Registration No. 33-35779
As filed with the Securities and Exchange Commission on October 31, 1997
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 12 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 14 X
(Check appropriate box or boxes)
TEMPLETON INSTITUTIONAL FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
500 EAST BROWARD BOULEVARD, FORT LAUDERDALE, FLORIDA 33394
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (954) 527-7500
Barbara J. Green
Templeton Worldwide, Inc.
500 East Broward Boulevard
FORT LAUDERDALE, FLORIDA 33394
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b) of Rule 485
X on NOVEMBER 1, 1997 pursuant to paragraph (b) of Rule 485
-----------------
60 days after filing pursuant to paragraph (a)(1) of Rule 485
on pursuant to paragraph (a)(1) of Rule 485
75 days after filing pursuant to paragraph (a)(2) of Rule 485
on pursuant to paragraph (a)(2) of Rule 485
this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
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<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
CROSS-REFERENCE SHEET
FORM N-1A
PART A
<TABLE>
<CAPTION>
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
<S> <C> <C>
1 Cover page Cover Page
2 Synopsis Expense Summary
3 Condensed Financial "Financial Highlights";
Information "How Do the Funds
Measure Performance?"
4 General Description "How Is the Company Organized?";
of Registrant "How Do the Funds Invest Their Assets?";
"What Are the Funds' Potential Risks?"
5 Management of the Fund "Who Manages the Funds?"
5A Management's Discussion Contained in Registrant's Annual
of Fund Performance Report to Shareholders
6 Capital Stock and Other "How Is the Company Organized?"; "Services
Securities to Help You Manage Your Account"; "What
Distributions Might I Receive From the
Funds?"; "How Taxation Affects You and the
Funds"
7 Purchase of Securities "How Do I Buy Shares?"; "May I Exchange
Being Offered Shares for Shares of Another Fund?";
"Transaction Procedures and Special
Requirements"; "Services to Help You Manage
Your Account"; "Who Manages the Funds?" "Useful
Terms and Definitions"
8 Redemption or Repurchase "May I Exchange Shares for Shares of Another
Fund?"; "How Do I Sell Shares?"; "Transaction
Procedures and Special Requirements"; "Services
to Help You Manage Your Account"
9 Pending Legal Procedures Not Applicable
</TABLE>
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
CROSS-REFERENCE SHEET
FORM N-1A
PART B
<TABLE>
<CAPTION>
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
<S> <C> <C>
10 Cover Page Cover Page
11 Table of Contents Table of Contents
12 General Information and Not Applicable
History
13 Investment Objectives and "How do the Funds Invest their Assets?";
Policies "Investment Restrictions"; "What are the
Funds' Potential Risks?"
14 Management of the "Officers and Directors"; "Investment
Registrant Management and Other Services"
15 Control Persons and "Officers and Directors"; "Investment
Principal Holders of Management and Other Services"; "Miscellaneous
Securities Information?"
16 Investment Advisory and "Investment Management and Other Services";
Other Services "The Funds' Underwriter"
17 Brokerage Allocation and "How do the Funds Buy Securities
Other Practices for their Portfolios?"
18 Capital Stock and Other "Miscellaneous Information"; See Prospectus
Securities "How Is the Company Organized?"
19 Purchase, Redemption and "How do I Buy, Sell and Exchange Shares?";
Pricing of Securities "How are Fund Shares Valued?";
Being Offered "Financial Statements"
20 Tax Status "Additional Information on Distributions
and Taxes"
21 Underwriters "The Funds' Underwriter"
22 Calculation of Performance "How do the Funds Measure Performance?"
Data
23 Financial Statements Financial Statements
</TABLE>
<PAGE>
PART A
PROSPECTUS
<PAGE>
[ART]
TIFI
- ------------------------------------------------------------------------------
TEMPLETON
INSTITUTIONAL
FUNDS, INC.
MAY 1, 1997
AS AMENDED NOVEMBER 1, 1997
PROSPECTUS
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country in which the offering is not authorized. No sales
representative, dealer or other person is authorized to give any information or
make any representations other than those contained in this prospectus. Further
information may be obtained from Distributors.
PRINCIPAL UNDERWRITER:
Franklin Templeton Distributors, Inc.
100 Fountain Parkway
P.O. Box 33030
St. Petersburg, Florida 33733-8030
INSTITUTIONAL SERVICES AND FUND
INFORMATION: 800-321-8563
ZTIFI P 11/97
<PAGE>
PROSPECTUS
LOGO
Templeton Institutional Funds, Inc.
MAY 1, 1997
as amended November 1, 1997
GROWTH SERIES
FOREIGN EQUITY SERIES
EMERGING MARKETS SERIES
EMERGING FIXED INCOME MARKETS SERIES
LOGO
- ------------------------------------------------------------------------------
This prospectus describes the four funds listed above (the "Funds") which are
series of Templeton Institutional Funds, Inc. (the "Company"). This prospectus
contains information you should know before investing in the Funds.
Please keep it for future reference.
INVESTMENTS IN EMERGING MARKETS INVOLVE CERTAIN CONSIDERATIONS WHICH ARE NOT
NORMALLY INVOLVED IN INVESTMENT IN SECURITIES OF U.S. COMPANIES, AND AN
INVESTMENT IN THE FUNDS MAY BE CONSIDERED SPECULATIVE. THE FUNDS MAY BORROW
MONEY FOR INVESTMENT PURPOSES, WHICH MAY INVOLVE GREATER RISK AND ADDITIONAL
COSTS TO THE FUNDS. IN ADDITION, THE FUNDS MAY INVEST UP TO 10% OF THEIR ASSETS
IN RESTRICTED SECURITIES, WHICH MAY INVOLVE GREATER RISK AND INCREASED FUND
EXPENSES. THE EMERGING FIXED INCOME MARKETS SERIES MAY INVEST A SUBSTANTIAL
PORTION OF ITS ASSETS IN HIGH-YIELD, HIGH RISK DEBT INSTRUMENTS THAT ARE
PREDOMINANTLY SPECULATIVE. SEE "WHAT ARE THE FUNDS' POTENTIAL RISKS?"
The Company has a Statement of Additional Information ("SAI") dated May 1, 1997,
as amended November 1, 1997, which may be further amended from time to time. It
includes more information about the Funds' procedures and policies. It has been
filed with the SEC and is incorporated by reference into this prospectus. For a
free copy or a larger print version of this prospectus, call 1-800/DIAL BEN or
write the Funds at their address.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE
U.S. GOVERNMENT. SHARES OF THE FUNDS INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TEMPLETON
INSTITUTIONAL
FUNDS, INC.
- -------------------------------------------------------------------------------
May 1, 1997
as amended November 1, 1997
WHEN READING THIS PROSPECTUS, YOU WILL SEE CERTAIN TERMS BEGINNING WITH CAPITAL
LETTERS. THIS MEANS THE TERM IS EXPLAINED IN OUR GLOSSARY SECTION.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary...................................................... 1
Financial Highlights................................................. 2
How Do the Funds Invest Their Assets?................................ 6
What Are the Funds' Potential Risks?................................. 17
Who Manages the Funds?............................................... 20
How Do the Funds Measure Performance?................................ 22
How Is the Company Organized?........................................ 23
How Taxation Affects You and the Funds............................... 23
ABOUT YOUR ACCOUNT
How Do I Buy Shares?................................................. 24
May I Exchange Shares for Shares of Another Fund?.................... 26
How Do I Sell Shares?................................................ 27
What Distributions Might I Receive from the Funds?................... 28
Transaction Procedures and Special Requirements...................... 28
Services to Help You Manage Your Account............................. 31
GLOSSARY
Useful Terms and Definitions......................................... 33
Appendix............................................................. 35
Corporate Bond Ratings............................................... 35
100 Fountain Parkway
P.O. Box 33030
St. Petersburg, Florida 33733-8030
1-800/DIAL BEN
<PAGE>
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Funds. For Growth Series, Foreign Equity Series and Emerging Markets Series, the
table is based on historical expenses for the fiscal year ended December 31,
1996. For Emerging Fixed Income Markets Series, the table is based on estimated
expenses, after fee reductions and expense limitations, for the current fiscal
year. The Funds' actual expenses may vary. The information in the table does not
reflect an administrative service fee of $5.00 per exchange for market timing or
allocation service accounts.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
EMERGING
FIXED
FOREIGN EMERGING INCOME
GROWTH EQUITY MARKETS MARKETS
SERIES SERIES SERIES SERIES
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management Fees (after fee reduction)*................... 0.70% 0.70% 1.25% 0.55%
Other Expenses........................................... 0.17% 0.17% 0.31% 0.70%
Total Fund Operating Expenses (after fee reduction)*..... 0.87% 0.87% 1.56% 1.25%
</TABLE>
EXAMPLE: Assume the annual return for each Fund is 5% and operating expenses are
as described above. For each $1,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GROWTH SERIES............................................ $ 9 $ 28 $ 48 $ 107
FOREIGN EQUITY SERIES.................................... $ 9 $ 28 $ 48 $ 107
EMERGING MARKETS SERIES.................................. $ 16 $ 49 $ 85 $ 186
EMERGING FIXED INCOME MARKETS SERIES..................... $ 13 $ 40 $ 69 $ 151
</TABLE>
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The Funds pay their operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each Fund and are not
directly charged to your account.
* THE INVESTMENT MANAGERS AND FT SERVICES HAVE AGREED IN ADVANCE TO REDUCE THEIR
RESPECTIVE FEES IN ORDER TO LIMIT THE TOTAL EXPENSES OF EACH FUND TO AN ANNUAL
RATE OF 1% OF AVERAGE NET ASSETS FOR GROWTH SERIES, 1% OF AVERAGE NET ASSETS FOR
FOREIGN EQUITY SERIES, 1.6% OF AVERAGE NET ASSETS FOR EMERGING MARKETS SERIES,
AND 1.25% OF AVERAGE NET ASSETS FOR EMERGING FIXED INCOME MARKETS SERIES THROUGH
APRIL 30, 1998. IF THESE FEE REDUCTIONS ARE INSUFFICIENT TO SO LIMIT THE FUNDS'
EXPENSES, FT SERVICES HAS AGREED TO MAKE CERTAIN PAYMENTS TO REDUCE THE FUNDS'
EXPENSES. AFTER APRIL 30, 1998, THESE AGREEMENTS MAY END AT ANY TIME UPON NOTICE
TO THE BOARD. THESE VOLUNTARY AGREEMENTS DID NOT RESULT IN ANY FEE REDUCTIONS
FOR GROWTH SERIES, FOREIGN EQUITY SERIES AND EMERGING MARKETS SERIES FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1996. IF THIS VOLUNTARY AGREEMENT WERE NOT IN
EFFECT FOR EMERGING FIXED INCOME MARKETS SERIES, THE FUND'S "MANAGEMENT FEE" AND
ESTIMATED "TOTAL FUND OPERATING EXPENSES" WOULD BE 0.70% AND 1.40%,
RESPECTIVELY.
<PAGE>
FINANCIAL HIGHLIGHTS
These tables summarize the Funds' financial history. The information for Growth
Series, Foreign Equity Series and Emerging Markets Series has been audited by
McGladrey & Pullen, LLP, the Funds' independent auditors for the periods
indicated in their reports which appear in the Funds' Annual Reports to
Shareholders for the fiscal year ended December 31, 1996; the information for
Emerging Fixed Income Markets Series has not been audited. The Annual Reports to
Shareholders also include more information about the Funds' performance. For a
free copy, please call Fund Information.
<TABLE>
<CAPTION>
GROWTH SERIES
PERIOD FROM MAY 3,
1993 (COMMENCEMENT
YEAR ENDED DECEMBER 31 OF OPERATIONS) TO
--------------------------------
1996 1995 1994 DECEMBER 31, 1993
--------- -------- -------- -------------------
<S> <C> <C> <C> <C>
Per Share Operating Performance
(for a share outstanding throughout the period)
Net asset value, beginning of period $ 11.86 $ 10.94 $ 11.80 $10.00
---------- --------- -------- -----------
Income from investment operations:
Net investment income .30 .27 .20 .06
Net realized and unrealized gain (loss) 2.32 1.62 (.36) 1.94
--------- ------- --------- ---------
Total from investment operations 2.62 1.89 (.16) 2.00
--------- ------- -------- ----------
Distributions:
Dividends from net investment income (.29) (.27) (.20) (.05)
Dividends from net realized gains (.74) (.70) (.50) (.15)
Amount in excess of net realized gains (.04) -- -- --
---------- --------- --------- ---------
Total Distributions (1.07) (.97) (.70) (.20)
--------- --------- --------- ---------
Change in net asset value 1.55 .92 (.86) 1.80
--------- --------- --------- ---------
Net asset value, end of period $ 13.41 $ 11.86 $ 10.94 $ 11.80
========= ========= ========= =========
Total Return1 22.57% 17.59% (1.32)% 20.04%
Ratios/supplemental data
Net assets, end of period (000) $268,158 $226,963 $194,059 $184,013
Ratio of expenses to average net assets .87% .88% .95% 1.00%/2/
Ratio of net investment income to average net assets 2.34% 2.28% 1.69% 1.19%/2/
Portfolio turnover rate 15.61% 30.20% 17.23% 17.32%
Average commission rate paid (per share) $ .0242
</TABLE>
/1/Not annualized for periods less than one year.
/2/Annualized.
<PAGE>
FOREIGN EQUITY SERIES
<TABLE>
<CAPTION>
Period from
October 18, 1990
(commencement of
operations)to
YEAR ENDED DECEMBER 31 December 31,
1996 1995 1994 19931 19921 1991 1990
------ ---- ---- ------ ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
(for a share outstanding throughout the
period)
Net asset value, beginning of period $ 14.04 $12.86 $13.32 $10.05 $ 10.63 $ 10.16 $10.00
------- ------ ------ ------ ------- ------- ------
Income from investment operations:
Net investment income .45 .31 .20 .23 .27 .31 .12
Net realized and unrealized gain (loss) 2.54 1.35 (.16) 3.19 (.41) 1.30 .04
---- ---- - ---- ---- - ---- -------- ---
Total from investment operations 2.99 1.66 .04 3.42 (.14) 1.61 16
---- ---- --- ---- ---- -------- - --
Distributions:
Dividends from net investment income (.45) (.31) (.19) (.09) (.24) (.44)
Amount in excess of net investment (.02) -- -- -- -- -- --
income
Distributions from net realized gains (.14) (.17) (.31) (.06) (.20) (.70)
Amount in excess of net realized gains (.08) -- -- -- -- --
---- -- ---- -- -- --------- --
--
Total distributions (.69) (.48) (.50) (.15) (.44) (1.14)
---- ---- ---- ---- ---- --------
Change in net asset value 2.30 1.18 (.46) 3.27 (.58) .47 .16
---- ---- ---- ---- ---- ------ ---
Net asset value, end of period $16.34 $14.04 $12.86 $13.32 $ 10.05 $ 10.63 $10.16
====== ====== ====== ====== ======= ======= ======
Total Return2 21.58% 13.00% 0.24% 34.03% (1.33)% 16.13% 1.60%
Ratios/supplemental data
Net assets, end of period (000) $2,857,591 $1,817,883 $1,093,227 $ 407,970 $ 566 $ 1,181 $ 1,015
Ratio of expenses to average net assets 0.87% 0.88% 0.95% 1.03% 8.82% 9.15% 9.24%3
Ratio of expenses, net of reimbursement, to 0.87% 0.88% 0.95% 1.00% 1.00% 1.00% 1.00%3
average net assets
Ratio of net investment income to average 3.20% 2.70% 2.03% 1.73% 2.38% 2.47% 5.77%3
net assets
Portfolio turnover rate 7.39% 20.87% 7.90% 42.79% 8.45% 76.16% 0.00%
Average commission rate paid (per share) $ .0021
</TABLE>
1BASED ON AVERAGE WEIGHTED SHARES OUTSTANDING.
2NOT ANNUALIZED FOR PERIODS LESS THAN ONE YEAR.
3ANNUALIZED.
