TEMPLETON INSTITUTIONAL FUNDS, INC.
THIS STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1996,
IS NOT A PROSPECTUS.
IT SHOULD BE READ IN CONJUNCTION WITH THE
PROSPECTUS OF TEMPLETON INSTITUTIONAL FUNDS, INC.
DATED MAY 1, 1996, 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: 1-800/DIAL BEN
TABLE OF CONTENTS
General Information and
History............................................ 1
Investment Objectives and
Policies......................................... 1
-Investment Policies.............................. 1
-Repurchase Agreements............................ 2
-Debt Securities................................. 2
-Structured Investments.......................... 4
-Futures Contracts................................ 5
-Options on Securities or
Indices............................................ 5
-Foreign Currency Hedging
Transactions....................................... 8
-Investment Restrictions.......................... 9
-Risk Factors.....................................11
-Trading Policies.................................16
-Personal Securities
Transactions.......................................16
Management of the Company..........................17
Director Compensation..............................25
Principal Shareholders.............................26
Investment Management and
Other
Services........................................ 27
-Investment Management
Agreements.........................................27
-Management Fees..................................29
-The Investment Managers..........................30
-Business Manager.................................30
-Custodian and Transfer
Agent..............................................32
-Legal Counsel....................................33
-Independent Accountants..........................33
-Reports to Shareholders..........................33
Brokerage Allocation...............................33
Purchase, Redemption and
Pricing of Shares................................36
-Ownership and Authority
Disputes...........................................37
-Redemptions in Kind . . . .
. . ...............................................37
Tax Status.........................................38
Principal Underwriter..............................43
Description of Shares..............................44
Performance Information............................44
Financial Statements...............................48
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 four series of Shares: Growth Series,
Foreign Equity Series, Emerging Markets Series, and Global Fixed Income Series
(collectively, the "Funds").
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT POLICIES. The Funds' Investment Objectives and Policies are
described in the Prospectus under the heading "Investment Objectives and
Policies." Each Fund may invest a portion of its assets, and may invest without
limit for defensive purposes, in commercial paper which, at the date of
investment, must be rated A-1 by Standard & Poor's Corporation ("S&P") or
Prime-1 by Moody's Investors Service, Inc. ("Moody's") or, if not rated, be
issued by a company which at the date of investment has an outstanding debt
issue rated AAA or AA by S&P or Aaa or Aa by Moody's.
REPURCHASE AGREEMENTS. Repurchase agreements are contracts under which
the buyer of a security simultaneously commits to resell the security to the
seller at an agreed-upon price and date. Under a repurchase agreement, the
seller is required to maintain the value of the securities subject to the
repurchase agreement at not less than their repurchase price. Each Fund's
investment manager, Templeton Investment Counsel, Inc. ("TICI") in the case of
Growth Series and Foreign Equity Series Templeton Asset Management Ltd.- Hong
Kong Branch, ("Templeton Hong Kong") in the case of Emerging Markets Series; and
the Templeton Global Bond Managers division of TICI ("TGBM") in the case of
Global Fixed Income Series) (collectively, the "Investment Managers") will
monitor the value of such securities daily to determine that the value equals or
exceeds the repurchase price. Repurchase agreements may involve risks in the
event of default or insolvency of the seller, including possible delays or
restrictions upon a Fund's ability to dispose of the underlying securities. A
Fund will enter into repurchase agreements only with parties who meet
creditworthiness standards approved by the Company's Directors, I.E., banks or
broker-dealers which have been determined by a Fund's Investment Manager to
present no serious risk of becoming involved in bankruptcy proceedings within
the time frame contemplated by the repurchase transaction.
DEBT SECURITIES. Each of the Funds may invest a portion of its assets
in debt securities, including bonds, notes, debentures, commercial paper,
certificates of deposit, time deposits and bankers' acceptances. Debt securities
purchased by a Fund may be rated as low as C by S&P or Moody's or, if unrated,
of comparable quality as determined by the Fund's Investment Manager. As an
operating policy, which may be changed by the Board of Directors without
Shareholder approval, each Fund will limit its investment in debt securities
rated lower than BBB by S&P or Baa by Moody's to 5% of its total assets. The
Board may consider a change in this operating policy if, in its judgment,
economic conditions change such that a higher level of investment in high risk,
lower quality debt securities would be consistent with the interests of the
Funds and their Shareholders. Commercial paper purchased by the Funds will meet
the credit quality criteria set forth under "Investment Policies"
above.
The market value of debt securities generally varies in response to
changes in interest rates and the financial condition of each issuer. During
periods of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the Funds' net asset value.
Although they may offer higher yields than do higher rated securities,
low rated and unrated debt securities generally involve greater volatility of
price and risk of principal and income, including the possibility of default by,
or bankruptcy of, the issuers of the securities. In addition, the markets in
which low rated and unrated debt securities are traded are more limited than
those in which higher rated securities are traded. The existence of limited
markets for particular securities may diminish a Fund's ability to sell the
securities at fair value either to meet redemption requests or to respond to a
specific economic event such as a deterioration in the creditworthiness of the
issuer. Reduced secondary market liquidity for certain low rated or unrated debt
securities may also make it more difficult for a Fund to obtain accurate market
quotations for the purposes of valuing the Fund's portfolio. Market quotations
are generally available on many low rated or unrated securities only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated debt securities may be more complex
than for issuers of higher rated securities, and the ability of a Fund to
achieve its investment objective may, to the extent of investment in low rated
debt securities, be more dependent upon such 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 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.
STRUCTURED INVESTMENTS. Included among the issuers of debt securities
in which the Funds may invest are entities organized and operated solely for the
purpose of restructuring the investment characteristics of various securities.
These entities are typically organized by investment banking firms which receive
fees in connection with establishing each entity and arranging for the placement
of its securities. This type of restructuring involves the deposit with or
purchase by an entity, such as a corporation or trust, of specified instruments
and the issuance by that entity of one or more classes of securities
("Structured Investments") backed by, or representing interests in, the
underlying instruments. The cash flows on the underlying instruments may be
apportioned among the newly issued Structured Investments to create securities
with different investment characteristics such as varying maturities, payment
priorities or interest rate provisions; the extent of the payments made with
respect to Structured Investments is dependent on the extent of the cash flows
on the underlying instruments. Because Structured Investments of the type in
which the Funds anticipate investing typically involve no credit enhancement,
their credit risk will generally be equivalent to that of the underlying
instruments.
The Funds are permitted to invest in a class of Structured Investments
that is either subordinated or unsubordinated to the right of payment of another
class. Subordinated Structured Investments typically have higher yields and
present greater risks than unsubordinated Structured Investments. Although a
Fund's purchase of subordinated Structured Investments would leave a similar
economic effect to that of borrowing against the underlying securities, the
purchase will not be deemed to be leveraged for purposes of the limitations
placed on the extent of a Fund's assets that may be used for borrowing
activities.
Certain issuers of Structured Investments may be deemed to be
"investment companies" as defined in the 1940 Act. As a result, a Fund's
investment in these Structured Investments may be limited by the restrictions
contained in the 1940 Act.
Structured Investments are typically sold in private placement transactions, and
there currently is no active trading market for Structured Investments. To the
extent such investments are illiquid, they will be subject to a Funds'
restrictions on investment in illiquid securities.
FUTURES CONTRACTS. The Funds may purchase and sell financial futures
contracts. Although some financial futures contracts call for making or taking
delivery of the underlying securities, in most cases these obligations are
closed out before the settlement date. The closing of a contractual obligation
is accomplished by purchasing or selling an identical offsetting futures
contract. Other financial futures contracts by their terms call for cash
settlements.
The Funds may also buy and sell index futures contracts with respect to
any stock index traded on a recognized stock exchange or board of trade. An
index futures contract is a contract to buy or sell units of an index at a
specified future date at a price agreed upon when the contract is made. The
stock index futures contract specifies that no delivery of the actual stocks
making up the index will take place. Instead, settlement in cash must occur upon
the termination of the contract, with the settlement being the difference
between the contract price and the actual level of the stock index at the
expiration of the contract.
At the time a Fund purchases a futures contract, an amount of cash,
U.S. Government securities, or other highly liquid debt securities equal to the
market value of the futures contract will be deposited in a segregated account
with the Fund's Custodian. When writing a futures contract, a Fund will maintain
with its Custodian liquid assets that, when added to the amounts deposited with
a futures commission merchant or broker as margin, are equal to the market value
of the instruments underlying the contract. Alternatively, a Fund may "cover"
its position by owning the instruments underlying the contract (or, in the case
of an index futures contract, a portfolio with a volatility substantially
similar to that of the index on which the futures contract is based), or holding
a call option permitting the Fund to purchase the same futures contract at a
price no higher than the price of the contract written by the Fund (or at a
higher price if the difference is maintained in liquid assets with the Fund's
Custodian).
