Series: Northern 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 Regents 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 outstanding 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 Management
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 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 research 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 performance by the
Investment Manager of its duties under the Investment Management
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 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
resources, including research facilities. During the fiscal year
ended December 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
December 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 Managers are
indirect wholly owned subsidiaries of Franklin Resources, Inc.
("Franklin"), a publicly traded company whose shares are listed
on the NYSE. Charles B. Johnson (a Director and officer of the
Company), 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:
- providing office space, telephone, office equipment and
supplies for the Company;
- paying all compensation of the Company's officers;
- authorizing expenditures and approving bills for
payment on behalf of the Company;
- supervising preparation of annual and semiannual
reports to Shareholders, notices of dividends, capital
gains distributions and tax credits, and attending to
routine correspondence and other communications with
individual Shareholders;
- daily pricing of the Funds' investment portfolios and
preparing and supervising publication of daily
quotations of the bid and asked prices of the Funds'
Shares, earnings reports and other financial data;
- providing trading desk facilities for the Funds;
- monitoring relationships with organizations serving the
Company, including custodians, transfer agents and
printers;
- supervising compliance by the Company with
recordkeeping requirements under the 1940 Act and
regulations thereunder and with state regulatory
requirements, maintaining books and records for the
Funds (other than those maintained by the custodian and
transfer agent); and preparing and filing tax reports
other than the Funds' income tax returns; and
- providing executive, clerical and secretarial help
needed to carry out these responsibilities.
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 fees 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 operations) 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, 1995. 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, 1995, 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 outstanding
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 generally do not hold certificates
for the securities 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 the services of the
Custodian is based on a schedule of charges agreed on from time
to time.
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 ("SEC") 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. Shareholders who would like
to receive an interim quarterly report may phone Fund Information
at 1-800-292-9293.
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 transactions
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 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.
Insofar as known to management, no Director or Officer of
the Company, nor the Investment Managers or the Principal
Underwriter or any person affiliated with any of them, has any
material direct or indirect interest in any broker employed by or
on behalf of a 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 NYSE (generally 4:00 p.m., New York time),
every Monday through Friday (exclusive of national business
holidays). The Company's offices will be closed, and net asset
value will not be calculated, on those days on which the NYSE 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
NYSE 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 NYSE 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 NYSE is
closed other than for customary weekend and holiday closings, (2)
trading on the NYSE 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 SEC may by order permit for the
protection of the holders of a Fund's Shares.
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: (1) 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 (2) 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 ("IRS") 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 distributed 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. Generally, dividends and distribu-
tions 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, as 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 circumstances of each Shareholder, Shareholders
are advised to contact their own tax advisers.
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
realized 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 distributions 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 circumstances, 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
realized. 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 between the date of
acquisition of the security or contract and the date of
disposition 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, or as a capital gain.
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 according 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 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 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.
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
holding 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
distributions 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 IRS notifies the Shareholder or the
Fund that the Shareholder has failed to report properly certain
interest and dividend income to the IRS 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. Shareholders 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 Distribution 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 Distribution 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 jurisdictions 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 additional 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 Distribution 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
Distribution 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 Distribution 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 outstanding at the time of the
call. In addition, the Company is required to assist Shareholder
communication in connection with the calling of Shareholder
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 one, five or ten 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 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
Corporation, 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, literacy rates, foreign investment
improvements due to a liberalization of securities laws
and a reduction of foreign exchange controls, and
improving communication technology, of various
countries as published by various statistical
organizations.
(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.
(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,* advocating the virtues of
diversification and long-term investing, including the
following:
_______________
* 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.
- "Never follow the crowd. Superior performance is
possible only if you invest differently from the
crowd."
- "Diversify by company, by industry and by
country."
- "Always maintain a long-term perspective."
- "Invest for maximum total real return."
- "Invest - don't trade or speculate."
- "Remain flexible and open-minded about types of
investment."
- "Buy low."
- "When buying stocks, search for bargains among
quality stocks."
- "Buy value, not market trends or the economic
outlook."
- "Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
- "Do your homework or hire wise experts to help
you."
- "Aggressively monitor your investments."
- "Don't panic."
- "Learn from your mistakes."
- "Outperforming the market is a difficult task."
- "An investor who has all the answers doesn't even
understand all the questions."
- "There's no free lunch."
- "And now the last principle: Do not be fearful or
negative too often."
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 of the Franklin Templeton Funds
or the dollar amount of fund and private account assets under
management in advertising materials.
FINANCIAL STATEMENTS
The financial statements contained in each Fund's Annual
Report to Shareholders dated December 31, 1994 are incorporated
herein by reference.