<PAGE>
EMERGING MARKETS SERIES
<TABLE>
<CAPTION>
Period from May 3,
1993 (commencement
YEAR ENDED DECEMBER 31, of operations) to
1996 1995 1994 DECEMBER 31, 1993
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
--- ----- --- ----
Per Share Operating Performance
(for a share outstanding throughout the period)
Net asset value, beginning of period $ 10.75 $ 11.21 $ 13.22 $ 10.00
------------ -------------- ------------- ---------
Income from investment operations:
Net investment income .15 .19 .17 .04
Net realized and unrealized gain (loss) 1.86 (.34) (1.65) 3.25
------------- -------------- -------------- ---------
Total from investment operations 2.01 (.15) (1.48) 3.29
------------- ------------- -------------- ---------
Distributions:
Dividends from net investment income (.15) (.17) (.17) (.04)
Dividends from net realized gains (.16) (.14) (.36) (.03)
------------ ------------ ------------- ----------
Total Distributions (.31) (.31) (.53) (.07)
------------ ------------ ------------- ----------
Change in net asset value for the period 1.70 (.46) (2.01) 3.22
------------- ------------ ------------- ----------
Net asset value, end of period $ 12.45 $ 10.75 $ 11.21 $ 13.22
============ ============ ============= ==========
Total Return/1/ 18.86% (1.23)% (11.39)% 32.93%
Ratios/supplemental data
Net assets, end of period (000) $ 1,565,537 $ 798.515 $ 582,878 $ 422,433
Ratio of expenses to average net assets 1.56% 1.52% 1.66% 1.60%\2\
Ratio of expenses, net of reimbursement, to
average net assets 1.56% 1.52% 1.60% 1.60%\2\
Ratio of net investment income to average net
assets 1.56% 2.00% 1.59% 0.91%\2\
Portfolio turnover rate 7.92% 13.47% 12.51% 9.42%
Average commission rate paid (per share) $ 0.0019
</TABLE>
/1/ NOT ANNUALIZED FOR PERIODS LESS THAN ONE YEAR.
/2/ ANNUALIZED.
<PAGE>
EMERGING FIXED INCOME MARKETS SERIES
<TABLE>
<CAPTION>
JUNE 4, 1997
(COMMENCEMENT OF
OPERATIONS) TO
SEPTEMBER 30, 1997
(UNAUDITED)
<S> <C>
Per Share Operating Performance
(for a share outstanding throughout the period)
Net asset value, beginning of period $ 10.00
--------------
Income from investment operations:
Net investment income .21
Net realized and unrealized gain (loss) .51
Total from investment operations .72
--------------
Net asset value, end of period $ 10.72
Total Return/1/ 7.20%
Ratios/supplemental data
Net assets, end of period (000) $ 2,144
Ratio of expenses to average net assets 6.42%/2/
Ratio of expenses, net of waiver, to average net assets 1.25%/2/
Ratio of net investment income to average net assets 6.40%/2/
Portfolio turnover rate 111.57%
</TABLE>
/1/NOT ANNUALIZED FOR PERIODS LESS THAN ONE YEAR.
/2/ANNUALIZED.
HOW DO THE FUNDS INVEST THEIR ASSETS?
THE FUNDS' INVESTMENT OBJECTIVES
Growth Series, Foreign Equity Series and Emerging Markets Series each seeks
long-term growth of capital. Emerging Fixed Income Markets Series seeks high
total return, consisting of current income and capital appreciation. The
investment objective of each Fund is a fundamental policy and may not be changed
without shareholder approval. Of course, there is no assurance that a Fund's
objective will be achieved.
PRIMARY INVESTMENT POLICIES OF THE FUNDS
Described below are the primary investment policies of each Fund. Each of the
Funds may, however, also invest in various types of securities and use various
investment strategies described under the headings "Types of Securities In Which
The Funds May Invest" and "Other Investment Policies Of The Funds." With the
exception of investment objectives and the investment restrictions specifically
identified as fundamental, all investment policies and practices described in
this prospectus and in the SAI are not fundamental, meaning that the Board may
change them without shareholder approval.
GROWTH SERIES. Growth Series seeks to achieve long-term capital growth through a
flexible policy of investing in stocks and debt obligations of companies and
governments of any nation, including developing nations. Although Growth Series
generally invests in common stock, it may also invest in preferred stocks and
certain debt securities that offer the potential for capital growth. In
selecting securities for Growth Series, the Investment Manager attempts to
identify those companies in various countries and industries where economic and
political factors, including currency movements, are likely to produce
above-average opportunities for capital appreciation.
Growth Series may invest up to 5% of its assets in warrants (excluding warrants
acquired in units or attached to securities), and up to 10% of its assets in
illiquid securities. Growth Series will not invest more than 5% of its total
assets in any of the following: (i) debt securities rated lower than BBB by S&P
or Baa by Moody's, (ii) structured investments, and (iii) securities of Russian
issuers. Growth Series may borrow up to one-third of the value of its total
assets and may lend portfolio securities with an aggregate market value of up to
one-third of its total assets. Growth Series may purchase and sell put and call
options on securities or indices, provided that (i) the value of the underlying
securities on which options may be written at any one time will not exceed 25%
of the Fund's total assets, and (ii) the Fund will not purchase put or call
options if the aggregate premium paid for such options would exceed 5% of its
total assets. Growth Series may enter into forward foreign currency contracts
and may purchase and write put and call options on foreign currencies. For
hedging purposes only, Growth Series may buy and sell financial futures
contracts, stock index futures contracts, foreign currency futures contracts and
options on any of these futures contracts, provided that (i) the Fund will not
commit more than 5% of its total assets to initial margin deposits on futures
contracts and related options, and (ii) the value of the underlying securities
on which futures contracts will be written at any one time will not exceed 25%
of the total assets of the Fund.
FOREIGN EQUITY SERIES. Foreign Equity Series seeks to achieve long-term capital
growth through a flexible policy of investing in equity securities and debt
obligations of companies and governments outside the U.S. Foreign Equity Series
will invest at least 65% of its total assets in foreign equity securities, as
defined below. Foreign Equity Series may also invest up to 35% of its total
assets in debt securities when, in the judgment of the Investment Manager, the
capital appreciation available through such investment outweighs the potential
for capital growth through investment in stocks. In selecting securities for
Foreign Equity Series, the Investment Manager attempts to identify those
companies in various countries and industries where economic and political
factors, including currency movements, are likely to produce above-average
opportunities for capital appreciation.
Foreign Equity Series may invest up to 5% of its assets in warrants (excluding
warrants acquired in units or attached to securities), and up to 10% of its
assets in illiquid securities. Foreign Equity Series will not invest more than
5% of its total assets in any of the following: (i) debt securities rated lower
than BBB by S&P or Baa by Moody's, (ii) structured investments, and (iii)
securities of Russian issuers. Foreign Equity Series may borrow up to one-third
of the value of its total assets and may lend portfolio securities with an
aggregate market value of up to one-third of its total assets. Foreign Equity
Series may purchase and sell put and call options on securities or indices,
provided that (i) the value of the underlying securities on which options may be
written at any one time will not exceed 25% of the Fund's total assets, and (ii)
the Fund will not purchase put or call options if the aggregate premium paid for
such options would exceed 5% of its total assets. Foreign Equity Series may
enter into forward foreign currency contracts and may purchase and write put and
call options on foreign currencies. For hedging purposes only, Foreign Equity
Series may buy and sell financial futures contracts, stock index futures
contracts, foreign currency futures contracts and options on any of these
futures contracts, provided that (i) the Fund will not commit more than 5% of
its total assets to initial margin deposits on futures contracts and related
options, and (ii) the value of the underlying securities on which futures
contracts will be written at any one time will not exceed 25% of the total
assets of the Fund.
EMERGING MARKETS SERIES. Emerging Markets Series seeks to achieve long-term
capital growth by investing primarily in equity securities of issuers in
countries having emerging markets. Under normal conditions at least 65% of
Emerging Markets Series' total assets will be invested in equity securities of
emerging market companies. Emerging Markets Series will, at all times except
during defensive periods, maintain investments in at least three countries
having emerging markets. The Investment Manager may, from time to time, use
various methods of selecting securities for Emerging Markets Series' portfolio
and may also employ and rely on independent or affiliated sources of information
and ideas in connection with management of the portfolio. Emerging Markets
Series may invest up to 35% of its total assets in debt securities that offer
the potential for capital growth.
Emerging Markets Series seeks to benefit from economic and other developments in
emerging markets. The investment objective of Emerging Markets Series reflects
the belief that investment opportunities may result from an evolving long-term
international trend favoring more market-oriented economies, a trend that may
especially benefit certain countries having emerging markets. This trend may be
facilitated by local or international political, economic or financial
developments that could benefit the capital markets of emerging market
countries. Certain emerging market countries, which may be in the process of
developing more market-oriented economies, may experience relatively high rates
of economic growth. Other countries, although having relatively mature emerging
markets, may also be in a position to benefit from local or international
developments encouraging greater market orientation and diminishing governmental
intervention in economic affairs.
Emerging Markets Series may invest up to 5% of its assets in warrants (excluding
warrants acquired in units or attached to securities), and up to 15% of its
assets in illiquid securities. Emerging Markets Series will not invest more than
5% of its total assets in any of the following: (i) debt securities rated lower
than BBB by S&P or Baa by Moody's, (ii) structured investments, and (iii)
securities of Russian issuers. Emerging Markets Series may borrow up to
one-third of the value of its total assets and may lend portfolio securities
with an aggregate market value of up to one-third of its total assets. Emerging
Markets Series may purchase and sell put and call options on securities or
indices, provided that (i) the value of the underlying securities on which
options may be written at any one time will not exceed 25% of the Fund's total
assets, and (ii) the Fund will not purchase put or call options if the aggregate
premium paid for such options would exceed 5% of its total assets. Emerging
Markets Series may enter into forward foreign currency contracts and may
purchase and write put and call options on foreign currencies. For hedging
purposes only, Emerging Markets Series may buy and sell financial futures
contracts, stock index futures contracts, foreign currency futures contracts and
options on any of these futures contracts, provided that (i) the Fund will not
commit more than 5% of its total assets to initial margin deposits on futures
contracts and related options, and (ii) the value of the underlying securities
on which futures contracts will be written at any one time will not exceed 25%
of the total assets of the Fund.
EMERGING FIXED INCOME MARKETS SERIES. Emerging Fixed Income Markets Series seeks
high total return, consisting of current income and capital appreciation, by
investing at least 65% of its total assets in a portfolio of "fixed income" or
debt obligations of sovereign or sovereign-related entities of emerging market
countries, as well as debt obligations of emerging market companies. For
purposes of this restriction, the Fund uses the term "fixed income" generically
to mean debt obligations of all types, including debt obligations which pay a
variable or floating rate of interest as well as a fixed rate of interest. In
selecting investments for Emerging Fixed Income Markets Series, the Investment
Manager will draw on its experience in global investing in seeking to identify
those markets and issuers around the world which are anticipated to provide the
opportunity for high current income and capital appreciation. Debt securities
issued in emerging markets are generally rated below investment grade.
Consequently, the Fund anticipates that a substantial percentage of its assets
may be invested in higher risk, lower quality debt securities, commonly known as
"junk bonds." These investments are speculative in nature. See "Debt Securities"
in this section and "What Are the Funds' Potential Risks?"
Emerging Fixed Income Markets Series' investments in sovereign or
sovereign-related debt obligations may consist of (i) bonds, notes, bills,
debentures or other fixed income or floating rate securities issued or
guaranteed by governments, governmental agencies or instrumentalities, or
government owned, controlled or sponsored entities, including central banks,
located in emerging market countries (including loans and participations in and
assignments of portions of loans between governments and financial
institutions), (ii) debt securities issued by entities organized and operated
for the purpose of restructuring the investment characteristics of securities
issued by any of the entities described above, including indexed or
currency-linked securities, and (iii) debt securities issued by supra-national
organizations such as the Asian Development Bank, the Inter-American Development
Bank, and the Corporacion Andina de Fomento, among others. These securities may
be issued in either registered or bearer form. Many of these securities are
trading at substantial discounts to their par value and it is expected that
initially a significant portion of Emerging Fixed Income Markets Series' assets
will be invested in securities purchased at a discount to par value. These
securities may include Brady Bonds discussed below under "Types of Securities In
Which the Funds May Invest."
Emerging Fixed Income Markets Series' investments in debt obligations of private
sector companies in emerging market countries will take the form of bonds,
notes, bills, debentures, convertible securities, warrants, indexed or
currency-linked securities, bank debt obligations, short-term paper, loan
participations, loan assignments and interests issued by entities organized and
operated for the purpose of restructuring the investment characteristics of
instruments issued by emerging market country issuers. Emerging market country
debt securities held by Emerging Fixed Income Markets Series may or may not be
listed or traded on a securities exchange. Emerging Fixed Income Markets Series
will not be subject to any restrictions on the maturities of the emerging market
country debt securities it holds; those maturities may range from overnight to
more than 30 years.
Emerging Fixed Income Markets Series may invest up to 35% of its assets in
securities issued or guaranteed by the U.S. government, its agencies and
instrumentalities.
Emerging Fixed Income Markets Series may invest up to 5% of its assets in
warrants (excluding warrants acquired in units or attached to securities), and
up to 15% of its assets in illiquid securities. Emerging Fixed Income Markets
Series will not invest more than 5% of its total assets in securities of Russian
issuers. Emerging Fixed Income Markets Series may invest in debt securities
rated below BBB by S&P or Baa by Moody's (or unrated debt securities determined
by the Fund's Investment Manager to be of comparable quality). Emerging Fixed
Income Markets Series may borrow up to one-third of the value of its total
assets and may lend portfolio securities with an aggregate market value of up to
one-third of its total assets. Emerging Fixed Income Markets Series may purchase
and sell put and call options on securities or indices, provided that (i) the
value of the underlying securities on which options may be written at any one
time will not exceed 25% of the Fund's total assets, and (ii) the Fund will not
purchase put or call options if the aggregate premium paid for such options
would exceed 5% of its total assets. Emerging Fixed Income Markets Series may
enter into forward foreign currency contracts and may purchase and write put and
call options on foreign currencies. For hedging purposes only (including
anticipatory hedges where the Investment Manager seeks to anticipate an intended
shift in maturity, duration or asset allocation), Emerging Fixed Income Markets
Series may buy and sell financial futures contracts, stock index futures
contracts, foreign currency futures contracts and options on any of these
futures contracts, provided that (i) the Fund will not commit more than 5% of
its total assets to initial margin deposits on futures contracts and related
options, and (ii) the value of the underlying securities on which futures
contracts will be written at any one time will not exceed 25% of the total
assets of the Fund. Emerging Fixed Income Markets Series may enter into swap
agreements as discussed below, provided that the Fund will not enter into an
agreement with any single party if the amount owed or to be received under any
existing contracts with that party would exceed 5% of the Fund's assets.
TYPES OF SECURITIES IN WHICH THE FUNDS MAY INVEST
Each Fund is authorized to invest in certain of the types of securities
described below.
EQUITY SECURITIES. As used in this prospectus, "equity securities" refers to
common stock, preferred stock, securities convertible into common or preferred
stock, warrants or rights to subscribe to or purchase such securities, and
sponsored or unsponsored American Depositary Receipts, European Depositary
Receipts and Global Depositary Receipts (see "Depositary Receipts" below).
EMERGING MARKETS SECURITIES. As used in this prospectus, an "emerging market"
country is any country that is generally considered to be developing or emerging
by the International Bank for Reconstruction and Development (more commonly
referred to as the World Bank) and the International Finance Corporation, as
well as countries that are classified by the United Nations or otherwise
regarded by their authorities as developing. Currently, the countries not in
this category include Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands,
New Zealand, Norway, Spain, Sweden, Switzerland, the United Kingdom, and the
United States. In addition, as used in this prospectus, emerging market
companies means (i) companies whose principal securities trading markets are in
emerging market countries, as defined above, (ii) companies that derive 50% or
more of their total revenue from either goods or services produced in emerging
market countries or sales made in emerging market countries, or (iii) companies
organized under the laws of, and with principal offices in, emerging market
countries.
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, and which may include
structured investments. The Funds are not limited as to the type of debt
securities in which they may invest. For example, bonds may include Eurobonds,
Global Bonds, Yankee Bonds, bonds sold under SEC Rule 144A, restructured
external debt such as Brady Bonds as well as restructured external debt that has
not undergone a Brady-style debt exchange, or other types of instruments
structured or denominated as bonds. Issuers of debt securities may include the
U.S. government, its agencies or instrumentalities; a foreign sovereign
government, its agencies or instrumentalities; supra-national organizations;
U.S. or foreign corporations; and U.S. or foreign banks, savings and loan
associations, and bank holding companies.
Debt securities purchased by the Funds may be rated C or better by S&P or
Moody's or, if unrated, of comparable quality as determined by each Fund's
Investment Manager. As an operating policy, which may be changed by the Board
without shareholder approval, each Fund except Emerging Fixed Income Markets
Series will limit its investment in debt securities rated below BBB by S&P or
Baa by Moody's (or unrated debt securities determined by a Fund's Investment
Manager to be of comparable quality) 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 different level of investment in high risk, lower
quality debt securities would be consistent with the interests of the Funds and
their shareholders. Debt securities rated C by Moody's are the lowest rated
class of bonds and may be regarded as having extremely poor prospects of ever
attaining any real investment standing. Debt securities rated C by S&P are
typically subordinated to senior debt which is vulnerable to default and is
dependent on favorable conditions to meet timely payment of interest and
repayment of principal.