OPTIONS ON SECURITIES OR INDICES. The Funds may write (I.E., sell)
covered put and call options and purchase put and call options on securities or
securities indices that are traded on United States and foreign exchanges or in
the over-the-counter markets.
An option on a security is a contract that gives the purchaser of the
option, in return for the premium paid, the right to buy a specified security
(in the case of a call option)
or to sell a specified security (in the case of a put option) from or to the
writer of the option at a designated price during the term of the option. An
option on a securities index gives the purchaser of the option, in return for
the premium paid, the right to receive from the seller cash equal to the
difference between the closing price of the index and the exercise price of the
option.
A Fund may write a call or put option only if the option is "covered."
A call option on a security written by a Fund is "covered" if the Fund owns the
underlying security covered by the call or has an absolute and immediate right
to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its Custodian)
upon conversion or exchange of other securities held in its portfolio. A call
option on a security is also covered if a Fund holds a call on the same security
and in the same principal amount as the call written where the exercise price of
the call held (a) is equal to or less than the exercise price of the call
written or (b) is greater than the exercise price of the call written if the
difference is maintained by the Fund in cash or high grade U.S. Government
securities in a segregated account with its Custodian. A put option on a
security written by a Fund is "covered" if the Fund maintains cash or
fixed-income securities with a value equal to the exercise price in a segregated
account with its Custodian, or else holds a put on the same security and in the
same principal amount as the put written where the exercise price of the put
held is equal to or greater than the exercise price of the put written.
A Fund will cover call options on stock indices that it writes by
owning securities whose price changes, in the opinion of the Fund's Investment
Manager, are expected to be similar to those of the index, or in such other
manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations. Nevertheless, where a Fund
covers a call option on a stock index through ownership of securities, such
securities may not match the composition of the index. In that event, a Fund
will not be fully covered and could be subject to risk of loss in the event of
adverse changes in the value of the index. A Fund will cover put options on
stock indices that it writes by segregating assets equal to the option's
exercise price, or in such other manner as may be in accordance with the rules
of the exchange on which the option is traded and applicable laws and
regulations.
A Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised or
is closed out at a profit. If the value of a security or an index on which a
Fund has written a call option falls or remains the same, the Fund will realize
a profit in the form of the premium received (less transaction costs) that could
offset all or a portion of any decline in the value of the portfolio securities
being hedged. If the value of
the underlying security or index rises, however, a Fund will realize a loss in
its call option position, which will reduce the benefit of any unrealized
appreciation in the Fund's investments. By writing a put option, a Fund assumes
the risk of a decline in the underlying security or index. To the extent that
the price changes of the portfolio securities being hedged correlate with
changes in the value of the underlying security or index, writing covered put
options on indices or securities will increase a Fund's losses in the event of a
market decline, although such losses will be offset in part by the premium
received for writing the option.
A Fund may also purchase put options to hedge its investments against a
decline in value. By purchasing a put option, a Fund will seek to offset a
decline in the value of the portfolio securities being hedged through
appreciation of the put option. If the value of a Fund's investments does not
decline as anticipated, or if the value of the option does not increase, the
Fund's loss will be limited to the premium paid for the option plus related
transaction costs. The success of this strategy will depend, in part, on the
accuracy of the correlation between the changes in value of the underlying
security or index and the changes in value of a Fund's security holdings being
hedged.
A Fund may purchase call options on individual securities to hedge
against an increase in the price of securities that the Fund anticipates
purchasing in the future. Similarly, a Fund may purchase call options on a
securities index to attempt to reduce the risk of missing a broad market
advance, or an advance in an industry or market segment, at a time when the Fund
holds uninvested cash or short-term debt securities awaiting investment. When
purchasing call options, a Fund will bear the risk of losing all or a portion of
the premium paid if the value of the underlying security or index does not rise.
There can be no assurance that a liquid market will exist when a Fund
seeks to close out an option position. Trading could be interrupted, for
example, because of supply and demand imbalances arising from a lack of either
buyers or sellers, or the options exchange could suspend trading after the price
has risen or fallen more than the maximum specified by the exchange. Although a
Fund may be able to offset to some extent any adverse effects of being unable to
liquidate an option position, the Fund may experience losses in some cases as a
result of such inability.
FOREIGN CURRENCY HEDGING TRANSACTIONS. In order to hedge against
foreign currency exchange rate risks, the Funds may enter into forward foreign
currency exchange contracts and foreign currency futures contracts, as well as
purchase put or call options on foreign currencies, as described below. The
Funds may also conduct their foreign currency exchange transactions on a spot
(I.E., cash) basis at the spot rate prevailing in the foreign currency exchange
market.
A Fund may enter into forward foreign currency exchange contracts
("forward contracts") to attempt to minimize the risk to the Fund from adverse
changes in the relationship between the U.S. dollar and foreign currencies. A
forward contract is an obligation to purchase or sell a specific currency for an
agreed price at a future date which is individually negotiated and privately
traded by currency traders and their customers. A Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security. In addition, for example, when a Fund believes
that a foreign currency may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell an amount of that foreign
currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency, or when a Fund believes that
the U.S. dollar may suffer a substantial decline against a foreign currency, it
may enter into a forward contract to buy that foreign currency for a fixed
dollar amount. This second investment practice is generally referred to as
"cross-hedging." Because in connection with a Fund's forward foreign currency
transactions an amount of the Fund's assets equal to the amount of the purchase
will be held aside or segregated to be used to pay for the commitment, a Fund
will always have cash, cash equivalents or high quality debt securities
available sufficient to cover any commitments under these contracts or to limit
any potential risk. The segregated account will be marked-to-market on a daily
basis. While these contracts are not presently regulated by the Commodity
Futures Trading Commission ("CFTC"), the CFTC may in the future assert authority
to regulate forward contracts. In such event, a Fund's ability to utilize
forward contracts in the manner set forth above may be restricted. Forward
contracts may limit potential gain from a positive change in the relationship
between the U.S. dollar and foreign currencies. Unanticipated changes in
currency prices may result in poorer overall performance for a Fund than if it
had not engaged in such contracts.
The Funds may purchase and write put and call options on foreign
currencies for the purpose of protecting against declines in the dollar value of
foreign portfolio securities and against increases in the dollar cost of foreign
securities to be acquired. As is the case with other kinds of options, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received, and a Fund could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may constitute
an effective hedge against fluctuation in exchange rates, although, in the event
of rate movements adverse to a Fund's position, the Fund may forfeit the entire
amount of the premium plus related transaction costs. Options on foreign
currencies to be written or purchased by a Fund will be traded on U.S. and
foreign exchanges or over-the-counter.
The Funds may enter into exchange-traded contracts for the purchase or
sale for future delivery of foreign currencies ("foreign currency futures").
This investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of a
Fund's portfolio securities or adversely affect the prices of securities that a
Fund intends to purchase at a later date. The successful use of foreign currency
futures will usually depend on the ability of a Fund's Investment Manager to
forecast currency exchange rate movements correctly. Should exchange rates move
in an unexpected manner, a Fund may not achieve the anticipated benefits of
foreign currency futures or may realize losses.
INVESTMENT RESTRICTIONS. Each Fund has imposed upon itself certain
Investment Restrictions set forth below, which, together with its Investment
Objective are fundamental policies. No changes in a Fund's Investment Objective
or these Investment Restrictions can be made without the approval of the Fund's
Shareholders. For this purpose, the provisions of the 1940 Act require the
affirmative vote of the lesser of either (A) 67% or more of the Shares of a Fund
present at a Shareholder's meeting at which more than 50% of the outstanding
Shares are present or represented by proxy or (B) more than 50% of the
outstanding Shares of the Fund.
Each Fund will not:
1. Invest in real estate or mortgages on real estate
(although a Fund may invest in marketable securities
secured by real estate or interests therein or issued
by companies or investment trusts which invest in real
estate or interests therein); invest in other open-end
investment companies except as permitted by the 1940
Act; invest in interests (other than debentures or
equity stock interests) in oil, gas or other mineral
exploration or development programs; or purchase or
sell commodity contracts (except futures contracts as
described in the Prospectus).
2. Purchase or retain securities of any company in which
Directors or officers of the Company or of the Fund's
Investment Manager, individually own more than 1/2 of 1% of
the securities of such company or, in the aggregate, own more
than 5% of the securities of such company.
3. Purchase any security (other than obligations of the U.S.
Government, its agencies or instrumentalities) if, as a
result, as to 75% of the Fund's total assets (i) more than 5%
of the Fund's total assets would then be invested in
securities of any single issuer, or (ii) the Fund would then
own more than 10% of the voting securities of any single
issuer; provided, however,
that this restriction does not apply to the Global
Fixed Income Series.
4. Act as an underwriter; issue senior securities except as set
forth in investment restriction 6 below; or purchase on margin
or sell short (but a Fund may make margin payments in
connection with options on securities or securities indices
and foreign currencies; futures contracts and related options;
and forward contracts and related options).
