TEMPLETON INSTITUTIONAL FUNDS, INC.
THISSTATEMENT OF ADDITIONAL INFORMATION DATED MAY
1, 1995, AS AMENDED SEPTEMBER 29, 1995, IS NOT A
PROSPECTUS.
IT SHOULD BE READ IN CONJUNCTION WITH THE
PROSPECTUS OF TEMPLETON INSTITUTIONAL FUNDS, INC.
DATED MAY 1, 1995, AS AMENDED FROM TIME TO TIME,
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/DIAL BEN
TABLE OF CONTENTS
General Information and History.................... 1
Investment Objectives and
Policies......................................... 1
-Investment Policies.............................. 1
-Repurchase Agreements............................ 2
-Debt Securities................................. 2
-Futures Contracts................................ 4
-Options on Securities or Indices................. 5
-Foreign Currency Hedging Transactions............ 7
-Investment Restrictions.......................... 8
-Risk Factors.....................................10
-Trading Policies.................................15
-Personal Securities Transactions.................15
Management of the Company..........................16
Director Compensation..............................22
Principal Shareholders.............................23
Investment Management and Other
Services........................................ 25
-Investment Management Agreements.................25
-Management Fees..................................27
-The Investment Managers..........................28
-Business Manager.................................28
-Custodian and Transfer Agent.....................30
-Legal Counsel....................................30
-Independent Accountants..........................31
-Reports to Shareholders..........................31
Brokerage Allocation...............................31
Purchase, Redemption and
Pricing of Shares................................34
-Ownership and Authority Disputes.................35
Tax Status.........................................35
Principal Underwriter..............................41
Description of Shares..............................42
Performance Information............................42
Financial Statements...............................46
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.
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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 (Singapore) Pte Ltd., ("Templeton
(Singapore)") 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 agree-ments 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.
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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 creditworthi-ness 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
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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).
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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
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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
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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.
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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.
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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 1/2 of 1% of
the securities of such company, in the aggregate own more than
5% of the securities of such company.
3. Purchase any security (other than obligations of the
U.S. Government, its agencies or instrumentalities) if,
as a result, as to 75% of the Fund's total assets (i)
more than 5% of the Fund's total assets would then be
invested in 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).
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7. Invest more than 5% of the value of its total assets in
securities of issuers which have been in continuous operation
less than three years.
8. Invest more than 5% of its total assets in warrants, whether
or not listed on the New York or American Stock Exchange,
including no more than 2% of its total assets which may be
invested in warrants that are not listed on those exchanges.
Warrants acquired by the Fund in units or attached to
securities are not included in this Restriction.
9. Invest more than 25% of its total assets in a single
industry.
10. Participate on a joint or a joint and several basis in any
trading account in securities. (See "Investment Objectives and
Policies -- Trading Policies" as to transactions in the same
securities for a Fund and/or other mutual funds with the same
or affiliated advisers.)
In addition, the Company has undertaken with a state securities
commission, as a non-fundamental policy which may be changed without shareholder
approval, to limit the investment by each Series in illiquid and restricted
securities (excluding securities eligible for resale pursuant to Rule 144A under
the Securities Act of 1933) to no more than 15% of the Series' net assets at the
time of purchase.
Whenever any Investment Policy or Investment Restriction states a
maximum percentage of a Fund's assets which may be invested in any security or
other property, it is intended that such maximum percentage limitation be
determined immediately after and as a result of a Fund's acquisition of such
security or property. Assets are calculated as described in the Prospectus under
the heading "Purchase of Shares." If a Fund receives from an issuer of
securities held by the Fund subscription rights to purchase securities of that
issuer, and if the Fund exercises such subscription rights at a time when the
Fund's portfolio holdings of securities of that issuer would otherwise exceed
the limits set forth in Investment Restrictions 3 or 9 above, it will not
constitute a violation if, prior to receipt of securities upon exercise of such
rights, and after announcement of such rights, the Fund has sold at least as
many securities of the same class and value as it would receive on exercise of
such rights.
RISK FACTORS. Each Fund has the right to purchase
securities in any foreign country, developed or developing.