Commercial paper purchased by the Funds will meet the credit quality criteria
set forth under "How Do the Funds Invest Their Assets?" in the SAI. Certain debt
securities can provide the potential for capital appreciation based on various
factors such as changes in interest rates, economic and market conditions,
improvement in an issuer's ability to repay principal and pay interest, and
ratings upgrades. Each of the Funds may invest in debt or preferred securities
which have equity features, such as conversion or exchange rights, or which
carry warrants to purchase common stock or other equity interests. Such equity
features enable the holder of the bond or preferred security to benefit from
increases in the market price of the underlying equity.
BRADY BONDS AND OTHER SOVEREIGN-RELATED DEBT. Emerging Fixed Income Markets
Series may invest a portion of its assets in certain debt obligations
customarily referred to as "Brady Bonds," which are created through the exchange
of existing commercial bank loans to sovereign entities for new obligations in
connection with debt restructuring under a plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Bolivia, Brazil,
Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Jordan, Mexico, Nigeria,
Panama, Peru, the Philippines, Poland, Uruguay, and Venezuela (collectively, the
"Brady Countries"). In addition, some countries have reached an agreement in
principle to restructure their bank debt according to a Brady Plan and other
countries are expected to negotiate similar restructurings in the future. In
some cases countries have restructured their external bank debt into new loans
or promissory notes.
Brady Bonds have been issued relatively recently, and, accordingly, do not have
a long payment history. They may be collateralized or uncollateralized and
issued in various currencies (although most are dollar-denominated) and they
have been actively traded in the over-the-counter secondary market.
Dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are generally collateralized in full as
to principal by U.S. Treasury zero coupon bonds which have the same maturity as
the Brady Bonds. Interest payments on these Brady Bonds generally are
collateralized on a one-year or longer rolling-forward basis by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of interest payments or, in the case of floating rate bonds,
initially is equal to at least one year's interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter. Certain Brady Bonds are entitled to "value recovery payments" in
certain circumstances, which in effect constitute supplemental interest
payments. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are considered
speculative.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Emerging Fixed Income Markets Series may
invest in fixed and floating rate loans ("Loans") arranged through private
negotiations between a sovereign, sovereign-related or corporate entity and one
or more financial institutions ("Lenders"). Emerging Fixed Income Markets Series
may invest in such Loans in the form of participations ("Participations") in
Loans and assignments ("Assignments") of all or a portion of Loans from third
parties. Participations typically will result in Emerging Fixed Income Markets
Series having a contractual relationship only with the Lender, not with the
borrower. Emerging Fixed Income Markets Series will have the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participation and only upon receipt by the Lender of the
payments from the borrower. In connection with purchasing Participations,
Emerging Fixed Income Markets Series generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
Loan, nor any rights of set-off against the borrower, and Emerging Fixed Income
Markets Series may not benefit directly from any collateral supporting the Loan
in which it has purchased the Participation. As a result, Emerging Fixed Income
Markets Series will assume the credit risk of both the borrower and the Lender
that is selling the Participation. In the event of the insolvency of the Lender
selling a Participation, Emerging Fixed Income Markets Series may be treated as
a general creditor of the Lender and may not benefit from any set-off between
the Lender and the borrower. Emerging Fixed Income Markets Series will acquire
Participations only if the Lender interpositioned between Emerging Fixed Income
Markets Series and the borrower is determined by its Investment Manager to be
creditworthy. When Emerging Fixed Income Markets Series purchases Assignments
from Lenders, Emerging Fixed Income Markets Series will acquire direct rights
against the borrower on the Loan, except that under certain circumstances such
rights may be more limited than those held by the assigning Lender.
Emerging Fixed Income Markets Series may have difficulty disposing of
Assignments and Participations. Because the market for such instruments is not
highly liquid, Emerging Fixed Income Markets Series anticipates that such
instruments could be sold only to a limited number of institutional investors.
The lack of a highly liquid secondary market will have an adverse impact on the
value of such instruments and on the ability of Emerging Fixed Income Markets
Series to dispose of particular Assignments or Participations in response to a
specific economic event, such as deterioration in the creditworthiness of the
borrower.
STRUCTURED INVESTMENTS. Included among the issuers of emerging market country
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 (such as Brady Bonds) 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 flow 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 flow 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. Because the right of
payment of subordinated structured investments is subordinated to the right of
payment of another class, subordinated structured investments bear an increased
risk of non-payment or decreased payments in the event of a decrease in the cash
flow of the underlying securities. Although the purchase of subordinated
structured investments would have a similar economic effect to that of borrowing
against the underlying securities, the purchase will not be deemed to be
leverage for purposes of the limitations placed on the extent of assets that may
be used for borrowing activities. See "Other Investment Policies of the Funds -
Borrowing."
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. Each of the Funds, except Emerging Fixed Income Markets Series,
will limit its investment in structured investments to 5% of its total assets.
FORWARD FOREIGN CURRENCY CONTRACTS AND OPTIONS ON FOREIGN SECURITIES. The Funds
will normally conduct foreign currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market, or through entering into forward contracts to purchase or sell foreign
currencies.
The Funds will generally not enter into forward contracts with terms of greater
than one year. 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. The
Funds will generally enter into forward contracts under two circumstances.
First, when a Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock" in the U.S. dollar
price of the security in relation to another currency by entering into a forward
contract to buy the amount of foreign currency needed to settle the transaction.
Second, when a Fund's Investment Manager believes that the currency of a
particular foreign country may suffer or enjoy a substantial movement against
another currency, it may enter into a forward contract to sell or buy the former
foreign currency (or another currency which acts as a proxy for that currency)
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. This second investment practice is
generally referred to as "cross-hedging." A Fund's forward transactions may call
for the delivery of one foreign currency in exchange for another foreign
currency and may at times not involve currencies in which its portfolio
securities are then denominated. The Funds have no specific limitation on the
percentage of assets they may commit to forward contracts, subject to their
stated investment objectives and policies, except that a Fund will not enter
into a forward contract if the amount of assets set aside to cover the contract
would impede portfolio management or the Fund's ability to meet redemption
requests. Although forward contracts will be used primarily to protect the Funds
from adverse currency movements, they also involve the risk of loss in the event
that anticipated currency movements will not be accurately predicted.
The Funds may purchase and write put and call options on foreign currencies for
the purpose of protecting against declines in the U.S. dollar value of foreign
currency denominated portfolio securities and against increases in the U.S.
dollar cost of such securities to be acquired. As in the case of other kinds of
options, however, the writing of an option on a foreign currency constitutes
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 a foreign currency
may constitute an effective hedge against fluctuations in exchange rates
although, in the event of rate movements adverse to a Fund's position, it may
forfeit the entire amount of the premium plus related transaction costs. Options
on foreign currencies to be written or purchased by the Funds are traded on U.S.
and foreign exchanges or over-the-counter.
WARRANTS. A warrant is typically a long-term option issued by a corporation that
gives the holder the privilege of buying a specified number of shares of the
underlying common stock at a specified exercise price at any time on or before
the expiration date. Stock index warrants entitle the holder to receive, upon
exercise, an amount in cash determined by reference to fluctuations in the level
of a specified stock index. If a Fund does not exercise or dispose of a warrant
before its expiration, it will expire worthless.
COMMON AND PREFERRED CONVERTIBLE SECURITIES. Convertible securities are, in
general, debt obligations or preferred stocks that may be converted within a
specified period of time into a certain amount of common stock of the same or a
different issuer. A convertible security provides a fixed-income stream and the
opportunity, through its conversion feature, to participate in the capital
appreciation resulting from a market price advance in its underlying common
stock. As with a straight fixed-income security, a convertible security tends to
increase in market value when interest rates decline and decrease in value when
interest rates rise. Like common stock, the value of a convertible security
tends to increase as the market value of the underlying stock rises, and it
tends to decrease as the market value of the underlying stock declines. Because
its value can be influenced by both interest rate and market movements, a
convertible security is not as sensitive to interest rates as a similar
fixed-income security, nor is it as sensitive to changes in share price as its
underlying stock.
DEPOSITARY RECEIPTS. The Funds may purchase sponsored or unsponsored American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global
Depositary Receipts ("GDRs") (collectively, "depositary receipts"). ADRs are
depositary receipts typically issued by a U.S. bank or trust company which
evidence ownership of underlying securities issued by a foreign corporation.
EDRs and GDRs are typically issued by foreign banks or trust companies, although
they also may be issued by U.S. banks or trust companies, and evidence ownership
of underlying securities issued by either a foreign or a United States
corporation. Generally, depositary receipts in registered form are designed for
use in the U.S. securities market and depositary receipts in bearer form are
designed for use in securities markets outside the U.S. Depositary receipts may
not necessarily be denominated in the same currency as the underlying securities
into which they may be converted. Depositary receipts may be issued pursuant to
sponsored or unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities traded in the form of depositary receipts.
In unsponsored programs, the issuer may not be directly involved in the creation
of the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the depositary receipts. Depositary receipts also involve the risks of other
investments in foreign securities, as discussed below. For purposes of the
Funds' investment policies, the Funds' investments in depositary receipts will
be deemed to be investments in the underlying securities.
OTHER INVESTMENT POLICIES OF THE FUNDS
Each Fund is authorized to engage in certain investment techniques and
strategies. Although these strategies are regularly used by some investment
companies and other institutional investors in various markets, some of these
strategies cannot at the present time be used to a significant extent by the
Funds in some of the markets in which the Funds will invest and may not be
available for extensive use in the future.
TEMPORARY INVESTMENTS. For temporary defensive purposes, each Fund may invest up
to 100% of its total assets in the following money market securities,
denominated in U.S. dollars or in the currency of any foreign country, issued by
entities organized in the United States or any foreign country: short-term (less
than twelve months to maturity) and medium-term (not greater than five years to
maturity) obligations issued or guaranteed by the U.S. government or the
governments of foreign countries, their agencies or instrumentalities; finance
company and corporate commercial paper, and other short-term corporate
obligations, in each case rated Prime-1 by Moody's or A or better by S&P or, if
unrated, of comparable quality as determined by each Fund's Investment Manager;
obligations (including certificates of deposit, time deposits and bankers'
acceptances) of banks having total assets in excess of $1 billion; and
repurchase agreements with banks and broker-dealers with respect to such
securities. In addition, for temporary defensive purposes, each Fund may invest
up to 25% of its total assets in obligations (including certificates of deposit,
time deposits and bankers' acceptances) of U.S. and foreign banks; provided that
a Fund will limit its investment in time deposits for which there is a penalty
for early withdrawal to 10% of its total assets.
CONCENTRATION AND DIVERSIFICATION. Each Fund reserves the right to invest more
than 25% of its assets in any one country, but will not invest more than 25% of
its total assets in any one industry (excluding the U.S. government). Under
normal circumstances, each Fund will invest at least 65% of its assets in
issuers domiciled in at least three different nations (one of which may be the
United States). Each Fund, except Emerging Fixed Income Markets Series, may
invest no more than 5% of its total assets in securities issued by any one
company or government, exclusive of U.S. government securities.
REPURCHASE AGREEMENTS. When a Fund acquires a security from a U.S. bank or a
registered broker-dealer, it may simultaneously enter into a repurchase
agreement, wherein the seller agrees to repurchase the security at a specified
time and price. The repurchase price is in excess of the purchase price by an
amount which reflects an agreed-upon rate of return, which is not tied to the
coupon rate on the underlying security. Under the 1940 Act, repurchase
agreements are considered to be loans collateralized by the underlying security
and therefore will be fully collateralized. However, if the seller should
default on its obligation to repurchase the underlying security, a Fund may
experience delay or difficulty in its ability to dispose of the underlying
security and might incur a loss if the value of the security declines, as well
as incur disposition costs in liquidating the security.
BORROWING. Each Fund may borrow up to one-third of the value of its total assets
from banks to increase its holdings of portfolio securities, to meet redemption
requests, to pay expenses or for other temporary needs. Under the 1940 Act, a
Fund is required to maintain continuous asset coverage of 300% with respect to
such borrowings and to sell (within three days) sufficient portfolio holdings to
restore such coverage if it should decline to less than 300% due to market
fluctuations or otherwise, even if such liquidations of a Fund's holdings may be
disadvantageous from an investment standpoint. Leveraging by means of borrowing
may exaggerate the effect of any increase or decrease in the value of portfolio
securities on a Fund's net asset value, and money borrowed will be subject to
interest and other costs (which may include commitment fees and/or the cost of
maintaining minimum average balances) which may or may not exceed the income
received or capital appreciation realized from the securities purchased with
borrowed funds.
LOANS OF PORTFOLIO SECURITIES. Each Fund may lend to broker-dealers portfolio
securities with an aggregate market value of up to one-third of its total assets
to generate income. Such loans must be secured by collateral (consisting of any
combination of cash, U.S. government securities or irrevocable letters of
credit) in an amount at least equal (on a daily marked-to-market basis) to the
current market value of the securities loaned. A Fund may terminate the loans at
any time and obtain the return of the securities loaned within five business
days. A Fund will continue to receive any interest or dividends paid on the
loaned securities and will continue to retain any voting rights with respect to
the securities. Loans of portfolio securities involve the risk of default by the
counter-party to the loan transaction, which could involve delay or difficulty
in a Fund's exercise of its right to realize upon the collateral for such loans,
as well as transaction costs.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Fund may purchase securities
on a when-issued or delayed delivery basis. Securities purchased on a
when-issued or delayed delivery basis are purchased for delivery beyond the
normal settlement date at a stated price and yield. No income accrues to the
purchaser of a security on a when-issued or delayed delivery basis prior to
delivery. Such securities are recorded as an asset and are subject to changes in
value based upon changes in the general level of interest rates. The Funds will
only make commitments to purchase securities on a when-issued or delayed
delivery basis with the intention of actually acquiring the securities, but may
sell them before the settlement date to attempt to "lock" in gains or avoid
losses, or if otherwise deemed advisable by the Investment Manager.
Purchasing a security on a when-issued or delayed delivery basis can involve a
risk that the market price at the time of delivery may be lower than the
agreed-upon purchase price, and therefore there could be an unrealized loss at
the time of delivery. In addition, while an issuer of when-issued securities has
made a commitment to issue the securities as of a specified future date, there
can be no assurance that the securities will be issued and that the trade will
settle. In the event settlement does not occur, any appreciation in the value of
the when-issued security would be lost, including the amount of any appreciation
"locked" in by the sale of an appreciated security prior to settlement. Each
Fund will establish a segregated account in which it will maintain liquid assets
in an amount at least equal in value to the Fund's net commitments to purchase
securities on a when-issued or delayed delivery basis. If the value of these
assets declines, the Fund will place additional liquid assets in the account on
a daily basis so that the value of the assets in the account is equal to the
amount of such commitments.
OPTIONS ON SECURITIES OR INDICES. In order to hedge against market shifts, each
Fund may purchase put and call options on securities or securities indices. In
addition, each Fund may seek to generate income to offset operating expenses
and/or may hedge a portion of its portfolio investments through writing (i.e.,
selling) covered put and call options. Options purchased or written by the Funds
will be traded on United States and foreign exchanges or in the over-the-counter
markets. An option on a security is a contract that permits 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 permits 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." This
means that so long as a Fund is obligated as the writer of a call option, it
will own the underlying securities subject to the call, or hold a call at the
same exercise price, for the same exercise period, and on the same securities as
the written call. A put is covered if a Fund maintains liquid assets with a
value equal to the exercise price in a segregated account, or holds a put on the
same underlying securities at an equal or greater exercise price. The value of
the underlying securities on which options may be written at any one time will
not exceed 25% of the total assets of a Fund. A Fund will not purchase put or
call options if the aggregate premium paid for such options would exceed 5% of
its total assets at the time of purchase.
FUTURES CONTRACTS. For hedging purposes only (including anticipatory hedges
where the Investment Manager seeks to anticipate an intended shift in maturity,
duration or asset allocation), the Funds may buy and sell covered financial
futures contracts, stock index futures contracts, foreign currency futures
contracts and options on any of the foregoing. A financial futures contract is
an agreement between two parties to buy or sell a specified debt security at a
set price on a future date. An index futures contract is an agreement to take or
make delivery of an amount of cash based on the difference between the value of
the index at the beginning and at the end of the contract period. A futures
contract on a foreign currency is an agreement to buy or sell a specified amount
of a currency for a set price on a future date. When a Fund enters into a
futures contract, it must make an initial deposit, known as "initial margin," as
a partial guarantee of its performance under the contract. As the value of the
security, index or currency fluctuates, either party to the contract is required
to make additional margin payments, known as "variation margin," to cover any
additional obligation it may have under the contract. In addition, when a Fund
enters into a futures contract, it will segregate assets or "cover" its position
in accordance with the 1940 Act. See "How Do the Funds Invest Their Assets? -
Futures Contracts" in the SAI.