5. Loan money apart from the purchase of a portion of an
issue of publicly distributed bonds, debentures, notes
and other evidences of indebtedness, although a Fund
may buy from a bank or broker-dealer United States
government obligations with a simultaneous agreement by
the seller to repurchase them within no more than seven
days at the original purchase price plus accrued
interest and loan its portfolio securities.
6. Borrow money, except that a Fund may borrow money from banks
in an amount not exceeding 33-1/3% of the value of its total
assets (including the amount borrowed).
7. Invest more than 5% of the value of its total assets in
securities of issuers which have been in continuous operation
less than three years.
8. Invest more than 5% of its total assets in warrants, whether
or not listed on the New York or American Stock Exchange,
including no more than 2% of its total assets which may be
invested in warrants that are not listed on those exchanges.
Warrants acquired by the Fund in units or attached to
securities are not included in this Restriction.
9. Invest more than 25% of its total assets in a single
industry.
10. Participate on a joint or a joint and several basis in any
trading account in securities. (See "Investment Objectives and
Policies -- Trading Policies" as to transactions in the same
securities for a Fund and/or other mutual funds with the same
or affiliated advisers.)
In addition, the Company has undertaken with a state securities
commission, as a non-fundamental policy which may be changed without shareholder
approval, to limit the investment by each Series in illiquid and restricted
securities (excluding securities eligible for resale pursuant to Rule 144A under
the Securities Act of 1933) to no more than 15% of the Series' net assets at the
time of purchase.
Whenever any Investment Policy or Investment Restriction states a
maximum percentage of a Fund's assets which may be invested in any security or
other property, it is intended that such maximum percentage limitation be
determined immediately after and as a result of a Fund's acquisition of such
security or property. Assets are calculated as described in the Prospectus under
the heading "Purchase of Shares." If a Fund receives from an issuer of
securities held by the Fund subscription rights to purchase securities of that
issuer, and if the Fund exercises such subscription rights at a time when the
Fund's portfolio holdings of securities of that issuer would otherwise exceed
the limits set forth in Investment Restrictions 3 or 9 above, it will not
constitute a violation if, prior to receipt of securities upon exercise of such
rights, and after announcement of such rights, the Fund has sold at least as
many securities of the same class and value as it would receive on exercise of
such rights.
RISK FACTORS. Each Fund has the right to purchase securities in any
foreign country, developed or developing. Investors should consider carefully
the substantial risks involved in securities of companies and governments of
foreign nations, which are in addition to the usual risks inherent in domestic
investments.
There may be less publicly available information about foreign
companies comparable to the reports and ratings published about companies in the
United States. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards, and auditing practices
and requirements may not be comparable to those applicable to United States
companies. The Funds, therefore, may encounter difficulty in obtaining market
quotations for purposes of valuing its portfolio and calculating its net asset
value. Foreign markets have substantially less volume than the New York Stock
Exchange ("NYSE"), and securities of some foreign companies are less liquid and
more volatile than securities of comparable United States companies. Commission
rates in foreign countries, which are generally fixed rather than subject to
negotiation as in the United States, are likely to be higher. In many foreign
countries there is less government supervision and regulation of stock
exchanges, brokers and listed companies than in the United States.
Investments in companies domiciled in developing countries may be
subject to potentially higher risks than investments in developed countries.
These risks include (i) less social, political and economic stability; (ii) the
small current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict a
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) the absence of
developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (v)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vi) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries.
In addition, many countries in which the Funds may invest have
experienced substantial, and in some periods extremely high, rates of inflation
for many years. Inflation and rapid fluctuations in inflation rates have had and
may continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the United States economy in such respects
as growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resources self-sufficiency and balance of payments
position.
Investments in Eastern European countries may involve risks of
nationalization, expropriation and confiscatory taxation. The communist
governments of a number of Eastern European countries expropriated large amounts
of private property in the past, in many cases without adequate compensation,
and there can be no assurance that such expropriation will not occur in the
future. In the event of such expropriation, a Fund could lose a substantial
portion of any investments it has made in the affected countries. Finally, even
though certain Eastern European currencies may be convertible into U.S. dollars,
the conversion rates may be artificial to the actual market values and may be
adverse to Fund Shareholders. Further, no accounting standards exist in Eastern
European countries.
Investing in Russian securities involves a high degree of risk and
special considerations not typically associated with investing in the United
States securities markets, and should be considered highly speculative. Such
risks include: (1) delays in settling portfolio transactions and risk of loss
arising out of Russia's system of share registration and custody; (2) the risk
that it may be impossible or more difficult than in other countries to obtain
and/or enforce a judgment; (3) pervasiveness of corruption and crime in the
Russian economic system; (4) currency exchange rate volatility and the lack of
available currency hedging instruments; (5) higher rates of inflation (including
the risk of social unrest associated with periods of hyper-inflation); (6)
controls on foreign investment and local practices disfavoring foreign investors
and limitations on repatriation of invested capital, profits and dividends, and
on a Fund's ability to exchange local currencies for U.S. dollars; (7) the risk
that the government of Russia or other executive or legislative bodies may
decide not to continue to support the economic reform programs implemented since
the dissolution of the Soviet Union and could follow radically different
political and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, or a return to the centrally planned
economy that existed prior to the dissolution of the Soviet Union; (8) the
financial condition of Russian companies, including large amounts of
inter-company debt which may create a payments crisis on a national scale; (9)
dependency on exports and the corresponding importance of international trade;
(10) the risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation; and (11) possible
difficulty in identifying a purchaser of securities held by a Fund due to the
underdeveloped nature of the securities markets.
There is little historical data on Russian securities markets because
they are relatively new and a substantial proportion of securities transactions
in Russia are privately negotiated outside of stock exchanges. Because of the
recent formation of the securities markets as well as the underdeveloped state
of the banking and telecommunications systems, settlement, clearing and
registration of securities transactions are subject to significant risks.
Ownership of shares (except where shares are held through depositories that meet
the requirements of the 1940 Act) is defined according to entries in the
company's share register and normally evidenced by extracts from the register or
by formal share certificates. However, there is no central registration system
for shareholders and these services are carried out by the companies themselves
or by registrars located throughout Russia. These registrars are not necessarily
subject to effective state supervision and it is possible for a Fund to lose its
registration through fraud, negligence or even mere oversight. While each Fund
will endeavor to ensure that its interest continues to be appropriately recorded
either itself or through a custodian or other agent inspecting the share
register and by obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability and it is possible
that subsequent illegal amendment or other fraudulent act may deprive the Fund
of its ownership rights or improperly dilute its interests. In addition, while
applicable Russian regulations impose liability on registrars for losses
resulting from their errors, it may be difficult for a Fund to enforce any
rights it may have against the registrar or issuer of the securities in the
event of loss of share registration. Furthermore, although a Russian public
enterprise with more than 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 issuers deemed suitable by its
Investment Manager. Further, this also could cause a delay in the sale of
Russian
securities by a Fund if a potential purchaser is deemed unsuitable, which may
expose the Fund to potential loss on the investment.
Each Fund endeavors to buy and sell foreign currencies on as favorable
a basis as practicable. Some price spread in currency exchange (to cover service
charges) will be incurred, particularly when a Fund changes investments from one
country to another or when proceeds of the sale of Shares in U.S. dollars are
used for the purchase of securities in foreign countries. Also, some countries
may adopt policies which would prevent a Fund from transferring cash out of the
country or withhold portions of interest and dividends at the source. There is
the possibility of cessation of trading on national exchanges, expropriation,
nationalization or confiscatory taxation, withholding and other foreign taxes on
income or other amounts, foreign exchange controls (which may include suspension
of the ability to transfer currency from a given country), default in foreign
government securities, political or social instability, or diplomatic
developments which could affect investments in securities of issuers in foreign
nations.
The Funds may be affected either unfavorably or favorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, by exchange control regulations and by indigenous economic
and political developments. Some countries in which the Funds may invest may
also have fixed or managed currencies that are not free-floating against the
U.S. dollar. Further, certain currencies may not be internationally traded.
Certain of these currencies have experienced a steady devaluation relative to
the U.S. dollar. Any devaluations in the currencies in which a Fund's portfolio
securities are denominated may have a detrimental impact on that Fund. Through
the flexible policy of the Funds, the Investment Managers endeavor to avoid
unfavorable consequences and to take advantage of favorable developments in
particular nations where from time to time they place the investments of the
Funds.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove profitable
and others may not. No assurance can be given that profits, if any, will exceed
losses.
The Directors consider at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions which
would affect the liquidity of the Funds' assets maintained with custodians in
foreign countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The Directors also consider the
degree of risk involved through the holding of portfolio securities in domestic
and foreign securities depositories (see
"Investment Management and Other Services -- Custodian and Transfer Agent").