Investors should consider carefully the substantial risks
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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
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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.
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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, particu-larly when a Fund changes investments from
one country to another or when proceeds of the sale of Shares in U.S. dollars
are used
- 13 -
<PAGE>
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
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<PAGE>
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 certain of these funds and
clients may contain many or some of the same securities. When certain funds or
clients are engaged simultaneously in the purchase or sale of the same security,
the trades may be aggregated for execution and then allocated 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 1
- 15 -
<PAGE>
this clearance; (2) Copies of all brokerage confirmations must be sent to the
Compliance Officer and within 10 days after the end of each calendar quarter, a
report of all securities transactions must be provided to the Compliance
Officer; (3) In addition to items (1) and (2), access persons involved in
preparing and making investment decisions must file annual reports of their
securities holdings each January and also inform the Compliance Officer (or
other designated personnel) if they own a security that is being considered for
a fund or other client transaction or if they are recommending a security in
which they have an ownership interest for purchase or sale by a fund or other
client.
MANAGEMENT OF THE COMPANY
The name, address, principal occupation during the past five years and
other information with respect to each of the Directors and principal executive
officers of the Company is as follows:
NAME, ADDRESS AND
OFFICES WITH COMPANY
PRINCIPAL OCCUPATION
DURING THE PAST FIVE YEARS
HARRIS J. ASHTON
Metro Center
1 Station Place
Stamford, Connecticut
Director
Chairman of the Board, president
and chief executive officer of
General Host Corporation (nursery
and craft centers); and a
director of RBC Holdings (U.S.A.)
Inc. (a bank holding company) and
Bar-S Foods. Age 63.
NICHOLAS F. BRADY*
102 East Dover Street
Easton, Maryland
Director Chairman of Templeton Emerging Markets Investment Trust PLC; chairman
of Templeton Latin 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. Age 65.
- 16 -
<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH COMPANY DURING THE PAST FIVE YEARS
FRANK J. CROTHERS
P.O. Box N-3238
Nassau, Bahamas
Director President and chief executive officer of Atlantic Equipment & Power
Ltd; vice chairman of Caribbean Utilities Co., Ltd.; president of Provo Power
Corporation; and a director of various other business and nonprofit
organizations. Age 51.
S. JOSEPH FORTUNATO
12 Brannick Drive
Madison, New Jersey
Director
Member of the law firm of Pitney,
Hardin, Kipp & Szuch; and a
director of General Host
Corporation. Age 63.
JOHN Wm. GALBRAITH
360 Central Avenue
Suite 1300
St. Petersburg, Florida
Director
President of Galbraith
Properties, Inc. (personal
investment company); director of
Gulfwest Banks, Inc. (bank
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). Age 74.
ANDREW H. HINES, JR.
150 2nd Avenue N.
St. Petersburg, Florida
Director Consultant for the Triangle Consulting Group; chairman of the board
and chief executive officer of Florida Progress Corporation (1982-February 1990)
and director of various of its subsidiaries; chairman and director of Precise
Power Corporation; executive-in-residence of Eckerd College (1991-present); and
a director of Checkers Drive-In Restaurants, Inc. Age72.
- 17 -
<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH COMPANY DURING THE PAST FIVE YEARS
CHARLES B. JOHNSON*
777 Mariners Island Blvd.
San Mateo, California
Chairman of the Board
and Vice President
President, chief executive officer, and director of Franklin Resources, Inc.;
chairman of the board and director of Franklin 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.
Age 62.
BETTY P. KRAHMER
2201 Kentmere Parkway
Wilmington, DE
Trustee
Director or trustee of various civic associations; formerly, economic analyst,
U.S.
Government. Age 66.
GORDON S. MACKLIN
8212 Burning Tree Road
Bethesda, Maryland
Director
Chairman of White River
Corporation (information
services); director of Fund
America Enterprises Holdings,
Inc., Lockheed Martin
Corporation, MCI Communications Corporation, Fusion Systems Corporation,
Infovest Corporation, and Medimmune, Inc.; and formerly held the following
positions: chairman of Hambrecht and Quist Group; director of H&Q Healthcare
Investors; and president of the National Association of Securities Dealers, Inc.