A Fund may not commit more than 5% of its total assets to initial margin
deposits on futures contracts and related options. The value of the underlying
securities on which futures contracts will be written at any one time will not
exceed 25% of the total assets of a Fund.
SWAP AGREEMENTS. Emerging Fixed Income Markets Series may enter into interest
rate, index and currency exchange rate swap agreements for purposes of
attempting to obtain a particular desired return at a lower cost to the Fund
than if the Fund had invested directly in an instrument that yielded that
desired return. Swap agreements are two-party contracts entered into primarily
by institutional investors for periods ranging from a few weeks to more than one
year. In a standard "swap" transaction, two parties agree to exchange the
returns (or differentials in rates of return) earned or realized on particular
predetermined investments or instruments. The gross returns to be exchanged or
"swapped" between the parties are calculated with respect to a "notional
amount," i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency, or in
a "basket" of securities representing a particular index. The "notional amount"
of the swap agreement is only a fictive basis on which to calculate the
obligations which the parties to a swap agreement have agreed to exchange.
Emerging Fixed Income Markets Series' obligations (or rights) under a swap
agreement will generally be equal only to the net amount to be paid or received
under the agreement based on the relative values of the positions held by each
party to the agreement (the "net amount"). Emerging Fixed Income Markets Series'
obligations under a swap agreement will be accrued daily (offset against any
amounts owing to the Fund) and any accrued but unpaid net amounts owed to a swap
counterparty will be covered by the maintenance of a segregated account
consisting of cash, U.S. Government securities, or high grade debt obligations,
to avoid any potential leveraging of the Fund's portfolio. Emerging Fixed Income
Markets Series will not enter into a swap agreement with any single party if the
net amount owed or to be received under existing contracts with that party would
exceed 5% of the Fund's assets.
Whether Emerging Fixed Income Markets Series' use of swap agreements will be
successful in furthering its investment objective will depend on the ability of
the Investment Manager correctly to predict whether certain types of investments
are likely to produce greater returns than other investments. Because they are
two-party contracts and because they may have terms of greater than seven days,
swap agreements may be considered to be illiquid. Moreover, Emerging Fixed
Income Markets Series bears the risk of loss of the amount expected to be
received under a swap agreement in the event of the default or bankruptcy of a
swap agreement counterparty. The Investment Manager will cause Emerging Fixed
Income Markets Series to enter into swap agreements only with counterparties
that would be eligible for consideration as repurchase agreement counterparties
under the Funds' repurchase agreement guidelines. Certain restrictions imposed
on Emerging Fixed Income Markets Series by the Code may limit its ability to use
swap agreements. The swap market is a relatively new market and is largely
unregulated. It is possible that developments in the swap market and the laws
relating to swaps, including potential government regulation, could adversely
affect Emerging Fixed Income Markets Series' ability to terminate existing swap
agreements, to realize amounts to be received under such agreements, or to enter
into swap agreements, or could have tax consequences. See "Additional
Information on Distributions and Taxes" in the SAI for more information
regarding the tax considerations relating to swap agreements.
CLOSED-END AND OPEN-END INVESTMENT COMPANIES. Some countries have authorized the
formation of closed-end investment companies to facilitate indirect foreign
investment in their capital markets. In accordance with the 1940 Act, each Fund
may invest up to 10% of its total assets in securities of closed-end investment
companies which invest principally in securities in which that Fund is
authorized to invest. This restriction on investment in securities of closed-end
investment companies may limit opportunities for a Fund to invest indirectly in
certain emerging markets. Shares of certain closed-end investment companies may
at times be acquired only at market prices representing premiums to their net
asset values. Investment by a Fund in shares of closed-end investment companies
would involve duplication of fees, in that shareholders would bear both their
proportionate share of expenses of the Fund (including management and advisory
fees) and, indirectly, the expenses of such closed-end investment companies.
Emerging Fixed Income Markets Series may invest in open-end investment companies
as well, subject to the above restrictions, and subject to a maximum of 10% of
its total assets in closed and open-end funds combined.
PORTFOLIO TURNOVER. Growth Series, Foreign Equity Series and Emerging Markets
Series each invests for long-term growth of capital and does not intend to place
emphasis upon short-term trading profits. Accordingly, each of these Funds
expects to have a portfolio turnover rate of less than 50%. The Investment
Manager may engage in short-term trading in the portfolio of Emerging Fixed
Income Markets Series when such trading is considered consistent with the Fund's
investment objective. Also, a security may be sold and another of comparable
quality simultaneously purchased to take advantage of what the Investment
Manager believes to be a temporary disparity in the normal yield relationship
between the two securities. As a result of its investment policies, under
certain market conditions, the portfolio turnover rate of Emerging Fixed Income
Markets Series may be higher than that of other mutual funds, and is expected to
be between 400% and 500%. Because a higher turnover rate increases transaction
costs and may increase capital gains, the Investment Manager carefully weighs
the anticipated benefits of short-term investment against these consequences.
ILLIQUID INVESTMENTS. Growth Series' and Foreign Equity Series' policy is not to
invest more than 10% of net assets, at the time of purchase, in illiquid
securities. Emerging Markets Series' and Emerging Fixed Income Markets Series'
policy is not to invest more than 15% of net assets, at the time of purchase, in
illiquid securities. Illiquid securities are generally securities that cannot be
sold within seven days in the normal course of business at approximately the
amount at which a Fund has valued them.
The Investment Managers, based on a continuing review of the trading markets,
may consider certain restricted securities which may otherwise be deemed to be
illiquid, that are offered and sold to "qualified institutional buyers," to be
liquid. The Board has adopted guidelines and delegated to the Investment
Managers the daily function of determining and monitoring the liquidity of
restricted securities. The Board, however, will oversee and be ultimately
responsible for the determinations. If the Fund invests in restricted securities
that are deemed liquid, the general level of illiquidity in a Fund may be
increased if qualified institutional buyers become uninterested in purchasing
these securities or the market for these securities contracts.
OTHER POLICIES AND RESTRICTIONS. Each Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about each Fund's investment policies, please
see "How Do the Funds Invest Their Assets?" and "Investment Restrictions" in the
SAI.
Each Fund's policies and restrictions discussed in this prospectus and in the
SAI are considered at the time the Fund makes an investment. The Funds are
generally not required to sell a security because of a change in circumstances.
WHAT ARE THE FUNDS' POTENTIAL RISKS?
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Funds, nor can
there be any assurance that a Fund's investment objective will be attained. As
with any investment in securities, the value of, and income from, an investment
in the Funds can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the Funds' portfolio
securities, including general economic conditions and market factors.
Additionally, investment decisions made by the Investment Managers will not
always be profitable or prove to have been correct. In addition to the factors
which affect the value of individual securities, a shareholder may anticipate
that the value of the shares of the Funds will fluctuate with movements in the
broader equity and bond markets, as well. A decline in the stock market of any
country in which a Fund is invested in equity securities may also be reflected
in declines in the price of the shares of the Fund. Changes in prevailing rates
of interest in any of the countries in which a Fund is invested in fixed income
securities will likely affect the value of such holdings and thus the value of
Fund shares. Increased rates of interest which frequently accompany inflation
and/or a growing economy are likely to have a negative effect on the value of a
Fund's shares. In addition, changes in currency valuations will affect the price
of the shares of a Fund. History reflects both decreases and increases in stock
markets and interest rates in individual countries and throughout the world and
in currency valuations, and these may occur unpredictably in the future. The
Funds are not intended as a complete investment program.
FOREIGN INVESTMENTS. The Funds have the right to purchase securities in any
foreign country, developed or underdeveloped. Investors should consider
carefully the risks associated with investing in foreign securities, which are
in addition to the usual risks inherent in domestic investments. These risks are
often heightened for investments in developing markets. See "What Are the Funds'
Potential Risks?" in the SAI. There is the possibility of expropriation,
nationalization or confiscatory taxation, taxation of income earned in foreign
nations or other taxes imposed with respect to investments in foreign nations,
foreign exchange controls (which may include suspension of the ability to
transfer currency from a given country), foreign investment controls on daily
stock market movements, default in foreign government securities, political or
social instability, or diplomatic developments which could affect investments in
securities of issuers in foreign nations. Some countries may withhold portions
of interest and dividends at the source. In addition, in many countries there is
less publicly available information about issuers than is available in reports
about companies in the U.S. Foreign companies are not generally subject to
uniform accounting or financial reporting standards, and auditing practices and
requirements may not be comparable to those applicable to U.S. companies. The
Funds may encounter difficulties or be unable to vote proxies, exercise
shareholder rights, pursue legal remedies, and obtain judgments in foreign
courts.
As a non-fundamental policy, each Fund will limit its investments in Russian
securities to 5% of its total assets. Russian securities involve additional
significant risks, including political and social uncertainty (for example,
regional conflicts and risk of war), currency exchange rate volatility,
pervasiveness of corruption and crime in the Russian economic system, delays in
settling portfolio transactions and risk of loss arising out of Russia's system
of share registration and custody. Russia's system of share registration and
custody creates certain risks of loss (including the risk of total loss) that
are not normally associated with investments in other securities markets. These
risks and other risks associated with the Russia securities market are discussed
more fully in the SAI under the caption "What Are the Funds' Potential Risks?"
and investors should read this section in detail.
Brokerage commissions, custodial services, and other costs relating to
investment in foreign countries are generally more expensive than in the U.S.
Foreign securities markets have different clearance and settlement procedures
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Delays in settlement could result in temporary
periods when assets of a Fund are uninvested and no return is earned thereon.
The inability of a Fund to make intended security purchases due to settlement
problems could cause a Fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems could
result either in losses to a Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser.
In many foreign countries there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the U.S. There is an increased risk, therefore, of uninsured loss due to
lost, stolen, or counterfeit stock certificates. In addition, the foreign
securities markets of many of the countries in which the Funds may invest may
also be smaller, less liquid, and subject to greater price volatility than those
in the U.S. For a discussion of special risks, see "What Are the Funds'
Potential Risks?" in the SAI. Prior governmental approval of non-domestic
investments may be required under certain circumstances in some developing
countries, and the extent of foreign investment in domestic companies may be
subject to limitation in other developing countries. Foreign ownership
limitations also may be imposed by the charters of individual companies in
developing countries to prevent, among other concerns, violation of foreign
investment limitations. Repatriation of investment income, capital and proceeds
of sales by foreign investors may require governmental registration and/or
approval in some developing countries. The Funds could be adversely affected by
delays in or a refusal to grant any required governmental registration or
approval for such repatriation.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
On July 1, 1997, Hong Kong reverted to the sovereignty of China. As with any
major political transfer of power, this could result in political, social,
economic, market or other developments in Hong Kong, China or other countries
that could affect the value of a Fund's investments.
FOREIGN CURRENCY EXCHANGE. The Funds may effect currency exchange transactions
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign exchange
market. However, some price spread on currency exchange (to cover service
charges) will be incurred when a Fund converts assets from one currency to
another. Further, the Funds may be affected either unfavorably or favorably by
fluctuations in the relative rates of exchange between the currencies of
different nations. Cross-hedging transactions by the Funds involve the risk of
imperfect correlation between changes in the values of the currencies to which
such transactions relate and changes in the value of the currency or other asset
or liability that is the subject of the hedge.
SMALL COMPANY STOCKS. The Funds may purchase securities issued by companies with
comparatively smaller capitalization although the Funds do not emphasize smaller
companies. Securities of smaller capitalization companies involve additional
risks. For example, smaller capitalization issuers include relatively new or
unseasoned companies which are in their early stages of development, or small
companies positioned in new and emerging industries where the opportunity for
rapid growth is expected to be above average. Historically, smaller
capitalization stocks have been more volatile in price than larger
capitalization stocks. Among the reasons for the greater price volatility of
these securities are the less certain growth prospects of smaller firms, the
lower degree of liquidity in the markets for these stocks, and the greater
sensitivity of small companies to changing economic conditions. Besides
exhibiting greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks. Small company stocks may decline in
price as large company stocks rise, or rise in price as large company stocks
decline. You should therefore expect the shares of a fund that invests a
substantial portion of its assets in small company stocks to be more volatile
than the shares of a fund that invests solely in larger capitalization stocks.
EMERGING FIXED INCOME MARKETS SERIES--A NON-DIVERSIFIED FUND. Emerging Fixed
Income Markets Series is a "non-diversified" Fund, which means the Fund is not
limited in the proportion of its assets that may be invested in the securities
of a single issuer. However, Emerging Fixed Income Markets Series intends to
conduct its operations so as to qualify as a "regulated investment company" for
purposes of the Code, which generally will relieve the Fund of any liability for
Federal income tax to the extent its earnings are distributed to shareholders.
See "How Taxation Affects You and the Funds." To so qualify, among other
requirements, Emerging Fixed Income Markets Series will limit its investments so
that, at the close of each quarter of the taxable year, (i) not more than 25% of
the market value of the Fund's total assets will be invested in the securities
of a single issuer, and (ii) with respect to 50% of the market value of its
total assets, not more than 5% of the market value of its total assets will be
invested in the securities of a single issuer and the Fund will not own more
than 10% of the outstanding voting securities of a single issuer. Emerging Fixed
Income Markets Series' investments in U.S. government securities are not subject
to these limitations. Because Emerging Fixed Income Markets Series, as a
non-diversified fund, may invest in a smaller number of individual issuers than
a diversified investment company, and may be more susceptible to any single
economic, political or regulatory occurrence, an investment in the Fund may
present greater risk to an investor than an investment in a diversified fund.
HIGH-RISK DEBT SECURITIES. The Funds are authorized to invest in medium quality
or high-risk, lower quality debt securities (see "Types of Securities In Which
the Funds May Invest - Debt Securities"). High-risk, lower quality debt
securities, commonly known as junk bonds, are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation and may be in
default. Unrated debt securities are not necessarily of lower quality than rated
securities but they may not be attractive to as many buyers. Regardless of
rating levels, all debt securities considered for purchase (whether rated or
unrated) will be carefully analyzed by a Fund's Investment Manager to insure, to
the extent possible, that the planned investment is sound. The Funds may, from
time to time, purchase defaulted debt securities if, in the opinion of a Fund's
Investment Manager, the issuer may resume interest payments in the near future.
A Fund will not invest more than 10% of its total assets in defaulted debt
securities, which may be illiquid.
Although they may offer higher yields than do higher rated securities, low rated
and unrated debt securities generally involve greater volatility of price and
risk of principal and income, including the possibility of default by, or
bankruptcy of, the issuers of the securities. In addition, the markets in which
low rated and unrated debt securities are traded are more limited than those in
which higher rated securities are traded. The existence of limited markets for
particular securities may diminish a Fund's ability to sell the securities at
fair value either to meet redemption requests or to respond to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
Reduced secondary market liquidity for certain low rated or unrated debt
securities may also make it more difficult for a Fund to obtain accurate market
quotations for the purposes of valuing the Fund's portfolio. Market quotations
are generally available on many low rated or unrated securities only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of low rated debt securities,
especially in a thinly traded market. Analysis of the creditworthiness of
issuers of low rated debt securities may be more complex than for issuers of
higher rated securities, and the ability of a Fund to achieve its investment
objective may, to the extent of investment in low rated debt securities, be more
dependent upon such creditworthiness analysis than would be the case if the Fund
were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of low rated debt securities have been found to be less sensitive to
interest rate changes than higher rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. A projection of
an economic downturn or of a period of rising interest rates, for example, could
cause a decline in low rated debt securities prices because the advent of a
recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of low
rated debt securities defaults, a Fund may incur additional expenses to seek
recovery.
Based upon the monthly weighted average ratings of debt securities held by
Emerging Fixed Income Markets Series during the period from commencement of
operations (June 4,1997) to September 30, 1997, the Series had 100% of its total
assets invested in debt securities that received a rating from Moody's and/or S
& P, and 0% of its total assets invested in debt securities that were not so
rated. Emerging Fixed Income Markets Series had the following weighted average
percentages of its total assets invested in rated securities: AAA and/or Aaa:
10.6%, BBB and/or Baa: 3.6%, BB and/or Ba: 58.0%, and B: 27.8%.
LEVERAGE. Leveraging by means of borrowing may exaggerate the effect of any
increase or decrease in the value of portfolio securities on a Fund's net asset
value and money borrowed will be subject to interest and other costs (which may
include commitment fees and/or the cost of maintaining minimum average balances)
which may or may not exceed the income received from the securities purchased
with borrowed funds.