However, in the absence of willful misfeasance, bad faith or gross negligence on
the part of a Fund's Investment Manager, any losses resulting from the holding
of a Fund's portfolio securities in foreign countries and/or with securities
depositories will be at the risk of the Shareholders. No assurance can be given
that the Directors' appraisal of the risks will always be correct or that such
exchange control restrictions or political acts of foreign governments will not
occur.
A Fund's ability to reduce or eliminate its futures and related options
positions will depend upon the liquidity of the secondary markets for such
futures and options. The Funds intend to purchase or sell futures and related
options only on exchanges or boards of trade where there appears to be an active
secondary market, but there is no assurance that a liquid secondary market will
exist for any particular contract or at any particular time. Use of stock index
futures and related options for hedging may involve risks because of imperfect
correlations between movements in the prices of the futures or related options
and movements in the prices of the securities being hedged. Successful use of
futures and related options by a Fund for hedging purposes also depends upon the
ability of that Fund's Investment Manager's to predict correctly movements in
the direction of the market, as to which no assurance can be given.
TRADING POLICIES. The Investment Managers and their affiliated
companies serve as investment advisers to other investment companies and private
clients. Accordingly, the respective portfolios of 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 this clearance; (2) Copies
of all brokerage confirmations must be sent to the Compliance Officer and within
10 days after the end of each calendar quarter, a report of all securities
transactions must be provided to the Compliance Officer; (3) In addition to
items (1) and (2), access persons involved in preparing and making investment
decisions must file annual reports of their securities holdings each January and
also inform the Compliance Officer (or other designated personnel) if they own a
security that is being considered for a fund or other client transaction or if
they are recommending a security in which they have an ownership interest for
purchase or sale by a fund or other client.
MANAGEMENT OF THE COMPANY
The name, address, principal occupation during the past five years and
other information with respect to each of the Directors and principal executive
officers of the Company is as follows:
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH COMPANY DURING THE PAST FIVE YEARS
HARRIS J. ASHTON
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 investmentfirm) (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 Dillon, Read & Co. Inc.
(investment banking) prior thereto. Age 66.
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
200 Campus Drive
Florham Park, 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. Age 73.
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 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 63.
BETTY P. KRAHMER
2201 Kentmere Parkway
Wilmington, DE
Director
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: Chairman of Hambrecht
and Quist Group; Director of H&Q Healthcare Investors; and President of the
National Association of Securities Dealers, Inc. Age 67.
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 67.
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 42.
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 51.
HARMON E. BURNS
777 Mariners Island Blvd.
San Mateo, California
Vice President
Executive Vice President, Secretary and Director of Franklin Resources,
Inc.; Director and Executive Vice President of Franklin Templeton
Distributors, Inc.; Executive Vice President of Franklin Advisers, Inc.;
Director of Franklin Templeton Investor Services, Inc.; officer and/or director,
as the case may be, of other subsidiaries of Franklin Resources, Inc.; and
officer and/or director or trustee of 61 of the investment companies in the
Franklin Templeton Group of Funds. Age 51.
RUPERT H. JOHNSON, JR.
777 Mariners Island Blvd.
San Mateo, California
Vice President
Executive Vice President, Secretary and Director of Franklin Resources, Inc.;
Executive Vice President of Franklin Templeton Distributors, Inc.; Executive
Vice President of Franklin Advisers, Inc.; Director of Franklin Templeton
Investor Services, Inc.; officer and/or director, as the case may be,
of other subsidiaries of Franklin Resources, Inc.; and officer and/or director
or trustee of 61 of the investment companies in the Franklin Templeton Group of
Funds. Age 55.
DEBORAH R. GATZEK
777 Mariners Island Blvd.
San Mateo, California
Vice President
Senior Vice President and General Counsel of Franklin Resources, Inc.;
Senior Vice President of Franklin Templeton Distributors, Inc.; Vice President
of Franklin Advisers, Inc. and officer of 61 of the investment companies in
the Franklin Templeton Group of Funds. Age 47.
CHARLES E. JOHNSON
500 East Broward Blvd.
Ft. Lauderdale, Florida
Vice President
Senior Vice President and Director of Franklin Resources, Inc.; Senior Vice
President of Franklin Templeton Distributors, Inc.; President and
Director of Templeton Worldwide, Inc. and Franklin Institutional Services
Corporation; Chairman of the Board of Templeton Investment Counsel, Inc.; vice
president and/or director, as the case may be, for some of the subsidiaries of
Franklin Resources, Inc.; and an officer and/or director, as the case may be, of
24 of the investment companies in the Franklin Templeton Group. Age 39.
MARK G. HOLOWESKO
Lyford Cay
Nassau, Bahamas
Vice President
President, Chief Executive Officer and Director of Templeton Global Advisors
Limited; Chief Investment Officer 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). Age 36.
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.
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.
J. MARK MOBIUS
Two Exchange Square
Hong Kong
Vice President
Managing Director of Templeton Asset Management Ltd.; 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.
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.
- ------------------------
* 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 Global Advisors Limited are limited partners of
Darby Emerging Markets Fund, L.P.
There are no family relationships between any of the Directors.
DIRECTOR COMPENSATION
All of the Company's officers and Directors also hold positions with
other investment companies in the Franklin Templeton Group. No compensation is
paid by the Company to any officer or director who is an officer, director or
employee of the Investment Managers or their affiliates. Each Templeton Fund
pays its independent directors and trustees and Mr. Brady an annual retainer
and/or fees for attendance at Board and Committee meetings, the amount of which
is based on the level of assets in each fund. Accordingly, the Company currently
pays the independent Directors and Mr. Brady an annual retainer of $6000.00 and
a fee of $500.00 per meeting attended of the Board and its Committees. The
independent Directors and Mr. Brady are reimbursed for any expenses incurred in
attending meetings, paid pro rata by each Franklin Templeton Fund in which they
serve. No pension or retirement benefits are accrued as part of Company
expenses.
The following table shows the total compensation paid to the Directors
by the Company and by all investment companies in the Franklin Templeton Group:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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*
Harris J. Ashton $8,000 56 $327,925
Nicholas F. Brady 8,000 24 98,225
Frank J. Crothers 8,902 4 22,975
S. Joseph Fortunato 8,000 58 344,745
John Wm. Galbraith 6,000 23 70,100
Andrew H. Hines, Jr. 8,000 24 106,325
Betty P. Krahmer 6,000 24 93,475
Gordon S. Macklin 8,000 53 321,525
Fred R. Millsaps 8,743 24 104,325
Constantine Dean 8,902 4 22,975
Tseretopoulos
- ---------------
</TABLE>
* For the fiscal year ended December 31, 1995
PRINCIPAL SHAREHOLDERS
As of March 29, 1996, there were 17,882,868 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 29, 1996, there were
142,966,001 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 29, 1996, there were 90,100,958 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 29, 1996,
there were 12,977 Shares of Global Fixed Income Series outstanding, of which no
Shares were owned beneficially, directly or indirectly, by the Directors or
officers of the Company.
Set forth below is information regarding persons who owned
5% or more of the outstanding Shares of the Funds. As of March
29, 1996, no person owned beneficially or of record 5% or more of the
outstanding Shares of Foreign Equity Series. As of March 29, 1996, 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
12,745,271 Shares (71% of the outstanding Shares); Peter Norton, on behalf of
the Norton Family Trust, 225 Arizona Avenue, Santa Monica, California
90401-1210, owned 1,159,085 Shares (6% of the outstanding Shares) and Utah State
Retirement Board Defined Contribution Plan, 540 East 200 South, Salt Lake City,
UT 84102- 2099, owned 1,446,562 (8% of the outstanding Shares). As of March 29,
1996, 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 5,416,499 Shares (6% of
the outstanding Shares); Caisse De Depot Et Placements Du Quebec, Attn: Philippe
Halley C.A., 1981 McGill College Avenue, Montreal, Quebec H3A 3C7, Canada, owned
5,137,051 Shares (5% of outstanding Shares); New York State Common Retirement
Fund, Alfred E. Smith State Office Building, Sixth Floor, Albany, New York
12236, owned 11,847,789 Shares (13% of the outstanding Shares); and Wendel &
Co., c/o Bank of New York-Mutual Fund Sec., Wall Street Station, PO Box 1066,
New York, NY 10286, owned 4,516,967 (5% of the outstanding Shares). As of March
29, 1996, 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 12,977 Shares (100% of the
outstanding Shares).
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGEMENT AGREEMENTS. The Investment Manager of Growth
Series and Foreign Equity 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 23, 1996,
to run through April 30, 1997. The Investment Management Agreement between TICI
and the Company on behalf of Growth 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 23, 1996,
to run through April 30, 1997.