Age 67.
- 18 -
<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH COMPANY DURING THE PAST FIVE YEARS
FRED R. MILLSAPS
2665 N.E. 37th Drive
Fort Lauderdale, Florida
Director
Manager of personal investments (1978-present); chairman and chief executive
officer of Landmark Banking Corporation (1969-1978); financial vice president of
Florida Power and Light (1965-1969); vice president of The Federal Reserve Bank
of Atlanta (1958-1965); and a director of various business and nonprofit
organizations. Age 66.
CONSTANTINE DEAN TSERETOPOULOS
Lyford Cay Hospital
P.O. Box N-7776
Nassau, Bahamas
Director Physician, Lyford Cay Hospital (July 1987-present); Cardiology
Fellow, University of Maryland (July 1985-July 1987); Internal Medicine Intern,
Greater Baltimore Medical Center (July 1982-July 1985). Age 41.
DONALD F. REED
4 King Street West
Toronto, Ontario
Canada
President Executive vice president of Templeton Worldwide, Inc.; president of
Templeton Investment Counsel, Inc.; president and chief executive officer of
Templeton Management Limited; co-founder and director of International Society
of Financial Analysts; chairman of Canadian Council of Financial Analysts;
formerly, president and director, Reed Monahan Nicolishen Investment Counsel
(1982-1989).
Age 50.
MARK G. HOLOWESKO
Lyford Cay
Nassau, Bahamas
Vice President President, chief executive officer and director of Templeton,
Galbraith & Hansberger Ltd.; director of global equity research for Templeton
Worldwide, Inc.; president or vice president of the Templeton Funds; formerly,
investment administrator with Roy West Trust Corporation (Bahamas) Limited
(1984-1985). Age35.
- 19 -
<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH COMPANY DURING THE PAST FIVE YEARS
MARTIN L. FLANAGAN
777 Mariners Island Blvd.
San Mateo, California
Vice President Senior vice president, treasurer and chief financial officer of
Franklin Resources, Inc.; director 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. Age 35.
DANIEL L. JACOBS
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President Executive vice president and director of Templeton Investment
Counsel, Inc.; director of Templeton Global Investors, Inc.; and president or
vice president of certain of the Templeton Funds. Age 43.
JAMES E. CHANEY
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President Vice president, Portfolio Management/Research of Templeton
Investment Counsel, Inc.; formerly, vice president of equities, GE Investments
(1987- 1991); consulting engineer and project manager, Camp, Dresser & McKee,
Inc. (January 1985-July 1985) and American British Consultants (1983-1984). Age
39.
- 20 -
<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH COMPANY DURING THE PAST FIVE YEARS
J. MARK MOBIUS
Two Exchange Square
Hong Kong
Vice President Managing director of Templeton Investment Management (Hong
Kong) Limited; portfolio manager for 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). Age 59.
THOMAS LATTA
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President Vice president of the Templeton Global Bond Managers division
of Templeton Investment Counsel, Inc.; vice president of various Templeton
Funds; formerly, portfolio manager, Forester & Hairston (1988-1991); and
investment adviser, Merrill Lynch, Pierce, Fenner & Smith Inc. (1981-1988). Age
35.
JOHN R. KAY
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President Vice president of the Templeton Funds; vice president and
treasurer of Templeton Global Investors, Inc. and Templeton Worldwide, Inc.;
assistant vice president of Franklin Templeton Distributors, Inc.; formerly,
vice president and controller of the Keystone Group, Inc. Age 55.
THOMAS M. MISTELE
700 Central Avenue
St. Petersburg, Florida
Secretary
Senior vice president of Templeton Global Investors, Inc.; vice president of
Franklin Templeton Distributors, Inc.; secretary of the Templeton Funds;
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). Age 42.
- 21 -
<PAGE>
JAMES R. BAIO
500 East Broward Blvd.
Fort Lauderdale, Florida
Treasurer Certified public accountant; treasurer of the Templeton Funds;
senior vice president of Templeton Worldwide, Inc., Templeton Global Investors,
Inc., and Templeton Funds Trust Company; formerly, senior tax manager with Ernst
& Young (certified public accountants) (1977-1989). Age 41.