FUTURES CONTRACTS AND RELATED OPTIONS. Successful use of futures contracts and
related options is subject to special risk considerations. A liquid secondary
market for any futures or options contract may not be available when a futures
or options position is sought to be closed. In addition, there may be an
imperfect correlation between movements in the securities or foreign currency on
which the futures or options contract is based and movements in the securities
or currency in a Fund's portfolio. Successful use of futures or options
contracts is further dependent on the ability of a Fund's Investment Manager to
correctly predict movements in the securities or foreign currency markets and no
assurance can be given that its judgment will be correct. Successful use of
options on securities or stock indices is subject to similar risk
considerations. In addition, by writing covered call options, a Fund gives up
the opportunity, while the option is in effect, to profit from any price
increase in the underlying security above the option exercise price.
There are further risk factors, including possible losses through the holding of
securities in domestic and foreign custodian banks and depositories, described
elsewhere in this prospectus and in the SAI.
WHO MANAGES THE FUNDS?
THE BOARD. The Board oversees the management of the Funds and elects their
officers. The officers are responsible for the Funds' day-to-day operations.
INVESTMENT MANAGERS. The Investment Manager of Growth Series and Foreign Equity
Series is Templeton Investment Counsel, Inc. ("TICI"). The Investment Manager of
Emerging Markets Series is Templeton Asset Management Ltd. -Hong Kong Branch
("TAML"). The Investment Manager of Emerging Fixed Income Markets Series is
Templeton Global Bond Managers ("TGBM"), a division of TICI. The Investment
Managers manage the Funds' assets and make their investment decisions. TICI and
TAML are wholly owned by Resources, a publicly owned company engaged in the
financial services industry through its subsidiaries. Charles B. Johnson and
Rupert H. Johnson, Jr. are the principal shareholders of Resources. Together,
the Investment Managers and their affiliates manage over $212 billion in assets.
The Templeton organization has been investing globally since 1940. The
Investment Managers and their affiliates have offices in Argentina, Australia,
Bahamas, Canada, France, Germany, Hong Kong, India, Italy, Korea, Luxembourg,
Poland, Russia, Singapore, South Africa, Taiwan, United Kingdom, U.S., and
Vietnam. Please see "Investment Management and Other Services" and
"Miscellaneous Information" in the SAI for information on securities
transactions and a summary of the Funds' Code of Ethics.
PORTFOLIO MANAGEMENT. The lead portfolio manager for Growth Series and Foreign
Equity Series since 1996 is Gary P. Motyl, an executive vice president of TICI.
Mr. Motyl holds a BS degree in finance from Lehigh University and an MBA in
finance from Pace University. He is a Chartered Financial Analyst. Prior to
joining the Templeton organization in 1981, Mr. Motyl worked from 1974 to 1979
as a security analyst with Standard & Poor's Corporation and as a research
analyst and portfolio manager from 1979 to 1981 with Landmark First National
Bank, where he had responsibility for equity research and managed several
pension and profit-sharing plans. Mark Beveridge, Gary R. Clemons and Edward
Ramos exercise secondary portfolio management responsibilities with respect to
Growth Series and Foreign Equity Series. Mr. Beveridge is a senior vice
president of TICI. He holds a BBA in finance from the University of Miami. He is
a Chartered Financial Analyst and a Chartered Investment Counselor, and a member
of the South Florida Society of Financial Analysts and the International Society
of Financial Analysts. Before joining the Templeton organization in 1985 as a
security analyst, Mr. Beveridge was a principal with a financial accounting
software firm based in Miami, Florida. He is currently a portfolio manager with
research responsibilities for appliances and household durables, industrial
components, waste management and business and public services. He also has
market coverage of Argentina. Mr. Clemons is a senior vice president of TICI. He
holds a BS degree from the University of Nevada-Reno and an MBA with emphases in
finance and investment banking from the University of Wisconsin-Madison. He
joined TICI in 1993. Prior to that time he was a research analyst at Templeton
Quantitative Advisors, Inc. in New York, where he was also responsible for
management of a small capitalization fund. As a research analyst with Templeton,
Mr. Clemons has responsibility for the telecommunications industry and country
coverage of Columbia, Peru, Sweden and Norway. Mr. Ramos is vice president of
TICI. He holds a BS in finance from Lehigh University and an MBA with emphases
in finance, accounting and international business from The Columbia Graduate
School of Business. Prior to joining the Templeton organization in 1993, Mr.
Ramos worked as assistant to the chief investment officer of Prudential Equity
Management Association. He is currently a portfolio manager and research analyst
with responsibility for the merchandising, finance and brokerage service
industries as well as country coverage of Turkey, Egypt and Israel.
The lead portfolio manager for Emerging Markets Series since its inception is
Dr. J. Mark Mobius. Dr. Mobius is managing director of TAML. In addition, Dr.
Mobius serves as a director and/or officer of many of the funds in the Franklin
Templeton Group of Funds and many investment advisory subsidiaries of Resources.
He holds a BA in Fine Arts from Boston University, an MA in Mass Communications
from Boston University, and a Ph.D. in Economics from the Massachusetts
Institute of Technology. Prior to joining the Templeton organization in 1987,
Dr. Mobius was president of the International Investment Trust Company Limited
(investment manager of Taiwan R.O.C. Fund) (1986-1987) and a director of Vickers
da Costa, Hong Kong (an international securities firm) (1983-1986). Dr. Mobius
began working in Vickers da Costa's Hong Kong office in 1980 and moved to Taiwan
in 1983 to open the firm's office there and to direct operations in India,
Indonesia, Thailand, the Philippines, and Korea. Messrs. Allan Lam and Tom Wu
exercise secondary portfolio management responsibilities with respect to
Emerging Markets Series. Mr. Lam holds a BA in Accounting from Rutgers
University. Prior to joining the Templeton organization in 1987, he worked as an
auditor with two international accounting firms in Hong Kong: Deloitte Haskins &
Sells CPA and KPMG Peat Marwick CPA. Mr. Wu is a director of TAML. He holds a
BSS in economics from the University of Hong Kong and an MBA in Finance from the
University of Oregon. Prior to joining the Templeton organization in 1987, Mr.
Wu worked as an investment analyst, specializing in Hong Kong companies, with
Vickers da Costa.
The portfolio managers of the Emerging Fixed Income Markets Series since its
inception are Neil S. Devlin, Ronald A. Johnson and Umran Demirors. Mr. Devlin
is the chief investment officer and executive vice president of TGBM. He holds a
BA in economics and philosophy from Brandeis University and is a Chartered
Financial Analyst. Before joining the Templeton organization in 1987, he was a
portfolio manager and bond analyst with Constitution Capital Management of
Boston. Prior to that, Mr. Devlin was a bond trader and research analyst for the
Bank of New England. Mr. Devlin currently directs investment strategies in both
the developed and emerging fixed income markets. He also manages numerous
Franklin Templeton mutual funds as well as corporate pension accounts. Dr.
Johnson is vice president of TGBM. He holds a PhD and an MA in economics from
Stanford University, and an MBA in finance and a BA in economics from Adelphi
University. Prior to joining the Templeton organization in 1995, Dr. Johnson was
chief strategist and head of research for JPBT Advisers, Inc. in Miami. Before
joining JPBT Advisers Inc., he was chief economist and head of research at
Vestrust Asset Management Corporation in Miami. In addition, Dr. Johnson has
held several positions at the Federal Reserve Bank of New York, including chief
of the Domestic Financial Markets Division. Currently, Dr. Johnson co-directs
the fixed income research process and manages several emerging markets fixed
income portfolios. Dr. Demirors is vice president of TGBM. He holds a PhD and an
MA in economics from New York University, and a BA in economics from Bursa
Academy of Economics and Business Administration in Turkey. Prior to joining the
Templeton organization in 1996, Dr. Demirors was a principal and portfolio
manager for Socimer Advisory Inc. in New York. Before joining Socimer Advisory
Inc., Dr. Demirors was the head of research and strategy at Vestcor Partners
Group in Miami. Currently, Dr. Demirors co-directs the fixed income process and
manages several emerging markets fixed income portfolios.
MANAGEMENT FEES. During the fiscal year ended December 31, 1996, management fees
as a percentage of each Fund's average net assets were as follows: Foreign
Equity Series, 0.70%; Growth Series, 0.70%; Emerging Markets Series, 1.25%. The
Investment Managers voluntarily agreed to reduce their fees in order to limit
total expenses of the Funds. This voluntary agreement did not result in any
management fee reductions for the Funds. After April 30, 1998, these agreements
may end at any time upon notice to the Board. Total expenses of the Funds during
the fiscal year ended December 31, 1996, including fees paid to the Investment
Managers, were as follows: Foreign Equity Series, 0.87%; Growth Series, 0.87%;
Emerging Markets Series, 1.56%. Emerging Fixed Income Markets Series had not
commenced operations as of December 31, 1996.
Emerging Fixed Income Markets Series pays its own operating expenses. These
expenses include the Investment Manager's management fees; taxes, if any;
custodian, legal, and auditing fees; the fees and expenses of Board members who
are not members of, affiliated with, or interested persons of the Investment
Manager; fees of any personnel not affiliated with the Investment Manager;
insurance premiums; trade association dues; expenses of obtaining quotations for
calculating the Fund's Net Asset Value; and printing and other expenses that are
not expressly assumed by the Investment Manager. Under its management agreement,
the Fund pays the Investment Manager a management fee equal on an annual basis
to 0.70% of its average daily net assets. The fee is computed at the close of
business on the last business day of each month.
PORTFOLIO TRANSACTIONS. The Investment Managers try to obtain the best execution
on all transactions. If an Investment Manager believes more than one broker or
dealer can provide the best execution, it may consider research and related
services and the sale of shares of a Fund, as well as shares of other funds in
the Franklin Templeton Group of Funds, when selecting a broker or dealer. Please
see "How Do the Funds Buy Securities For their Portfolios?" in the SAI for more
information.
ADMINISTRATIVE SERVICES. FT Services (and, prior to October 1, 1996, Templeton
Global Investors, Inc.) provides certain administrative services and facilities
for the Funds. For its services, the Company pays the Administrator a monthly
fee equivalent on an annual basis to 0.15% of combined average daily net assets
of the Funds during the year, reduced to 0.135% of such net assets of $200
million, further reduced to 0.10% of such net assets in excess of $700 million,
and further reduced to 0.075% of such net assets in excess of $1,200 million.
Please see "Investment Management and Other Services" in the SAI for more
information.
HOW DO THE FUNDS MEASURE PERFORMANCE?
From time to time, the Funds advertise their performance. The most commonly used
measure of performance is total return. Total return is the change in value of
an investment over a given period. It assumes any dividends and capital gains
are reinvested.
The Funds' investment results will vary. Performance figures are always based on
past performance and do not guarantee future results. For a more detailed
description of how each Fund calculates its performance figures, please see "How
Do the Funds Measure Performance?" in the SAI.
HOW IS THE COMPANY ORGANIZED?
Each of the Funds, with the exception of the Emerging Fixed Income Markets
Series, is a diversified series of the Company, which is an open-end management
investment company, commonly called a mutual fund. The Emerging Fixed Income
Markets Series is a non-diversified series of the Company. The Company was
organized as a Maryland corporation on July 6, 1990, and is registered with the
SEC. Each share of the Funds has one vote. All shares have equal voting,
participation and liquidation rights. Shares of the Funds are considered Class I
shares for redemption, exchange and other purposes. In the future, the Funds may
offer additional classes of shares. As of September 30, 1997, Princeton
Theological Seminary owned 61% of the outstanding shares of Growth Series; and
Templeton Global Investors, Inc. owned 100% of the outstanding shares of
Emerging Fixed Income Markets Series.
The Funds have noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Funds do not intend to hold annual shareholder meetings. The Company or a
Fund may hold special meetings, however, for matters requiring shareholder
approval. The Funds will call a special meeting of shareholders for the purpose
of considering the removal of a Board member if requested in writing to do so by
shareholders holding at least 10% of the outstanding shares. In certain
circumstances, we are required to help you communicate with other shareholders
about the removal of a Board member.
HOW TAXATION AFFECTS YOU AND THE FUNDS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Funds and their shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
Each Fund is treated as a separate entity for federal income tax purposes. Each
Fund intends to elect to be treated and to qualify each year as a regulated
investment company under Subchapter M of the Code. A regulated investment
company generally is not subject to federal income tax on income and gains
distributed in a timely manner to its shareholders.
The Funds intend to distribute to shareholders substantially all of their net
investment income and net realized capital gains, which generally will be
taxable income or capital gains in their hands. If a Fund experiences losses
from certain investments or positions denominated in foreign currency, the
ordinary income distributable to you may decrease and amounts distributed to you
may constitute a non-taxable return of capital. If a distribution is treated as
a return of capital, your tax basis in your Fund shares will be reduced by a
like amount (to the extent of such basis), and any excess of the distribution
over your tax basis in your Fund shares will be treated as capital gain.
Similarly, certain foreign currency gains realized by a Fund may increase the
amount of ordinary income distributable to you.
Distributions declared in October, November or December to shareholders of
record on a date in such month and paid during the following January will be
treated as having been received by shareholders on December 31 in the year such
distributions were declared. The Funds will inform you each year of the amount
and nature of such income or gains. Sales or other dispositions of Fund shares
generally will give rise to taxable gain or loss.
<PAGE>
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
Shares of the Funds may be purchased at net asset value without a sales charge
through any broker that has a dealer agreement with Distributors, the Principal
Underwriter of the shares of the Funds, or directly from Distributors, upon
receipt by Distributors of an Institutional Account Application Form and
payment. Distributors may establish minimum requirements with respect to amount
of purchase.
MINIMUM INVESTMENT
There is a minimum initial investment of $5 million ($25 for subsequent
investments) for all investors except the
following:
(a) Employer stock, bonus, pension or profit-sharing plans that meet the
requirements for qualification under Section 401(k) of the Code, are
subject to no minimum initial investment if the number of employees is
equal to or greater than 200. Plans with less than 200 employees are
subject to a $1 million initial investment or an investment of $1 million
over the subsequent 13-month period in the Funds or any other funds in the
Franklin Templeton Group of Funds;
(b) Trust companies or bank trust departments exercising exclusive
discretionary investment authority over funds which are held in a
fiduciary, agency, advisory, custodial or similar capacity and over which
the trust companies, bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion are subject to a $1 million initial investment or an
investment of $1 million over the subsequent 13-month period in the Funds
or any other funds in the Franklin Templeton Group of Funds. Trust
companies and bank trust departments making such purchases may be required
to register as dealers pursuant to state law; or
(c) Government, municipalities and other tax-exempt entities that meet the
requirements for qualification under Section 501 of the Code are subject to
an initial investment in the Funds of $1 million.
(d) Service agents and broker dealers who have entered into an agreement with
Distributors may purchase shares of the Funds for clients of associated
registered investment advisors participating in fee-based programs until
May 31, 1997. After this date, additional purchases of a Fund may be made
only for clients who already own or hold shares of that Fund.
LETTER OF INTENT
An initial investment of less than $5 million may be made if the investor
executes a Letter of Intent ("Letter") which expresses the investor's intention
to invest at least $5 million within a 13-month period in the Franklin Templeton
Group of Funds, including at least $1 million in the Funds. See the
Institutional Account Application Form. The minimum initial investment under a
Letter is $1 million. If the investor does not invest at least $5 million in
shares of the Funds or other funds in the Franklin Templeton Group of Funds
within the 13-month period, the shares actually purchased will be involuntarily
redeemed and the proceeds sent the investor at the address of record. Any
redemptions made by the shareholder during the 13-month period will be
subtracted from the amount of the purchases for purposes of determining whether
the terms of the Letter have been completed.
GROUP PURCHASES
Any other investor, including a private investment vehicle such as a family
trust or foundation, who is a member of a qualified group may also purchase
shares of the Funds if the group as a whole meets the minimum initial investment
of $5 million, at least $1 million of which is invested or to be invested in the
Funds. The minimum initial investment is based upon the aggregate dollar value
of shares previously purchased and still owned by the group, plus the amount of
the current purchase. A "qualified group" is one which (i) has formalized
operations which have been in existence for more than six months, (ii) has a
purpose other than acquiring Fund shares, and (iii) satisfies uniform criteria,
such as centralized accounting and communications, which enable Distributors to
realize economies of scale in its costs of distributing shares.
PURCHASES BY TELEPHONE. Shares of the Funds may be purchased for existing
accounts by telephone, and paid for by wire, in the following manner:
1. Call Institutional Services at 1-800/321-8563 or 1-415/312-3600 to advise
of the intention to wire funds for investment. The call must be received
prior to 4:00 p.m. Eastern time to receive that day's price. Each Fund will
supply a wire control number for the investment. It is necessary to obtain
a new wire control number every time money is wired into an account in a
Fund. Wire control numbers are effective for one transaction only and
cannot be used more than once. Wired money which is not properly identified
with a currently effective wire control number will be returned to the bank
from which it was wired and will not be credited to the shareholder's
account.