The Investment Manager of Emerging Markets Series is
Templeton Asset Management Ltd.- Hong Kong Branch, a Singapore
corporation at Two Exchange Square, Suite 908, Hong Kong. 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 Hong Kong and the Company on
behalf of Emerging Markets Series, dated May 3, 1993, and amended and restated
on February 25, 1994, was approved by TGI as sole shareholder of Emerging
Markets Series on April 30, 1993, and was last approved by the Board of
Directors on February 23, 1996 to run through April 30, 1997.
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 23, 1996 to run through April 30,
1997.
Each of the Investment Management Agreements will continue from year to
year after its initial term, subject to approval annually by the Board of
Directors or by vote of a majority of the outstanding Shares of each Fund (as
defined in the 1940 Act) and also, in either event, with the approval of a
majority of those Directors who are not parties to the Agreement or interested
persons of any such party in person at a meeting called for the purpose of
voting on such approval.
Each Investment Management Agreement requires a Fund's Investment
Manager to manage the investment and reinvestment of each Fund's assets. In so
doing, without cost to the Funds, the Investment Managers may receive certain
research services described below. The Investment Managers are not required to
furnish any personnel, overhead items or facilities for the Fund, including
daily pricing or trading desk facilities.
Each Investment Management Agreement provides that a Fund's Investment
Manager will select brokers and dealers for execution of the Fund's portfolio
transactions consistent with the Fund's brokerage policy (see "Brokerage
Allocation"). Although the services provided by broker-dealers in accordance
with the brokerage policy incidentally may help reduce the expenses of or
otherwise benefit the Investment Managers and other investment advisory clients
of the Investment Managers and of their affiliates, as well as the Funds, the
value of such services is indeterminable, and the Investment Managers' fees are
not reduced by any offset arrangement by reason thereof.
When the Investment Manager of a Fund determines to buy or sell the
same securities for the Fund that the Investment Manager or 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.
The Investment Managers also provide management services to numerous
other investment companies or funds and accounts pursuant to management
agreements with each fund or account. The Investment Managers may give advice
and take action with respect to any of the other funds and accounts it manages,
or for its own account, which may differ from action taken by an Investment
Manager on behalf of a Fund. Similarly, with respect to a Fund, an Investment
Manager is not obligated to recommend, purchase or sell, or to refrain from
recommending, purchasing or selling any security that the Investment Manager and
access persons, as defined by the 1940 Act, may purchase or sell for its or
their own account or for the accounts of any other fund or account. Furthermore,
the Investment Managers are not obligated to refrain from investing in
securities held by a Fund or other funds or accounts which they manage or
administer. Any transactions for the accounts of the Investment Managers and
other access persons will be made in compliance with the Company's Code of
Ethics as described in the section "Investment Objectives and Policies
- --Personal Securities Transactions."
Each Investment Management Agreement further provides that a Fund's
Investment Manager shall have no liability for any error of judgment, mistake of
law, or any loss arising out of any investment or other act or omission in the
performance by the Investment Manager of its duties under the Investment
Management Agreement or for any loss or damage resulting from the imposition by
any government of exchange control restrictions which might affect the liquidity
of the Fund's assets, or from acts or omissions of custodians or securities
depositories, or from any wars or political acts of any foreign governments to
which such assets might be exposed, except for any liability, loss or damage
resulting from willful misfeasance, bad faith or gross negligence on the
Investment Manager's part or reckless disregard of its duties under the
Investment Management Agreement. Each Investment Management Agreement will
terminate automatically in the event of its assignment, and may be terminated by
the Company on behalf of a Fund at any time without payment of any penalty on 60
days' written notice, with the approval of a majority of the Directors of the
Company in office at the time or by vote of a majority of the outstanding Shares
of the affected Fund (as defined in the 1940 Act).
MANAGEMENT FEES. Growth Series and Foreign Equity 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, 1995, 1994, and
1993, TICI received from Foreign Equity Series fees of $9,916,869, $5,740,479,
and $1,000,116, respectively. During the fiscal years ended December 31, 1995
and 1994 and for the period from May 3, 1993 (commencement of operations) to
December 31, 1993, TICI received from Growth Series fees of $1,469,015,
$1,365,883 and $573,848, respectively. Emerging Markets Series pays Templeton
Hong Kong a monthly fee equal on an annual basis to 1.25% of its average daily
net assets during the year. This fee is higher than advisory fees paid by most
other U.S. investment companies, primarily because investing in equity
securities of companies in emerging markets, which are not widely followed by
professional analysts, requires Templeton Hong Kong to invest additional time
and incur added expense in developing specialized resources, including research
facilities. During the fiscal years ended December 31, 1995 and 1994 and during
the period from May 3, 1993 (commencement of operations) to December 31, 1993,
the Investment Manager received from Emerging Markets Series fees of $8,488,442,
$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 years ended December 31, 1995 and 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 $555, $2,453 and
$1,974, respectively. Each of the Investment Managers will comply with any
applicable state regulations which may require it to make reimbursements to a
Fund in the event that the Fund's aggregate operating expenses, including the
management fee, but generally excluding interest, taxes, brokerage commissions
and extraordinary expenses, are in excess of specific applicable limitations.
The strictest rule currently applicable to the Funds is 2.5% of the first
$30,000,000 of net assets, 2% of the next $70,000,000 of net assets and 1.5% of
the remainder.
THE INVESTMENT MANAGERS. The Investment Managers are
indirect wholly owned subsidiaries of Franklin Resources, Inc.
("Franklin"), a publicly traded company whose shares are listed
on the NYSE. Charles B. Johnson (a Director and officer of the
Company) and Rupert H. Johnson, Jr. (an officer of the Company)
are principal shareholders of Franklin and own, respectively,
approximately 20% and 16% 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 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, 1995, 1994 and 1993, the Business Manager (and,
prior to April 1, 1993, Templeton Funds Management, Inc., the Company's previous
business manager) received fees of $1,412,755, $912,500, and $201,527,
respectively for business management services to Foreign Equity Series. During
the fiscal years ended December 31, 1995 and 1994 and for the period of May 3,
1993 (commencement of operations) to December 31, 1993, the Business Manager
received fees of $208,881, $216,577 and $114,812, respectively, for business
management services to Growth Series. For the fiscal years ended December 31,
1995 and 1994 and for the period of May 3, 1993 (commencement of operations) to
December 31, 1993, the Business
Manager received fees of $681,225, $589,648 and $176,839, respectively, for
business management services to Emerging Markets Series. For the fiscal years
ended December 31, 1995 and 1994 and for the period of May 3, 1993 (commencement
of operations) to December 31, 1993, the Business Manager received $98, $495 and
$503, respectively for business management services to Global Fixed Income
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, 1996. 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, 1996, at which time each Fund's expenses may increase and its
total return may be reduced, depending on the total assets of the Fund.
The Business Manager is relieved of liability to the Company and to the
Funds for any act or omission in the course of its performance under the
Business Management Agreement in the absence of willful misfeasance, bad faith,
gross negligence or reckless disregard of its duties and obligations. The
Business Management Agreement may be terminated by the Company at any time on 60
days' written notice without payment of penalty, provided that such termination
by the Company shall be directed or approved by vote of a majority of the
Directors of the Company in office at the time or by vote of a majority of the
outstanding voting securities of the Funds (as defined in the 1940 Act), and
shall terminate automatically and immediately in the event of its assignment.
The Business Manager is an indirect wholly owned subsidiary of
Franklin.
CUSTODIAN AND TRANSFER AGENT. The Chase Manhattan Bank, N.A. serves as
Custodian of the Funds' assets, which are maintained at the Custodian's
principal office, MetroTech Center, Brooklyn, New York 11245, and at the offices
of its branches and agencies throughout the world. The Custodian has entered
into agreements with foreign sub-custodians approved by the Directors pursuant
to Rule 17f-5 under the 1940 Act. The Custodian, its branches and sub-custodians
generally do not hold certificates for the securities in their custody, but
instead have book records with domestic and foreign securities depositories,
which in turn have book records with the transfer agents of the issuers of the
securities. Compensation for the services of the Custodian is based on a
schedule of charges agreed on from time to time.
Franklin Templeton Investor Services, Inc. serves as the
Funds' Transfer Agent. Services performed by the Transfer Agent
include processing purchase, transfer and redemption orders;
making dividend payments, capital gains distributions and reinvestments; and
handling all routine communications with Shareholders. The Transfer Agent
receives from each Fund an annual fee of $14.08 per Shareholder account plus
out-of-pocket expenses, such fee to be adjusted each year to reflect changes in
the Department of Labor Consumer Price Index.
LEGAL COUNSEL. Dechert Price & Rhoads, Washington, D.C., is
legal counsel for the Company.
INDEPENDENT ACCOUNTANTS. The firm of McGladrey & Pullen, LLP, 555 Fifth
Avenue, New York, New York 10017, serves as independent accountants for the
Company. In addition to reporting annually on the financial statements of the
Funds, the accountants review certain filings of the Funds with the Securities
and Exchange Commission ("SEC") and prepare the Company's Federal and state
corporation tax returns.