JACK L. COLLINS
700 Central Avenue
St. Petersburg, Florida
Assistant Treasurer Assistant treasurer of the Templeton Funds; assistant vice
president of Franklin Templeton Distributors, Inc.; formerly, partner with Grant
Thornton (international certified public accountants). Age 66.
JEFFREY L. STEELE
1500 K Street, N.W.
Washington, D.C.
Assistant Secretary
Partner, Dechert Price & Rhoads.
Age 50.
- ------------------------
* 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
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<PAGE>
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:
<TABLE>
<CAPTION>
NUMBER OF TOTAL COMPENSATION
NAME AGGREGATE FRANKLIN TEMPLETON FROM ALL FUNDS IN
OF COMPENSATION FUND BOARDS ON WHICH FRANKLIN TEMPLETON
DIRECTOR FROM THE COMPANY* DIRECTOR SERVES GROUP*
- -------- ----------------- -------------------- -------------
<S> <C> <C> <C>
Harris J. Ashton $3,500 54 $319,925
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 Tseretopoulos 4,000 4 12,850
</TABLE>
- ---------------
* 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
- 23 -
<PAGE>
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,
- 24 -
<PAGE>
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 the Hong Kong
office of Templeton Investment Management (Singapore) Pte Ltd., a Singapore
corporation at 20 Raffles Place, Ocean Tower, Singapore. On September 29, 1995,
the Investment Manager assumed the investment management duties of Templeton
Investment Management (Hong Kong) Limited, a Hong Kong company, with respect to
the Emerging Markets Series under the Investment Management Agreement. The
Investment Management Agreement between Templeton (Singapore) 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
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<PAGE>
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 certain of its
affiliates have selected for one or more of the Investment Manager's other
clients or for clients of its affiliates, the orders for all such securities
trades may be 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
- 26 -
<PAGE>
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 (Singapore) 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 (Singapore) 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, Templeton Investment Management (Hong Kong) Limited, the Fund's
previous investment manager, 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
- 27 -
<PAGE>
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:
o providing office space, telephone, office equipment and
supplies for the Company;
o paying all compensation of the Company's officers;
o authorizing expenditures and approving bills for
payment on behalf of the Company;
o supervising preparation of annual and semiannual reports to
Shareholders, notices of dividends, capital gains
distributions and tax credits, and attending to routine
correspondence and other communications with individual
Shareholders;
o 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;
o providing trading desk facilities for the Funds;
o monitoring relationships with organizations serving the
Company, including custodians, transfer agents and
printers;
o supervising compliance by the Company with recordkeeping
requirements under the 1940 Act and regulations thereunder and
with state regulatory requirements, maintaining books and
records for the
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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
o 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
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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.
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<PAGE>
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 the Fund Information
Department at 1-800/DIAL BEN.
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.
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<PAGE>
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
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<PAGE>
(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.
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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.
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<PAGE>
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.
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<PAGE>
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
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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
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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
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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.
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(12) Quotations from the Templeton organization's founder, Sir John
Templeton,* advocating the virtues of diversification and
long-term investing, including the following:
o "Never follow the crowd. Superior performance is
possible only if you invest differently from the
crowd."
o "Diversify by company, by industry and by
country."
o "Always maintain a long-term perspective."
o "Invest for maximum total real return."
o "Invest - don't trade or speculate."
o "Remain flexible and open-minded about types of
investment."
o "Buy low."
o "When buying stocks, search for bargains among
quality stocks."
o "Buy value, not market trends or the economic
outlook."
o "Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
o "Do your homework or hire wise experts to help
you."
o "Aggressively monitor your investments."
o "Don't panic."
o "Learn from your mistakes."
o "Outperforming the market is a difficult task."
- --------
* 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.
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o "An investor who has all the answers doesn't even
understand all the questions."
o "There's no free lunch."
o "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.
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ZTIFI SAI 09/95
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