2. On the next business day, wire funds to Bank of America, ABA Routing No.
121000358, for credit to account no. 1493304779. Be sure to include the
wire control number, the investor's Franklin or Templeton account number
and account registration. Wired funds received by the bank and reported by
the bank to the Funds by the close of the Federal Reserve Wire System are
available for credit on that day. Later wires are credited the following
business day. In order to maximize efficient Fund management, investors are
urged to place and wire their investments as early in the day as possible.
If the purchase is not for an existing account, identify the Fund in which the
investment is being made and send a
PURCHASES BY MAIL. Shares of the Funds may be purchased by mail, and paid for by
check, Federal Reserve draft or negotiable bank draft in the following manner:
1. For an initial investment, send a completed Institutional Account
Application Form to Institutional Services.
2. Make the check, Federal Reserve draft or negotiable bank draft payable to
the Fund in which the investment is being made.
3. Send the check, Federal Reserve draft or negotiable bank draft to
Institutional Services. Investments in good order and received by the Fund
prior to 4:00 p.m. Eastern time on any business day will receive the price
next calculated on that day. Items received after 4:00 p.m. Eastern time
will receive the price calculated on the next business day.
Orders mailed to Distributors by dealers or individual investors do not require
advance notice. Checks or negotiable bank drafts must be in U.S. currency drawn
on a commercial bank in the U.S. and, if over $100,000, may not be deemed to
have been received until the proceeds have been collected, unless the check is
certified or issued by such bank. Any subscription may be rejected by
Distributors or by the Company.
Shares of the Funds may be purchased with "in-kind" securities, if approved in
advance by the Company. Securities used to purchase Fund shares must be
appropriate investments for that Fund, consistent with its investment objective,
policies and limitations, as determined by the Company, and must have readily
available market quotations. The securities will be valued in accordance with
the Company's policy for calculating net asset value (as set forth above),
determined as of the close of the day on which the securities are received by
the Company in salable form. A prospective shareholder will receive shares of
the applicable Fund next computed after such receipt. To obtain the approval of
the Company, call Institutional Services. Investors who are affiliated persons
of the Company (as defined in the 1940 Act) may not purchase shares in this
manner in the absence of SEC approval.
If an investment in the Funds is made through a broker that has executed a
dealer agreement with respect to the Templeton Funds, Distributors or one of its
affiliates may make a payment out of its own resources to such dealer in an
amount not to exceed 0.25% of the amount invested. Dealers may contact
Institutional Services for additional information.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums. In general,
no sales charge applies, and in the case of an exchange into a Franklin
Templeton Fund that offers two classes of shares, a shareholder would receive
Class I shares, which generally bear lower Rule 12b-1 distribution fees than
Class II shares of the same fund.
METHOD STEPS TO FOLLOW
- -------------------------------------------------------------------------------
BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you're exchanging
- -------------------------------------------------------------------------------
BY PHONE Call Institutional Services at 1-800/321-8563
IF YOU DO NOT WANT THE ABILITY TO EXCHANGE BY PHONE TO
APPLY TO YOUR ACCOUNT, PLEASE LET US KNOW.
- -------------------------------------------------------------------------------
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically registered
money fund account requiring only one signature for all transactions. PLEASE
NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON YOUR
ACCOUNT(S). Additional procedures may apply. Please see "Transaction
Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you: (i) request an exchange
out of a Fund within two weeks of an earlier exchange request, (ii) exchange
shares out of a Fund more than twice in a calendar quarter, or (iii) exchange
shares equal to at least $5 million, or more than 1% of a Fund's net assets.
Shares under common ownership or control are combined for these limits. If
you exchange shares as described in this paragraph, you will be considered a
Market Timer. Each exchange by a Market Timer, if accepted, will be charged
$5.00. Some of our funds do not allow investments by Market Timers.
<PAGE>
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe a Fund would be harmed or unable
to invest effectively, or (ii) a Fund receives or anticipates simultaneous
orders that may significantly affect the Fund.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
HOW DO I SELL SHARES?
You may sell (redeem) your shares any time.
METHOD STEPS TO FOLLOW
- -------------------------------------------------------------------------------
BY MAIL 1. Send us written instructions signed by all
account owners. If you would like
your redemption proceeds wired to a bank
account, other than the bank account
previously designated, your instructions
should include:
o The Federal Reserve ABA routing number
o The name, address and telephone number of
the bank where you want the proceeds sent
o Your bank account number
o If you are using a savings and loan or
credit union, the name of the corresponding
bank and the account number
2. Include any outstanding share certificates
for the shares you are selling
3. Provide a signature guarantee
4. Corporate, partnership and trust accounts
may need to send additional documents.
Accounts under court jurisdiction may have
other requirements.
- -------------------------------------------------------------------------------
BY PHONE Call Institutional Services at 1-800/321-8563. If
(Only available if you have you would like your redemption proceeds wired to
completed and sent the a bank account, you must complete the
Institutional Telephone Institutional Telephone Privileges Agreement.
Privileges Agreement.)
Telephone requests will be accepted:
o If you have filed an Institutional Telephone
Privileges Agreement.
o If the redemption is to be sent to the address
of record.
o If the redemption is to be sent via previously
designated wiring instructions.
- ------------------------------------------------------------------------------
If you redeem your shares by mail or by phone, we will send your redemption
check within seven days after we receive your request in proper form. If you
would like the check to be sent to an address other than the address of record
or to be made payable to someone other than the registered owners on the
account, send us written instructions signed by all account owners, with a
signature guarantee. We are not able to pay out cash in the form of currency.
The wiring of redemption proceeds is a service that we make available whenever
possible for redemption requests of $1,000 or more. If we receive your request
in proper form before 4:00 p.m. Eastern time, your wire payment will be sent the
next business day. For requests received in proper form after 4:00 p.m. Eastern
time, the payment will be sent the second business day. By offering this service
to you, the Funds are not bound to meet any redemption request in less than the
seven day period prescribed by law. Neither the Funds nor their agents shall be
liable to you or any other person if, for any reason, a redemption request by
wire is not processed as described in this section.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUNDS?
Each Fund intends to pay a dividend at least annually representing substantially
all of the Fund's net investment income and any net realized capital gains.
Income dividends and capital gain distributions paid by a Fund, other than on
those shares whose owners keep them registered in the name of a broker-dealer,
are automatically reinvested on the payment date in whole or fractional shares
of the Fund at net asset value as of the ex-dividend date, unless a shareholder
makes a written request for payments in cash.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUNDS DO NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
IF YOU BUY SHARES SHORTLY BEFORE THE RECORD DATE, PLEASE KEEP IN MIND THAT ANY
DISTRIBUTION WILL LOWER THE VALUE OF THE FUND'S SHARES BY THE AMOUNT OF THE
DISTRIBUTION.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
HOW AND WHEN SHARES ARE PRICED
The Company is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the scheduled close of the NYSE, generally 4:00 p.m.
Eastern time. You can find the prior day's closing Net Asset Value and Offering
Price for each Fund in many newspapers.
To calculate Net Asset Value per share of each Fund, the assets of each Fund are
valued and totaled, liabilities are subtracted, and the balance, called net
assets, is divided by the number of shares of the Fund outstanding. Each Fund's
assets are valued as described under "How are Fund Shares Valued?" in the SAI.
THE PRICE WE USE WHEN YOU BUY OR SELL SHARES
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o Your account number,
o A description of the request,
o The dollar amount or number of shares,
o For exchanges, the name of the fund you're exchanging into
o A telephone number where we may reach you during the day, or in the evening
if preferred,
o The address the check is to be sent to if different from the address of
record, and
o The name of the payee if different from the registered owner(s).
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1. You wish to sell over $50,000 worth of shares,
2. You want the proceeds to be paid to someone other than the registered
owners,
3. You want the proceeds sent to an address other than the address of record,
or
4. We believe a signature guarantee would protect us against potential
claims based on the instructions received.
A signature guarantee verifies the authenticity of your signature. YOU SHOULD BE
ABLE TO OBTAIN A SIGNATURE GUARANTEE FROM A BANK, BROKER, CREDIT UNION, SAVINGS
ASSOCIATION, CLEARING AGENCY, OR SECURITIES EXCHANGE OR ASSOCIATION. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares. The certificates should be properly endorsed. You
can do this either by completing a share assignment form, and you should return
the certificate and assignment form in separate envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make. You may
also call Institutional Services for instructions.
When you call, we will request personal or other identifying information to
confirm that your instructions are genuine. We will also record calls. We will
not be liable for following instructions communicated by telephone if we
reasonably believe they are genuine. For your protection, we may delay a
transaction or not implement one if we are not reasonably satisfied that the
instructions are genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by telephone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. You may not sell shares or change
distribution options on Trust Company retirement plans by phone. While you may
exchange shares of Trust Company IRA and 403(b) retirement accounts by phone,
certain restrictions may be imposed on other retirement plans.
To obtain any required form or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, ALL owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account. The registration of your account should also include the name and
date of the trust.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account. A transfer letter of instructions is required in addition to the
following documentation:
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- -------------------------------------------------------------------------------
CORPORATION Corporation Resolution
- -------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
- -------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- -------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
TAX IDENTIFICATION NUMBER
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies a Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $1,000.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
INSTITUTIONAL ACCOUNTS
Institutional investors will be required to complete an institutional account
application. There may be additional methods of opening accounts and purchasing,
redeeming or exchanging shares of the Funds available for institutional
accounts. To obtain an institutional application or additional information
regarding institutional accounts, contact Institutional Services at
1-800/321-8563 Monday through Friday, from 9:00 a.m. - 8:00 p.m.
Eastern time.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, another location, or an address other than the address of
record, a signature guarantee is required.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
<PAGE>
TELEFACTS
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
and
o request duplicate statements and deposit slips for your account.
You will need the Funds' code numbers to use TeleFACTS. The Funds' codes are:
453, for Emerging Fixed Income Markets Series; 454, for Foreign Equity Series;
455, for Growth Series; and 456, for Emerging Markets Series.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including transfers from your account and dividend reinvestments. PLEASE
VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Funds will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of a Fund's financial reports or an interim quarterly
report.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, a Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 100 Fountain Parkway, PO Box 33030, St. Petersburg, FL 33733-8030. The Funds
and Distributors are also located at this address. TICI and TGBM are located at
500 East Broward Boulevard, Ft. Lauderdale, FL 33394-3091. TAML is located at
Two Exchange Square, Hong Kong. You may also contact us by phone at one of the
numbers listed below.
<TABLE>
<CAPTION>
HOURS OF OPERATION (EASTERN TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Institutional Services 1-800/321-8563 9:00 a.m. to 8:00 p.m.
Shareholder Services 1-800/632-2301 8:30 a.m. to 8:00 p.m.
Dealer Services 1-800/524-4040 8:30 a.m. to 8:00 p.m.
Fund Information 1-800/DIAL BEN 8:30 a.m. to 11:00 p.m.
(1-800/342-5236) 9:30 a.m. to 5:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 8:30 a.m. to 8:00 p.m.
TDD (hearing impaired) 1-800/851-0637 8:30 a.m. to 8:00 p.m.
</TABLE>
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
<PAGE>
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
BOARD - The Board of Directors of the Company
CD - Certificate of Deposit
CLASS I AND CLASS II - Certain funds in the Franklin Templeton Funds offer two
classes of shares, designated "Class I" and "Class II." The two classes have
proportionate interests in the same portfolio of investment securities. They
differ, however, primarily in their sales charge structures and Rule 12b-1
plans. Shares of the Funds are considered Class I shares for redemption,
exchange and other purposes.
CODE - Internal Revenue Code of 1986, as amended.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Funds' principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Directors."
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund.
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries.
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds and the Templeton Group of Funds.
FT SERVICES - Franklin Templeton Services, Inc., the Funds' administrator.
INVESTMENT MANAGER - A Fund's investment manager: Templeton Investment Counsel,
Inc. ("TICI") for Growth Series and Foreign Equity Series; Templeton Asset
Management Ltd. - Hong Kong Branch ("TAML") for Emerging Markets Series; and
Templeton Global Bond Managers ("TGBM"), a division of TICI, for Emerging Fixed
Income Markets Series.
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Funds'
shareholder servicing and transfer agent.
IRS - Internal Revenue Service.
LETTER - Letter of Intent
MARKET TIMER(S) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
MOODY'S - Moody's Investors Service, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation.
NYSE - New York Stock Exchange, Inc.
OFFERING PRICE - The public offering price is the Net Asset Value per share.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Ratings Service, a division of The McGraw-Hill
Companies, Inc.
SEC - U.S. Securities and Exchange Commission.
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Funds. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TELEFACTS - Franklin Templeton's automated customer servicing system.
TAML - Templeton Asset Management Ltd. - Hong Kong branch, the investment
manager for Emerging Markets Series.
TGBM - Templeton Global Bond Managers, the investment manager of Emerging Fixed
Income Markets Series, is a division of TICI.
TFTC - Templeton Funds Trust Company.
TICI - Templeton Investment Counsel, Inc., the investment manager of Growth
Series and Foreign Equity Series.
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States.
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Funds and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
<PAGE>
APPENDIX
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or maintenance of other terms of
the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from `AA' to `CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
<PAGE>
INSTRUCTIONS AND IMPORTANT NOTICE
SUBSTITUTE W-9 INSTRUCTIONS INFORMATION
GENERAL. Backup withholding is not an additional tax. Rather, the tax liability
of persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained from the IRS.
OBTAINING A NUMBER. If you do not have a Social Security Number/Taxpayer
Identification Number or you do not know your SSN/TIN, you must obtain Form SS-5
or Form SS-4 from your local Social Security or IRS office and apply for one. If
you have checked the "Awaiting TIN" box and signed the certification,
withholding will apply to payments relating to your account unless you provide a
certified TIN within 60 days.
WHAT SSN/TIN TO GIVE. Please refer to the following guidelines:
<TABLE>
<CAPTION>
ACCOUNT TYPE GIVE SSN OF ACCOUNT TYPE GIVE EMPLOYER ID # OF
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
o Individual Individual o Trust, Estate, or Trust, Estate, or
Pension Plan Pension Plan Trust
Trust
- ------------------------------------------------------------------------------------------------------------
o Joint Individual Owner who will o Corporation, Corporation,
be paying tax or Partnership, or Partnership, or
first-named other other organization
individual organization
- ------------------------------------------------------------------------------------------------------------
o Unif. Gift/ Minor o Broker nominee Broker nominee
Transfer to Minor
- ------------------------------------------------------------------------------------------------------------
o Sole Proprietor Owner of
business
- ------------------------------------------------------------------------------------------------------------
o Legal Guardian Ward, Minor,
or Incompetent
- ------------------------------------------------------------------------------------------------------------
</TABLE>
EXEMPT RECIPIENTS. Please provide your TIN and check the "Exempt Recipient" box
if you are an exempt recipient. Exempt recipients include:
A corporation A real estate investment trust
A financial institution A common trust fund operated
by a bank under section 584(a)
An organization exempt from An exempt charitable remainder
tax under section 501(a), or an trust or a non-exempt trust
individual retirement plan described in section 4947(a)(1)
A registered dealer in securities An entity registered at all times
or commodities registered in under the Investment Company
the U.S. or a U.S. possession Act of 1940
IRS PENALTIES. If you do not supply us with your SSN/TIN, you will be subject to
an IRS $50 penalty unless your failure is due to reasonable cause and not
willful neglect. If you fail to report certain income on your federal income tax
return, you will be treated as negligent and subject to an IRS 20% penalty on
any underpayment of tax attributable to such negligence, unless there was
reasonable cause for the resulting underpayment and you acted in good faith. If
you falsify information on this form or make any other false statement resulting
in no backup withholding on an account which should be subject to backup
withholding, you may be subject to an IRS $500 penalty and certain criminal
penalties including fines and imprisonment.
SUBSTITUTE W-8 INSTRUCTIONS INFORMATION
EXEMPT FOREIGN PERSON. Check the "Exempt Foreign Person" box if you qualify as a
non-resident alien or foreign entity that is not subject to certain U.S.
information return reporting or to backup withholding rules. Dividends paid to
your account may be subject to withholding of up to 30%. You are an "Exempt
Foreign Person" if you are not (1) a citizen or resident of the U.S., or (2) a
U.S. corporation, partnership, estate, or trust. In the case of an individual,
an "Exempt Foreign Person" is one who has been physically present in the U.S.
for less than 31 days during the current calendar year. An individual who is
physically present in the U.S. for at least 31 days during the current calendar
year will still be treated as an "Exempt Foreign Person," provided that the
total number of days physically present in the current calendar year and the two
preceding calendar years does not exceed 183 days (counting all of the days in
the current calendar year, only one-third of the days in the first preceding
calendar year and only one-sixth of the days in the second preceding calendar
year). In addition, lawful permanent residents or green card holders may not be
treated as "Exempt Foreign Persons." If you are an individual or an entity, you
must not now be, or at this time expect to be, engaged in a U.S. trade or
business with respect to which any gain derived from transactions effected by
the Fund/Payer during the calendar year is effectively connected to the U.S. (or
your transactions are exempt from U.S. taxes under a tax treaty).