REPORTS TO SHAREHOLDERS. The Company's fiscal year ends on December 31.
Shareholders will be provided at least semiannually with reports showing the
portfolios of the Funds and other information, including an annual report with
financial statements audited by independent accountants. Shareholders who would
like to receive an interim 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.
2. In selecting brokers for portfolio transactions, each Fund's
Investment Manager takes into account its past experience as
to brokers qualified to achieve "best execution," including
brokers who specialize in any foreign securities held by the
Fund.
3. The Investment Managers are authorized to allocate
brokerage business to brokers who have provided
brokerage and research services, as such services are
defined in Section 28(e) of the Securities Exchange Act
of 1934 (the "1934 Act"), for the Funds and/or other
accounts, if any, for which the Investment Managers
exercise investment discretion (as defined in Section
3(a)(35) of the 1934 Act) and, as to transactions as to
which fixed minimum commission rates are not
applicable, to cause a Fund to pay a commission for
effecting a securities transaction in excess of the
amount another broker would have charged for effecting
that transaction, if the Investment Manager for that
Fund determines in good faith that such amount of
commission is reasonable in relation to the value of
the brokerage and research services provided by such
broker, viewed in terms of either that particular
transaction or the Investment Manager's overall
responsibilities with respect to the Fund and the other
accounts, if any, as to which it exercises investment
discretion. In reaching such determination, the
Investment Managers are not required to place or
attempt to place a specific dollar value on the
research or execution services of a broker or on the
portion of any commission reflecting either of said
services. In demonstrating that such determinations
were made in good faith, the Investment Manager of a
Fund shall be prepared to show that all commissions
were allocated and paid for purposes contemplated by
the Fund's brokerage policy; that commissions were paid
only for products or services which provide lawful and
appropriate assistance to the Investment Manager in the
performance of its investment decision-making
responsibilities; and that the commissions paid were
within a reasonable range. The determination that
commissions were within a reasonable range shall be
based on any available information as to the level of
commissions known to be charged by other brokers on
comparable transactions, but there shall be taken into
account the Company's policies that (i) obtaining a low
commission is deemed secondary to obtaining a favorable
securities price, since it is recognized that usually
it is more beneficial to the Funds to obtain a favorable price
than to pay the lowest commission; and (ii) the quality,
comprehensiveness and frequency of research studies which are
provided for the Funds and the Investment Managers are useful
to the Investment Managers in performing advisory services
under their Investment Management Agreements with the Company.
Research services provided by brokers to the Investment
Managers are considered to be in addition to, and not in lieu
of, services required to be performed by the Investment
Managers under their Agreements. Research furnished by brokers
through whom the Funds effect securities transactions may be
used by the Investment Managers for any of their accounts, and
not all such research may be used by the Investment Managers
for the Funds. When execution of portfolio transactions is
allocated to brokers trading on exchanges with fixed brokerage
commission rates, account may be taken of various services
provided by the broker, including quotations outside the
United States for daily pricing of foreign securities held in
the Funds' portfolios.
4. Purchases and sales of portfolio securities within the United
States other than on a securities exchange shall be executed
with primary market makers acting as principal except where,
in the judgment of a Fund's Investment Manager, better prices
and execution may be obtained on a commission basis or from
other sources.
5. Sales of the Funds' Shares (which shall be deemed to
include also shares of other investment companies
registered under the 1940 Act which have either the
same investment adviser or an investment adviser
affiliated with any Fund's Investment Manager) made by
a broker are one factor among others to be taken into
account in deciding to allocate portfolio transactions
(including agency transactions, principal transactions,
purchases in underwritings or tenders in response to
tender offers) for the account of a Fund to that
broker; provided that the broker shall furnish "best
execution" as defined in paragraph 1 above, and that
such allocation shall be within the scope of the Fund's
policies as stated above; and provided further, that in
every allocation made to a broker in which the sale of
Shares is taken into account there shall be no increase
in the amount of the commissions or other compensation
paid to such broker beyond a reasonable commission or
other compensation determined, as set forth in
paragraph 3 above, on the basis of best execution alone
or best execution plus research services, without
taking account of or placing any value upon such sale
of Shares.
Insofar as known to management, no Director or Officer of the Company,
nor the Investment Managers or the Principal Underwriter or any person
affiliated with any of them, has any material direct or indirect interest in any
broker employed by or on behalf of a Fund. Franklin Templeton Distributors,
Inc., the Principal Underwriter for the Funds, is a registered broker-dealer,
but has never executed any purchase or sale transactions for a Fund's portfolio
or participated in commissions on any such transactions, and has no intention of
doing so in the future.
During the fiscal years ended December 31, 1995, 1994, and 1993,
Foreign Equity Series paid brokerage commissions of $2,779,325, $1,856,075, and
$1,220,225, respectively. During the fiscal years ended December 31, 1995 and
1994 and for the period from May 3, 1993 (commencement of operations) to
December 31, 1993, Growth Series paid brokerage commissions of $302,096,
$196,751 and $324,895, respectively. For the fiscal years ended December 31,
1995 and 1994 and for the period from May 3, 1993 (commencement of operations)
to December 31, 1993, Emerging Markets Series paid brokerage commissions of
$1,949,885, $1,442,148 and $1,111,391, respectively. For the fiscal years ended
December 31, 1995 and 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, $ 0, and $0, respectively. There is no fixed method used in
determining which broker-dealers receive which order or how many orders.
PURCHASE, REDEMPTION AND PRICING OF SHARES
The Prospectus describes the manner in which the Funds'
Shares may be purchased and redeemed. See "How to Buy Shares of
the Funds," "How to Sell Shares of the Funds" and "Exchange
Privilege."
Net asset value per Share is determined as of the scheduled closing
time of the NYSE (generally 4:00 p.m., New York time), every Monday through
Friday (exclusive of national business holidays). The Company's offices will be
closed, and net asset value will not be calculated, on those days on which the
NYSE is closed, which currently are: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Trading in securities on European and Far Eastern securities exchanges
and over-the-counter markets is normally completed well before the close of
business in New York on each day on which the NYSE is open. Trading of European
or Far Eastern securities generally, or in a particular country or countries,
may not take place on every New York business day. Furthermore, trading takes
place in various foreign markets on days which are not business days in New York
and on which each Fund's net asset value is not calculated. The Funds calculate
net asset value per Share, and therefore effect sales and redemptions of their
Shares, as of the close of the NYSE once on each day on which that Exchange is
open. Such calculation does not take place contemporaneously with the
determination of the prices of many of the portfolio securities used in such
calculation, and if events occur which materially affect the value of those
foreign securities, they will be valued at fair market value as determined by
the management and approved in good faith by the Board of Directors.
The Board of Directors may establish procedures under which the Company
may suspend the determination of net asset value for the whole or any part of
any period during which (1) the NYSE is closed other than for customary weekend
and holiday closings, (2) trading on the NYSE is restricted, (3) an emergency
exists as a result of which disposal of securities owned by a Fund is not
reasonably practicable or it is not reasonably practicable for a Fund fairly to
determine the value of its net assets, or (4) for such other period as the SEC
may by order permit for the protection of the holders of a Fund's Shares.
OWNERSHIP AND AUTHORITY DISPUTES. In the event of disputes involving
multiple claims of ownership or authority to control a Shareholder's account,
each Fund has the right (but has no obligation) to: (1) freeze the account and
require the written agreement of all persons deemed by the Fund to have a
potential property interest in the account, prior to executing instructions
regarding the account; or (2) interplead disputed funds or accounts with a court
of competent jurisdiction. Moreover, the Fund may surrender ownership of all or
a portion of an account to the Internal Revenue Service ("IRS") in response to a
Notice of Levy.
REDEMPTIONS IN KIND. Redemption proceeds are normally paid in cash;
however, a Fund may pay the redemption price in whole or in part by a
distribution in kind of securities from the portfolio of the Fund, in lieu of
cash, in conformity with applicable rules of the SEC. In such circumstances, the
securities distributed would be valued at the price used to compute a Fund's net
asset value. If Shares are redeemed in kind, the redeeming Shareholder might
incur brokerage costs in converting the assets into cash. A Fund is obligated to
redeem Shares solely in cash up to the lesser of $250,000 or 1% of its net
assets during any 90-day period for any one Shareholder.
TAX STATUS
Each Fund intends normally to pay a dividend at least once annually
representing substantially all of its net investment income and to distribute at
least annually any net realized capital gains. By so doing and meeting certain
diversification of assets and other requirements of the Internal Revenue Code of
1986, as amended (the "Code"), each Fund intends to qualify as a regulated
investment company under the Code. The status of a Fund as a regulated
investment company does not involve government supervision of management or of
its investment practices or policies. As a regulated investment company, a Fund
generally will be relieved of liability for United States Federal income tax on
that portion of its net investment income and net realized capital gains which
it distributes to its Shareholders. Amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement also are subject to a
nondeductible 4% excise tax. To prevent application of the excise tax, the Funds
intend to make distributions in accordance with the calendar year distribution
requirement.
Dividends of net investment income and of short-term capital gains (the
excess of net short-term capital gains over net long-term capital losses) are
taxable to Shareholders as ordinary income. Distributions from the Funds are not
expected to qualify for the corporate dividends-received deduction.
Distributions of net long-term capital gains (the excess of net long-term
capital gains over net short-term capital losses) designated by a Fund as
capital gain dividends are taxable to Shareholders as long-term capital gains,
regardless of the length of time the Fund's Shares have been held by a
Shareholder, and are not eligible for the dividends-received deduction.
Generally, dividends and distributions are taxable to Shareholders, whether or
not reinvested in Shares of a Fund. Any distributions that are not from a Fund's
investment company taxable income or net capital gain may be characterized as a
return of capital to Shareholders or, in some cases, as capital gain.
Shareholders will be notified annually as to the Federal tax status of dividends
and distributions they receive and any tax withheld thereon.
Income received by a Fund from sources within a foreign country may be
subject to withholding taxes and other taxes imposed by that country. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes.
If, at the close of any fiscal year, more than 50% of the value of a
Fund's total assets is invested in securities of foreign corporations (as to
which no assurance can be given), the Fund generally may elect pursuant to
Section 853 of the Code to pass through to its Shareholders the foreign income
and similar taxes paid by the Fund in order to enable such Shareholders to take
a credit (or deduction) for foreign income taxes paid by the Fund. In that case,
a Shareholder must include in his gross income on his Federal income tax return
both dividends received by him from the Fund and the amount which the Fund
advises him is his pro rata portion of foreign income taxes paid with respect
to, or withheld from, dividends, interest, or other income of the Fund from its
foreign investments. The Shareholder may then subtract from his Federal income
tax the amount of such taxes withheld, or else treat such foreign taxes as an
itemized deduction from his gross income; however, the above-described tax
credit and deduction are subject to certain limitations. Foreign taxes may not
be deducted in computing alternative taxable income and may at most offset (as a
credit) 90% of the alternative minimum tax. The foregoing is only a general
description of the foreign tax credit. Because application of the credit depends
on
the particular circumstances of each Shareholder, Shareholders
are advised to contact their own tax advisers.
The Funds may invest in shares of foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign corporation is classified as a PFIC for a taxable year if at
least one-half of its assets constitute investment-type assets or 75% or more of
its gross income is investment-type income. If a Fund receives a so-called
"excess distribution" with respect to PFIC stock, the Fund itself may be subject
to a tax on a portion of the excess distribution, whether or not the
corresponding income is distributed by the Fund to Shareholders. In general,
under the PFIC rules, an excess distribution is treated as having been realized
ratably over the period during which a Fund held the PFIC shares. A Fund itself
will be subject to tax on the portion, if any, of an excess distribution that is
so allocated to prior Fund taxable years and an interest factor will be added to
the tax, as if the tax had been payable in such prior taxable years. Certain
distributions from a PFIC as well as gain from the sale of PFIC shares are
treated as excess distributions. Excess distributions are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain.
The Funds may be eligible to elect alternative tax treatment with
respect to PFIC shares. Under an election that currently is available in some
circumstances, a Fund generally would be required to include in its gross income
its share of the earnings of a PFIC on a current basis, regardless of whether
distributions are received from the PFIC in a given year. If this election were
made, the special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, another election may be available
that would involve marking to market each Fund's PFIC shares at the end of each
taxable year (and on certain other dates prescribed in the Code), with the
result that unrealized gains are treated as though they were realized. If this
election were made, tax at the fund level under the PFIC rules would generally
be eliminated, but the Funds could, in limited circumstances, incur
nondeductible interest charges. Each Fund's intention to qualify annually as a
regulated investment company may limit its elections with respect to PFIC
shares.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC stock, as well as subject a Fund
itself to tax on certain income from PFIC stock, the amount that must be
distributed to Shareholders, and which will be taxed to Shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC stock.
Under the Code, gains or losses attributable to fluctuations in foreign
currency exchange rates which occur between the time a Fund accrues income or
other receivables or accrues expenses or other liabilities denominated in a
foreign currency and the time the Fund actually collects such receivables or
pays such liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain financial contracts and options, gains or losses
attributable to fluctuations in the value of foreign currency between the date
of acquisition of the security or contract and the date of disposition also are
treated as ordinary gain or loss. These gains and losses, referred to under the
Code as "section 988" gains and losses, may increase or decrease the amount of a
Fund's net investment income to be distributed to its Shareholders as ordinary
income. For example, fluctuations in exchange rates may increase the amount of
income that a Fund must distribute in order to qualify for treatment as a
regulated investment company and to prevent application of an excise tax on
undistributed income. Alternatively, fluctuations in exchange rates may decrease
or eliminate income available for distribution. If section 988 losses exceed
other net investment income during a taxable year, a Fund generally would not be
able to make ordinary dividend distributions, or distributions made before the
losses were realized would be recharacterized as return of capital to
Shareholders for Federal income tax purposes, rather than as an ordinary
dividend, reducing each Shareholder's basis in his Fund Shares, or as a capital
gain.
Certain options, futures contracts and forward contracts in which the
Funds may invest are "section 1256 contracts." Gains or losses on section 1256
contracts generally are considered 60% long-term and 40% short-term capital
gains or losses ("60/40"); however, foreign currency gains or losses (as
discussed above) arising from certain section 1256 contracts may be treated as
ordinary income or loss. Also, section 1256 contracts held by a Fund at the end
of each taxable year (and, in some cases, for purposes of the 4% excise tax, on
October 31 of each year) are "marked-to-market" with the result that unrealized
gains or losses are treated as though they were realized.
The hedging transactions undertaken by the Funds may result in
"straddles" for Federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by a Fund. In addition, losses realized
by a Fund on positions that are part of a straddle may be deferred under the
straddle rules, rather than being taken into account in calculating the taxable
income for the taxable year in which such losses are realized. Because only a
few regulations implementing the straddle rules have been promulgated, the tax
consequences to the Funds of hedging transactions are not entirely clear. The
hedging transactions may increase the amount of short-term capital gain realized
by the Funds which is taxed as ordinary income when distributed to Shareholders.
Each Fund may make one or more of the elections available under the
Code which are applicable to straddles. If the Fund makes any of the elections,
the amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the elections(s) made. The rules applicable under certain of the elections
may operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to Shareholders, and which will be taxed to Shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not engage in such hedging transactions.
Rules governing the tax aspects of swap agreements are in a developing
stage and are not entirely clear in certain respects. Accordingly, while the
Global Fixed Income Series intends to account for such transactions in a manner
deemed by it to be appropriate, the Internal Revenue Service might not
necessarily accept such treatment. If it did not, the status of the Global Fixed
Income Series as a regulated investment company might be affected. The Global
Fixed Income Series intends to monitor developments in this area. Certain
requirements that must be met under the Code in order for the Global Fixed
Income Series to qualify as a regulated investment company may limit the extent
to which it will be able to engage in swap agreements.
Certain requirements that must be met under the Code in order for each
Fund to qualify as a regulated investment company may limit the extent to which
a Fund will be able to engage in transactions in options, futures, forward
contracts and swap agreements.
Some of the debt securities that may be acquired by the Funds may be
subject to the special rules for obligations issued or acquired at a discount.
Generally, under these rules, the amount of the discount is treated as ordinary
income and, depending upon the circumstances, the discount is included in income
(i) over the term of the debt security, even though payment of the discount is
not received until a later time, usually when the debt security matures, or (ii)
upon the disposition of, and any partial payment of principal on, the debt
security.
A Fund generally will be required to distribute dividends to
Shareholders representing discount on debt securities that is currently
includable in income, even though cash representing such income may not have
been received by the Fund. Cash to pay such dividends may be obtained from sales
proceeds of securities held by the Fund or by borrowing.
Upon the sale or exchange of his Shares, a Shareholder generally will
realize a taxable gain or loss depending upon his basis in the Shares. Such gain
or loss will be treated as capital gain or loss if the Shares are capital assets
in the Shareholder's hands, and will be long-term if the Shareholder's holding
period for the Shares is more than one year and generally otherwise will be
short-term. Any loss realized on a sale or exchange of a Fund's Shares will be
disallowed to the extent that the Shares disposed of are replaced (including
replacement through the reinvesting of dividends and capital gain distributions
in the Fund) within a period of 61 days beginning 30 days before and ending 30
days after the disposition of the Shares. In such a case, the basis of the
Shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a Shareholder on the sale of Fund Shares held by the Shareholder for
six months or less will be treated for Federal income tax purposes as a
long-term capital loss to the extent of any distributions of long-term capital
gains (designated by the Fund as capital gain dividends) received by the
Shareholder with respect to such Shares.