PERMANENT ADDRESS. The Shareholder Application must contain your permanent
address if you are an "Exempt Foreign Person." If you are an individual, provide
your permanent address. If you are a partnership or corporation, provide the
address of your principal office. If you are an estate or trust, provide the
address of your permanent residence or the principal office of any fiduciary.
NOTICE OF CHANGE IN STATUS. If you become a U.S. citizen or resident after you
have provided certification of your foreign status, or if you cease to be an
"Exempt Foreign Person," you must notify the Fund/Payer within 30 days of your
change in status. Reporting will then begin on the account(s) listed, and backup
withholding may also begin unless you certify to the Fund/Payer that (1) the tax
payer identification number you have given is correct, and (2) the Internal
Revenue Service has not notified you that you are subject to backup withholding
because you failed to report certain interest or dividend income. You may use
Form W-9, "Payer's Request for Taxpayer Identification Number and
Certification," to make these certifications. If an account is no longer active,
you do not have to notify a Fund/Payer or broker of your change in status unless
you also have another account with the same Fund/Payer that is still active. If
you receive interest from more than one Fund/Payer or have dealings with more
than one broker or barter exchange, file a certificate with each. If you have
more than one account with the same Fund/Payer, the Fund/Payer may require you
to file a separate certificate for each account.
WHEN TO FILE. File these certifications with the Fund before a payment is made
to you, unless you have already done this in either of the two preceding
calendar years.
HOW OFTEN YOU MUST FILE. This certificate generally remains in effect for three
calendar years. A Fund/Payer or broker, however, may require that a new
certificate be filed each time a payment is made. On joint accounts for which
each joint owner is a foreign person, each must provide a certification of
foreign status.
<PAGE>
RESOLUTION SUPPORTING AUTHORITY OF CORPORATE/ASSOCIATION
SHAREHOLDER
- -------------------------------------------------------------------------------
INSTRUCTION:
It will be necessary for corporate/association shareholders to provide a
certified copy of a resolution or other certificate of authority supporting the
authority of designated officers of the corporation/association to issue oral
and written instruction on behalf of the corporation/association for the
purchase, sale (redemption), transfer and/or exchange of Franklin Templeton Fund
shares. You may use the following form of resolution or you may prefer to use
your own.
CERTIFIED COPY OF RESOLUTION (Corporation or Association)
The undersigned hereby certifies and affirms that he/she is the duly elected
of
Title Corporate Name
a organized under the laws of the State of
Type of Organization
and that the following is a true and correct copy
State
of a resolution adopted by the Board of Directors by unanimus written consent
(a copy of which is attached) or at a meeting duly called and held on ,19 .
"RESOLVED that
Name of Corporation/Association
(the "Company") is authorized to invest the Company's assets in one or more
investment companies (mutual funds) whose shares are distributed by
Franklin/Templeton Distributors, Inc. ("Distributors"). Each such
investment company, or series thereof, is referred to as a "Franklin
Templeton Fund" or "Fund."
FURTHER RESOLVED, that any (enter number) of the
following officers of this Company (acting alone, if one, or acting
together, if more than one) is/are authorized to issue oral or written
instructions (including the signing of drafts in the case of draft
accessed money fund accounts) on behalf of the Company for the purchase,
sale (redemption), transfer and/or exchange of Fund shares and to execute
any Fund application(s) and agreements pertaining to Fund shares
registered or to be registered to the Company (referred to as a "Company
Instruction"); and, that this authority shall continue until
Franklin/Templeton Investor Services, Inc. ("Investor Services") receives
written notice of revocation or amendment delivered by registered mail.
The Company's officers authorized to act on behalf of the Company under
this resolution are (enter officers titles only):
(referred to as the "Authorized Officers").
FURTHER RESOLVED, that Investor Services may rely on the most recently
provided incumbency certificate delivered by the Company to Investor
Services to identify those individuals who are the incumbent Authorized
Officers and that Investor Services shall have no independent duty to
determine if there has been any change in the individuals serving as
incumbent Authorized Officers.
FURTHER RESOLVED, that the Company ("Indemnitor") undertakes and agrees to
indemnify and hold harmless Distributors, each affiliate of Distributors,
each Franklin Templeton fund and their officers, employees and agents
(referred to hereafter collectively as the "Indemnitees") from and against
any and all liability, loss, suits, claims, costs, damages and expenses of
whatever amount and whatever nature (including without limitation
reasonable attorneys' fees, whether for consultation and advice or
representation in litigation at both the trial and appellate level) any
Indemnitee may sustain or incur by reason of, in consequence of, or
arising from or in connection with any action taken or not taken by an
Indemnitee in good faith reliance on a Company Instruction given as
authorized under this resolution."
The undersigned further certifies that the below named persons, whose signatures
appear opposite their names, are the incumbent Authorized Officers (as that term
is defined in the above resolution) who have been duly elected to the office
identified beside their name(s) (attach additional list if necessary).
X
Name/title (please print or type)
Signature
X
Name/title (please print or type)
Signature
X
Name/title (please print or type)
Signature
X
Name/title (please print or type)
Signature
Certified from minutes
X
- -------------------------------------------------------------------------------
Signature
- ------------------------------------------------------------------------------
Name/title (please print or type)
CORPORATE SEAL (if appropriate)
<PAGE>
FRANKLIN TEMPLETON GROUP OF FUNDS
LITERATURE REQUEST ~ Call 1-800/DIAL BEN (1-800/342-5236) today for a free
descriptive brochure and prospectus on any of the funds listed below. The
prospectus contains more complete information, including fees, charges and
expenses, and should be read carefully before investing or sending money.
<TABLE>
<S> <C> <C>
GLOBAL GROWTH Franklin Growth Fund FOR CORPORATIONS:
Franklin Global Health Care Fund Franklin MidCap Growth Fund
Franklin Templeton Japan Fund Franklin Small Cap Growth Fund Franklin Corporate Qualified
Templeton Developing Markets Trust Mutual Discovery Fund Dividend Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies GROWTH AND INCOME FRANKLIN FUNDS SEEKING TAX-FREE
Fund INCOME
Templeton Global Infrastructure Fund Franklin Asset Allocation Fund
Templeton Global Opportunities Trust Franklin Balance Sheet Investment Federal Intermediate-Term Tax-Free
Templeton Global Real Estate Fund Fund Income Fund
Templeton Global Smaller Companies Franklin Convertible Securities Fund Federal Tax-Free Income Fund
Fund Franklin Equity Income Fund High Yield Tax-Free Income Fund
Templeton Greater European Fund Franklin Income Fund Insured Tax-Free Income Fund
Templeton Growth Fund Franklin MicroCap Value Fund Puerto Rico Tax-Free Income Fund
Templeton Latin America Fund Franklin Natural Resources Fund Tax-Exempt Money Fund
Templeton Pacific Growth Fund Franklin Real Estate Securities Fund
Templeton World Fund Franklin Rising Dividends Fund FRANKLIN STATE-SPECIFIC FUNDS
Franklin Strategic Income Fund SEEKING TAX-FREE INCOME
GLOBAL GROWTH AND INCOME Franklin Utilities Fund
Franklin Value Fund Alabama
Franklin Global Utilities Fund Mutual Beacon Fund Arizona*
Franklin Templeton German Government Mutual Financial Services Fund Arkansas**
Bond Fund Mutual Qualified Fund California*
Franklin Templeton Global Currency Mutual Shares Fund Colorado
Fund Templeton American Trust, Inc. Connecticut
Mutual European Fund Florida*
Templeton Global Bond Fund FUND ALLOCATOR SERIES Georgia
Templeton Growth and Income Fund Hawaii**
Franklin Templeton Conservative Indiana
GLOBAL INCOME Target Fund Kentucky
Franklin Templeton Moderate Target Louisiana
Franklin Global Government Income Fund Maryland
Fund Franklin Templeton Growth Target Massachusetts***
Franklin Templeton Hard Currency Fund Fund Michigan*
Franklin Templeton High Income Minnesota***
Currency Fund INCOME Missouri
Templeton Americas Government New Jersey
Securities Fund Franklin Adjustable Rate Securities New York*
Fund North Carolina
GROWTH Franklin Adjustable U.S. Government Ohio***
Securities Fund Oregon
Franklin Biotechnology Discover Fund Franklin's AGE High Income Fund Pennsylvania
Franklin Blue Chip Fund Franklin Investment Grade Income Tennessee**
Franklin California Growth Fund Fund Texas
Franklin DynaTech Fund Franklin Short-Intermediate U.S. Virginia
Franklin Equity Fund Government Securities Fund Washington**
Franklin Gold Fund Franklin U.S.Government Securities
Fund VARIABLE ANNUITIES+
Franklin Money Fund
Franklin Federal Money Fund Franklin Valuemark*
Franklin Templeton Valuemark Income
Plus (an immediate annuity)
</TABLE>
*Two or more fund options available: long-term portfolio, intermediate-term
portfolio, a portfolio of insured municipal securities, and/or a high yield
portfolio (CA) and a money market portfolio (CA and NY). **The fund may invest
up to 100% of its assets in bonds that pay interest subject to the federal
alternative minimum tax. ***Portfolio of insured municipal securities. +Franklin
Valuemark and Franklin Templeton Valuemark Income Plus are issued by Allianz
Life Insurance Company of North America or by its wholly owned subsidiary,
Preferred Life Insurance Company of New York, and distributed by NALAC Financial
Plans, LLC.
FGF 09/97 Printed on recycled paper.
LOGO
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
TEMPLETON INSTITUTIONAL
FUNDS, INC.
STATEMENT OF
ADDITIONAL INFORMATION LOGO
100 Fountain Parkway
P.O. Box 33030
MAY 1, 1997 St. Petersburg, Fl 33733-8030
as amended November 1, 1997 1-800/DIAL BEN
Table of Contents Page
How do the Funds Invest their 2
Assets?..............................
What are the Funds' Potential Risks?. 6
Investment Restrictions.............. 9
Officers and Directors............... 10
Investment Management and Other
Services........................... 17
How do the Funds Buy Securities for
their Portfolios?.................. 18
How do I Buy, Sell and Exchange
Shares?............................ 19
How are Fund Shares Valued?.......... 21
Additional Information on
Distributions 21
and Taxes..........................
The Funds' Underwriter............... 25
How do the Funds Measure 25
Performance?.........................
Miscellaneous Information............ 28
Financial Statements................. 29
Useful Terms and Definitions......... 37
- --------------------------------------------------------------------------
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
- --------------------------------------------------------------------------
Templeton Institutional Funds, Inc. (the "Company") is an open-end management
investment company currently consisting of four separate series (the "Funds,"
individually a "Fund"). The Funds are the Growth Series, the Foreign Equity
Series, the Emerging Markets Series and the Emerging Fixed Income Markets
Series. All of the Funds, with the exception of the Emerging Fixed Income
Markets Series, are diversified series of the Company. The Emerging Fixed Income
Markets Series is a non-diversified series of the Company.
The Growth Series' investment objective is to achieve long-term capital
growth. The Fund seeks to achieve its objective by investing in stocks and
debt obligations of companies and governments of any nation.
The Foreign Equity Series' investment objective is to achieve long-term
capital growth. The Fund seeks to achieve its objective by investing in
stocks and debt obligations of companies and governments outside the U.S.
The Emerging Markets Series' investment objective is to achieve long-term
capital growth. The Fund seeks to achieve its objective by investing in
securities of issuers of countries having emerging markets.
The Emerging Fixed Income Markets Series' investment objective is to achieve
high total return. The Fund seeks to achieve its objective by investing
primarily in a portfolio of debt obligations of companies, governments and
government-related entities in emerging market countries.
The prospectus, dated May 1, 1997, as amended November 1, 1997, which may be
further amended from time to time, contains the basic information you should
know before investing in the Funds. For a free copy, call 1-800/DIAL BEN or
write the Company at the address shown.
This SAI is not a prospectus. It contains information in addition to and in more
detail than set forth in the prospectus. This SAI is intended to provide you
with additional information regarding the activities and operations of the
Funds, and should be read in conjunction with the prospectus.
Mutual funds, annuities, and other investment products:
o are not federally insured by the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other agency of the U.S. government;
o are not deposits or obligations of, or guaranteed or endorsed by, any
bank;
o are subject to investment risks, including the possible loss of
principal.
How do the Funds Invest their Assets?
The following provides more detailed information about some of the securities
the Funds may buy and their investment policies. You should read it together
with the section in the prospectus entitled "How do the Funds Invest their
Assets?"
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 S&P or Prime-1 by 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. The Funds may enter into 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 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 without shareholder approval, each Fund, with
the exception of Emerging Fixed Income Markets Series, 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 different 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 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.
The Funds investing in debt securities may accrue and report interest on high
yield bonds structured as zero coupon bonds or pay-in-kind securities as income
even though they receive 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 "Additional Information on Distributions
and Taxes"). 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.
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 U.S. 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 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 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.
Convertible Securities. As with a straight fixed-income security, a convertible
security tends to increase in market value when interest rates decline and
decrease in value when interest rates rise. Like a common stock, the value of a
convertible security also tends to increase as the market value of the
underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because its value can be influenced by both interest
rate and market movements, a convertible security is not as sensitive to
interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security,
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank. The issuer of a convertible
security may be important in determining the security's true value. This is
because the holder of a convertible security will have recourse only to the
issuer.
The Funds use the same criteria to rate a convertible debt security that it uses
to rate a more conventional debt security. A convertible preferred stock is
treated like a preferred stock for the Funds' financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
The Funds may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stock ("PERCS"), which
provide an investor with the opportunity to earn higher dividend income than is
available on a company's common stock. A PERCS is a preferred stock which
generally features a mandatory conversion date, as well as a capital
appreciation limit which is usually expressed in terms of a stated price. Most
PERCS expire three years from the date of issue, at which time they are
convertible into common stock of the issuer (PERCS are generally not convertible
into cash at maturity). Under a typical arrangement, if after three years the
issuer's common stock is trading at a price below that set by the capital
appreciation limit, each PERCS would convert to one share of common stock. If,
however, the issuer's common stock is trading at a price above that set by the
capital appreciation limit, the holder of the PERCS would receive less than one
full share of common stock. The amount of that fractional share of common stock
received by the PERCS holder is determined by dividing the price set by the
capital appreciation limit of the PERCS by the market price of the issuer's
common stock. PERCS can be called at any time prior to maturity, and hence do
not provide call protection. However if called early the issuer must pay a call
premium over the market price to the investor. This call premium declines at a
preset rate daily, up to the maturity date of the PERCS.
The Funds may also invest in other classes of enhanced convertible securities.
These include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities), and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all have the
following features: they are issued by the company, the common stock of which
will be received in the event the convertible preferred stock is converted;
unlike PERCS they do not have a capital appreciation limit; they seek to provide
the investor with high current income with some prospect of future capital
appreciation; they are typically issued with three or four-year maturities; they
typically have some built-in call protection for the first two to three years;
investors have the right to convert them into shares of common stock at a preset
conversion ratio or hold them until maturity; and, upon maturity, they will
necessarily convert into either cash or a specified number of shares of common
stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company whose common stock is to be acquired in the event the security
is converted or by a different issuer, such as an investment bank. These
securities may be identified by names such as ELKS (Equity Linked Securities) or
similar names. Typically they share most of the salient characteristics of an
enhanced convertible preferred stock but will be ranked as senior or
subordinated debt in the issuer's corporate structure according to the terms of
the debt indenture. There may be additional types of convertible securities not
specifically referred to herein which may be similar to those described above in
which a Fund may invest, consistent with its objectives and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to a Fund. The Funds may have difficulty disposing of
such securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and a Fund's ability to dispose of particular securities, when
necessary, to meet a Fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the creditworthiness of an issuer.
Reduced liquidity in the secondary market for certain securities may also make
it more difficult for a Fund to obtain market quotations based on actual trades
for purposes of valuing the Fund's portfolio. Each Fund, however, intends to
acquire liquid securities, though there can be no assurances that this will be
achieved.
What are the Funds' Potential Risks?
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 U.S.
Foreign companies are not generally subject to uniform accounting and financial
reporting standards, and auditing practices and requirements may not be
comparable to those applicable to U.S. companies. A Fund, 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 NYSE, and securities of some foreign
companies are less liquid and more volatile than securities of comparable U.S.
companies. Commission rates in foreign countries, which are generally fixed
rather than subject to negotiation as in the U.S., 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 U.S.
The economies of individual emerging market countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, the
economies of developing countries generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be adversely
affected by trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been and may continue
to be adversely affected by economic conditions in the countries with which they
trade.