Each Fund generally will be required to withhold Federal income tax at
a rate of 31% ("backup withholding") from dividends paid, capital gain
distributions, and redemption proceeds to Shareholders if (1) the Shareholder
fails to furnish the Fund with the Shareholder's correct taxpayer identification
number or social security number and to make such certifications as the Fund may
require, (2) the IRS notifies the Shareholder or the Fund that the Shareholder
has failed to report properly certain interest and dividend income to the IRS
and to respond to notices to that effect, or (3) when required to do so, the
Shareholder fails to certify that he is not subject to backup withholding. Any
amounts withheld may be credited against the Shareholder's Federal income tax
liability.
Ordinary dividends and taxable capital gain distributions declared in
October, November or December with a record date in such month and paid during
the following January will be treated as having been paid by a Fund and received
by Shareholders on December 31 of the calendar year in which declared, rather
than the calendar year in which the dividends are actually received.
Distributions from the Funds and dispositions of Fund Shares also may
be subject to state and local taxes. Non-U.S. Shareholders may be subject to
U.S. tax rules that differ significantly from those summarized above.
Shareholders are advised to consult their own tax advisers for details with
respect to the particular tax consequences to them of an investment in the
Funds.
PRINCIPAL UNDERWRITER
Franklin Templeton Distributors, Inc. ("FTD" or the
"Principal Underwriter"), 700 Central Avenue, P.O. Box 33030, St.
Petersburg, Florida 33733-8030, toll free telephone (800) 237- 0738, is the
Principal Underwriter of the Funds' Shares. FTD is an indirect wholly owned
subsidiary of Franklin.
The Distribution Agreement provides that the Principal Underwriter will
use its best efforts to maintain a broad and continuous distribution of the
Funds' Shares among bona fide investors and may sign selling contracts with
responsible dealers, as well as sell to individual investors. The Shares are
sold only at net asset value next determined after receipt of the purchase order
by FTD.
The Distribution Agreement provides that the Funds shall pay the costs
and expenses incident to registering and qualifying their Shares for sale under
the Securities Act of 1933 and under the applicable Blue Sky laws of the
jurisdictions in which the Principal Underwriter desires to distribute such
Shares, and for preparing, printing and distributing prospectuses and reports to
Shareholders. The Principal Underwriter pays the cost of printing additional
copies of prospectuses and reports to Shareholders used for selling purposes.
(The Funds pay costs of preparation, set-up and initial supply of the prospectus
for existing Shareholders.)
The Distribution Agreement is subject to renewal from year to year in
accordance with the provisions of the 1940 Act and terminates automatically in
the event of its assignment. The Distribution Agreement may be terminated
without penalty by either party upon 60 days' written notice to the other,
provided termination by the Company on behalf of a Fund shall be approved by the
Board of Directors or a majority (as defined in the 1940 Act) of the
Shareholders of that Fund. The Principal Underwriter is relieved of liability
for any act or omission in the course of its performance of the Distribution
Agreement, in the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations.
FTD is the principal underwriter for the other Templeton Funds.
DESCRIPTION OF SHARES
The Shares have non-cumulative voting rights so that the holders of a
plurality of the Shares voting for the election of Directors at a meeting at
which 50% of the outstanding Shares are present can elect all the Directors and
in such event, the holders of the remaining Shares voting for the election of
Directors will not be able to elect any person or persons to the Board of
Directors.
The Company's Bylaws provide that the President or Secretary of the
Company will call a special meeting of Shareholders at the request in writing by
Shareholders owning 10% of the capital stock of the Company issued and
outstanding at the time of the
call. In addition, the Company is required to assist Shareholder communication
in connection with the calling of Shareholder meetings to consider removal of a
Director.
PERFORMANCE INFORMATION
Each Fund may, from time to time, include its total return in
advertisements or reports to Shareholders or prospective investors. Quotations
of average annual total return for a Fund will be expressed in terms of the
average annual compounded rate of return for periods in excess of one year or
the total return for periods less than one year of a hypothetical investment in
the Fund over periods of one, five or ten years (up to the life of the Fund)
calculated pursuant to the following formula: P (1 + T)n = ERV (where P = a
hypothetical initial payment of $1,000, T = the average annual total return for
periods of one year or more or the total return for periods of less than one
year, n = the number of years, and ERV = the ending redeemable value of a
hypothetical $1,000 payment made at the beginning of the period). All total
return figures reflect the deduction of a proportional share of Fund expenses on
an annual basis, and assume that all dividends and distributions are reinvested
when paid. The average annual total return of Foreign Equity Series for the one
and five-year periods ended December 31, 1995 and for the period from
commencement of operations on October 18, 1990 to December 31, 1995 was 13.00%,
12.70% and 11.56,% respectively. The average annual total return of Growth
Series, for the one-year period ending December 31, 1995 and for the period from
commencement of operations on May 3, 1993 to December 31, 1995 was 17.59% and
13.26%, respectively. The average annual total return of the Emerging Markets
Series for the one-year period ending December 31, 1995 and for the period from
commencement of operations on May 3, 1993 to December 31, 1995 was -1.23% and
5.86%, respectively. The average annual total return for the Global Fixed Income
Series for the one-year period ending December 31, 1995 and for the period from
commencement of operations on May 3, 1993 to December 31, 1995 was 4.67% and
1.09%, respectively.
Performance information for the Funds may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index, Dow Jones
Industrial Average, or other unmanaged indices, so that investors may compare a
Fund's results with those of a group of unmanaged securities widely regarded by
investors as representative of the securities market in general; (ii) other
groups of mutual funds tracked by Lipper Analytical Services, a widely used
independent research firm which ranks mutual funds by overall performance,
investment objectives and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from an investment in the Fund. Unmanaged indices may
assume the reinvestment of
dividends but generally do not reflect deductions for
administrative and management costs and expenses.
Performance information for a Fund reflects only the performance of a
hypothetical investment in the Fund during the particular time period on which
the calculations are based. Performance information for a Fund should be
considered in light of the Fund's Investment Objective and Policies,
characteristics and quality of the portfolio and the market conditions during
the given time period, and should not be considered as a representation of what
may be achieved in the future.
From time to time, the Company and the Investment Managers may also
refer to the following information:
(1) The Investment Managers' and their affiliates' market share of
international equities managed in mutual funds prepared or
published by Strategic Insight or a similar statistical
organization.
(2) The performance of U.S. equity and debt markets
relative to foreign markets prepared or published by
Morgan Stanley Capital International or a similar
financial organization.
(3) The capitalization of U.S. and foreign stock markets as
prepared or published by the International Finance
Corporation, Morgan Stanley Capital International or a similar
financial organization.
(4) The geographic and industry distribution of a Fund's
portfolio and a Fund's top ten holdings.
(5) The gross national product and populations, including age
characteristics, literacy rates, foreign investment
improvements due to a liberalization of securities laws and a
reduction of foreign exchange controls, and improving
communication technology, of various countries as published by
various statistical organizations.
(6) To assist investors in understanding the different
returns and risk characteristics of various
investments, a Fund may show historical returns of
various investments and published indices (E.G.,
Ibbotson Associates, Inc. Charts and Morgan Stanley
EAFE - Index).
(7) The major industries located in various jurisdictions
as published by the Morgan Stanley Index.
(8) Rankings by DALBAR Surveys, Inc. with respect to mutual
fund shareholder services.
(9) Allegorical stories illustrating the importance of
persistent long-term investing.
(10) The Fund's portfolio turnover rate and its ranking
relative to industry standards as published by Lipper
Analytical Services, Inc. or Morningstar, Inc.
(11) A description of the Templeton organization's investment
management philosophy and approach, including its worldwide
search for undervalued or "bargain" securities and its
diversification by industry, nation and type of stocks or
other securities.
(12) The number of Shareholders in a Fund or the aggregate number
of shareholders in the Franklin Templeton Group of Funds or
the dollar amount of Fund and private account assets under
management.
(13) Comparison of the characteristics of various emerging
markets, including population, financial and economic
conditions.
(14) 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."
- --------
* 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.
o "When buying stocks, search for bargains among
quality stocks."
o "Buy value, not market trends or the economic
outlook."
o "Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
o "Do your homework or hire wise experts to help
you."
o "Aggressively monitor your investments."
o "Don't panic."
o "Learn from your mistakes."
o "Outperforming the market is a difficult task."
o "An investor who has all the answers doesn't even
understand all the questions."
o "There's no free lunch."
o "And now the last principle: Do not be fearful or
negative too often."
FINANCIAL STATEMENTS
The financial statements contained in each Fund's Annual Report to
Shareholders dated December 31, 1995 are incorporated herein by reference.
ZTIFI SAI 05/96