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 U.S. 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 U.S. 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"). 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 to predict correctly movements in the
direction of the market, as to which no assurance can be given.
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 pursuant to Rule 17a-7
under the 1940 Act.
Access persons of the Franklin Templeton Group, as defined in SEC Rule 17(j)
under the 1940 Act, who are employees of Resources or their subsidiaries, are
permitted to engage in personal securities transaction subject to the following
general restrictions and procedures: (1) The trade must receive advance
clearance from a Compliance Officer and must be completed within 24 hours after
this clearance; (2) Copies of all brokerage confirmations must be sent to the
Compliance Officer and, within 10 days after the end of each calendar quarter, a
report of all securities transactions must be provided to the Compliance
Officer; (3) In addition to items (1) and (2), access persons involved in
preparing and making investment decisions must file annual reports of their
securities holdings each January and also inform the Compliance Officer (or
other designated personnel) if they own a security that is being considered for
a Fund or other client transaction or if they are recommending a security in
which they have an ownership interest for purchase or sale by a Fund or other
client.
Investment Restrictions
Each Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. Each Fund may 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 a Fund's Investment Manager, individually
owning more than 1/2 of 1% of the securities of such company, in the
aggregate own more than 5% of the securities of such company.
3. Purchase any security (other than obligations of the U.S. government, its
agencies or instrumentalities) if, as a result, as to 75% of the Fund's
total assets (i) more than 5% of the Fund's total assets would then be
invested in securities of any single issuer, or (ii) the Fund would then
own more than 10% of the voting securities of any single issuer;
provided, however, that this restriction does not apply to the Emerging
Fixed Income Markets 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 U.S. 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. Emerging Fixed Income
Markets Series may invest in debt instruments of all types consistent
with its investment objectives and policies.
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;
provided that this restriction does not apply to Emerging Fixed Income
Markets Series.
8. Invest more than 5% of its total assets in warrants, whether or not
listed on the NYSE or AMEX, including no more than 2% of its total assets
which may be invested in warrants that are not listed on those exchanges;
provided that this restriction does not apply to Emerging Fixed Income
Markets Series. Warrants acquired by a 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.(1)
10. Participate on a joint or a joint and several basis in any trading account
in securities; (See "What are the Funds' Potential Risks?" and "How do the
Funds Buy Securities for their Portfolios?" above as to transactions in the
same securities for a Fund and/or other mutual funds with the same or
affiliated advisers.)
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.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value of portfolio
securities or the amount of assets will not be considered a violation of any of
the foregoing restrictions.
(1) The SEC considers each foreign government to be a separate industry.
Officers and Directors
The Board has the responsibility for the overall management of the Company,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Company who are responsible for
administering the Funds' day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
<TABLE>
<CAPTION>
Positions and
Offices
Name, Address and Age with the Company Principal Occupation During the Past Five Years
<S> <C> <C>
HARRIS J. ASHTON Director Chairman of the board, president and chief
Metro Center executive officer of General Host Corporation
1 Station Place (nursery and craft centers); director of RBC
Stamford, Connecticut Holdings Inc. (a bank holding company) and
Age 65 Bar-S Foods (a meat packing company); and
director or trustee of 53 of the investment
companies in the Franklin Templeton Group of
Funds.
* NICHOLAS F. BRADY Director Chairman of Templeton Emerging Markets
The Bullitt House Investment Trust PLC; chairman of Templeton Latin
102 East Dover Street America Investment Trust PLC; chairman of
Easton, Maryland Darby Overseas Investments, Ltd. (an investment
Age 67 firm)(1994-present); chairman and director of
Templeton Central and Eastern
European Investment Company;
director of Amerada Hess
Corporation, Christiana
Companies, and the H.J. Heinz
Company; formerly, Secretary of
the U.S. Department of the
Treasury (1988-1993) and chairman
of the Board of Dillon, Reed &
Co., Inc. (investment banking)
prior to 1988; and director or
trustee of 23 of the investment
companies in the Franklin
Templeton Group of Funds.
FRANK J. CROTHERS Director President and chief executive officer of
P.O. Box N-3238 Atlantic Equipment & Power Ltd.; vice
Nassau, Bahamas chairman of Caribbean Utilities Co., Ltd.;
Age 53 president of Provo Power Corporation; director
of various other business and nonprofit
organizations; and director or trustee of 5
of the investment companies in the Franklin
Templeton Group of Funds.
S. JOSEPH FORTUNATO Director Member of the law firm of Pitney, Hardin,
200 Campus Drive Kipp & Szuch; director of General Host Corporation
Florham Park, New Jersey (nursery and craft centers); and director or
Age 65 trustee of 55 the investment companies in
the Franklin Templeton Group of Funds.
JOHN Wm. GALBRAITH Director President of Galbraith Properties, Inc.
360 Central Avenue (personal investment company); director of
Suite 1300 Gulf West Banks, Inc. (bank holding company)
St. Petersburg, Florida (1995-present), formerly, director of
Age 76 Mercantile Bank (1991-1995), vice chairman of
Templeton, Galbraith & Hansberger Ltd.
(1986-1992), and Chairman of Templeton Funds
Management, Inc. (1974-1991); and director or
trustee of 22 of the investment companies in
the Franklin Templeton Group of Funds.
ANDREW H. HINES, JR. Director Consultant for the Triangle Consulting Group;
150 Second Avenue N. executive-in-residence of Eckerd College
St. Petersburg, Florida (1991-present); formerly, chairman of the
Age 74 board and chief executive officer of Florida
Progress Corporation (1982-1990)
and director of various of its
subsidiaries; and director or
trustee of 24 of the investment
companies in the Franklin
Templeton Group of Funds.
Edith E. Holiday Director Director (1993-present) of Amerada Hess
3239 38th St., N.W. Corporation and Hercules Incorporated;
Washington, D.C. director of Beverly Enterprises, Inc.
Age 45 (1995-present) and H.J. Heinz Company (1994-
present); chairman (1995-present) and
trustee (1993-present) of National Child
Research Center; formerly, assistant to the
President of the U.S. and Secretary of the
Cabinet (1990-1993), general counsel to the
U.S. Treasury Department (1989-1990), and
counselor to the Secretary and Assistant
Secretary for Public Affairs and Public
Liaison - U.S. Treasury
Department (1988-1989); and
director or trustee of 16 of the
investment companies in the
Franklin Templeton Group of
Funds.
* CHARLES B. JOHNSON Chairman of the President, chief executive officer and
777 Mariners Island Blvd. Board and Vice director of Franklin Resources, Inc.;
San Mateo, California President chairman of the board and director of
Age 64 Franklin Advisers, Inc., Franklin Investment
Advisory Services, Inc., Franklin Advisory
Services, Inc. and Franklin
Templeton Distributors, Inc.; director of
Franklin/Templeton Investor Services, Inc.,
Franklin Templeton Services, Inc. and General
Host Corporation (nursery and craft centers);
and officer and/or director or trustee, as
the case may be, of most other subsidiaries of
Franklin Resources, Inc. and 54 of the
investment companies in the Franklin
Templeton Group of Funds.
BETTY P. KRAHMER Director Director or trustee of various civic
2201 Kentmere Parkway associations; formerly, economic analyst,
Wilmington, Delaware U.S. government; and director or trustee
Age 68 of 23 of the investment companies in the
Franklin Templeton Group of Funds.
GORDON S. MACKLIN Director Chairman of White River Corporation
8212 Burning Tree Road (financial services); director of Fund
Bethesda, Maryland America Enterprises Holdings, Inc., MCI
Age 69 Communications Corporation, CCC Information
Services Group, Inc. (information services),
MedImmune, Inc. (biotechnology), Shoppers
Express, Inc. (home shopping) and Spacehab,
Inc. (aerospace services); formerly,
chairman of Hambrecht and Quist Group;
director of H&Q Healthcare
Investors and president of the National
Association of Securities Dealers, Inc.; and
director or trustee of 50 of the investment
companies in the Franklin Templeton Group of
Funds.
FRED R. MILLSAPS Director Manager of personal investments (1978-
2665 N.E. 37th Drive present); director of various business
Fort Lauderdale, Florida and non-profit corporations; formerly,
Age 68 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 director or trustee of 24
of the investment companies in the Franklin
Templeton Group of Funds.
CONSTANTINE DEAN Director Physician, Lyford Cay Hospital (1987-present);
TSERETOPOULOS director of various non-profit corporations;
Lyford Cay Hospital formerly cardiology fellow, University of
P.O. Box N-7776 Maryland (1985- 1987) and internal medicine
Nassau, Bahamas intern, Greater Baltimore
Medical Center (1982-1985); and
director or trustee of 5 of the
investment companies in the
Franklin Templeton Group of Funds.
DONALD F. REED President Executive vice president of Templeton
4 King Street West Worldwide, Inc.; president of Templeton
Toronto, Ontario Investment Counsel, Inc.; president and chief
Canada executive officer of Templeton Management
Age 53 Limited; co-founder and director of
International Society of
Financial Analysts; chairman of
the Canadian Council of Financial
Analysts; and formerly, president
and director of Reed Monahan
Nicholishen Investment Counsel
(1982-1989).
HARMON E. BURNS Vice President Executive vice president, secretary and
777 Mariners Island Blvd. director of Franklin Resources, Inc.;
San Mateo, California executive vice president and director of Franklin
Age 52 Templeton Distributors, Inc. and Franklin
Templeton Services, Inc.; executive vice
president of Franklin Advisers, Inc.;
director of Franklin/Templeton Investor Services,
Inc.; and officer and/or director of other
subsidiaries of Franklin Resources, Inc.; and
officer and/or director or trustee, as the
case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and 58 of the
investment companies in the Franklin
Templeton Group of Funds.
RUPERT H. JOHNSON, JR. Vice President Executive vice president and director of
777 Mariners Island Blvd. Franklin Resources, Inc. and Franklin
San Mateo, California Templeton Distributors, Inc.; president and
Age 57 director of Franklin Advisers, Inc.; senior vice
president and director of
Franklin Advisory Services, Inc.
and Franklin Investment Advisory
Services, Investor Services,
Inc.; and officer and/or director
or trustee, as the case may be,
of most other subsidiaries of
Franklin Resources, Inc. and 58
of the investment companies in
the Franklin Templeton Group of
Funds.
DEBORAH R. GATZEK Vice President Senior vice president and general counsel of
777 Mariners Island Blvd. Franklin Resources, Inc.; senior vice
San Mateo, California president of Franklin Templeton Services, Inc.
Age 48 and Franklin Templeton Distributors, Inc.; vice
president of Franklin Advisers, Inc. and
Franklin Advisory Services, Inc.; chief legal
officer and chief operating officer of
Franklin Investment Advisory Services,Inc.and
officer of 58 of the investment companies in the
Franklin Templeton Group of Funds.
CHARLES E. JOHNSON Vice President Senior vice president and director of
500 East Broward Blvd. Franklin Resources, Inc.; senior vice president
Fort Lauderdale, Florida of Franklin Templeton Distributors, Inc.;
Age 41 president and director ofTempleton
Worldwide, Inc.; chief executive officer, chief
investment officer and director of Franklin
Institutional Services Corporation; chairman
and director of Templeton Investment Counsel,
Inc.; vice president of Franklin Advisers,
Inc.; officer and/or director of some of
the other subsidiaries of Franklin Resources,
Inc.; and officer and/or director or
trustee, as the case may be, of 37 of the
investment companies in the Franklin Templeton
Group.
MARK G. HOLOWESKO Vice President President and director of Templeton Global
Lyford Cay Advisors Limited; chief investment officer of
Nassau, Bahamas global equity research for Templeton
Age 37 Worldwide, Inc.; formerly, investment
administrator with RoyWest Trust Corporation
(Bahamas) Limited (1984-1985); and officer of
23 of the investment companies in the Franklin
Templeton Group of Funds.
MARTIN L. FLANAGAN Vice President Senior vice president and chief financial
777 Mariners Island Blvd. officer of Franklin Resources, Inc.; director
San Mateo, California and executive vice president of Templeton
Age 37 Worldwide, Inc.; director, executive vice
president and chief operating officer of
Templeton Investment Counsel, Inc.; senior
vice president and treasurer of Franklin
Advisers, Inc.; treasurer of Franklin
Advisory Services, Inc.; treasurer and
chief financial officer of
Franklin Investment Advisory Services, Inc.;
president of Franklin Templeton Services,
Inc.; senior vice president of Franklin/Templeton
Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of
58 of the investment companies in the Franklin
Templeton Group of Funds.
J. MARK MOBIUS Vice President Portfolio manager of various Templeton
Two Exchange Square advisory affiliates; managing director of Templeton
Suite 908 Asset Management Ltd.; formerly, president of
Hong Kong International Investment Trust Company
Age 61 Limited (investment manager of Taiwan R.O.C. Fund)
(1986-1987) and director of Vickers da Costa,
Hong Kong (1983-1986); and officer of 8 of the
investment companies in the Franklin
Templeton Group of Funds.
THOMAS LATTA Vice President Vice President of the Templeton Global Bond
500 East Broward Blvd. Managers, a division of Templeton Investment
Ft. Lauderdale, Florida Counsel, Inc., formerly, portfolio manager at
Age 37 Forester & Hairston (1988-1990) and
investment advisor at Merrill, Lynch, Pierce,
Fenner & Smith, Inc. (1981-1988).
JOHN R. KAY Vice President Vice president and treasurer of Templeton
500 East Broward Blvd. Worldwide, Inc.; assistant vice president of
Ft. Lauderdale, Florida Franklin Templeton Distributors, Inc.;
Age 57 formerly, vice president and controller of
the Keystone Group, Inc.; and officer
of 27 of the investment companies in
the Franklin Templeton Group of Funds.
ELIZABETH M. KNOBLOCK Vice President- General counsel, secretary and a senior vice
500 East Broward Blvd. Compliance president of Templeton Investment Counsel,
Ft. Lauderdale, Florida Inc.; senior vice president of Templeton
Age 42 Global Investors, Inc.; formerly, vice
president and associate general counsel of
Kidder Peabody & Co. Inc.(1989-1990), assistant
general counsel of Gruntal & Co., Inc. (1988),
vice president and associate general counsel of
Shearson Lehman Hutton Inc. (1988), vice
president and assistant general counsel of E.F.
Hutton & Co. Inc. (1986-1988), and special
counsel of the division of investment management
of the Securities and Exchange Commission
(1984-1986); and officer of 23 of the investment
companies in the Franklin Templeton Group of Funds.
JAMES R. BAIO Treasurer Certified public accountant; treasurer of
500 East Broward Blvd. Franklin Mutual Advisers, Inc.; senior vice
Ft. Lauderdale, Florida president of Templeton Worldwide, Inc.,
Age 43 Templeton Global Investors, Inc.and
Templeton Funds Trust Company; formerly,
senior tax manager with Ernst & Young
(certified public accountants) (1977-1989);
and treasurer of 24 of the investment
companies in the Franklin Templeton
Group of Funds.
BARBARA J. GREEN Secretary Senior vice president of Templeton Worldwide,
500 East Broward Blvd. Inc. and an officer of other subsidiaries of
Ft. Lauderdale, Florida Templeton Worldwide, Inc.; senior vice
Age 50 president of Templeton Global Investors,
Inc.; formerly, deputy director of the Division
of Investment Management, executive assistant
and senior advisor to the chairman, counsellor
to the chairman, special counsel and attorney
fellow, U.S. Securities and Exchange Commission
(1986-1995), attorney,Rogers & Wells, and judicial
clerk, U.S. District Court (District of
Massachusetts); and secretary of 23 of the
investment companies in the Franklin Templeton
Group of Funds.
</TABLE>
* Nicholas F. Brady and Charles B. Johnson are "interested persons" of the
Company under the 1940 Act, which limits the percentage of interested persons
that can comprise a fund's board. Charles B. Johnson is an interested person due
to his ownership interest in Resources. Mr. Brady's status as an interested
person results from his business affiliations with Resources and Templeton
Global Advisors Limited. Mr. Brady and Resources are both limited partners of
Darby Overseas Partners, L.P. ("Darby Overseas"). Mr. Brady established Darby
Overseas in February 1994, and is Chairman and 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. The remaining Board members of the Company are not interested persons (the
"independent members of the Board").
There are no family relationships between any of the directors.
The table above shows the officers and Board members who are affiliated with
Distributors and the Investment Managers. Nonaffiliated members of the Board and
Mr. Brady are currently paid an annual retainer and/or fees for attendance at
Board and committee meetings. Currently, the Company pays the nonaffiliated
Board members and Mr. Brady an annual retainer of $10,000, a fee of $800 per
Board meeting, and its portion of a flat fee of $2,000 for each audit committee
meeting and/or nominating and compensation committee meeting attended. All of
the nonaffiliated Board members also serve as directors, trustees or managing
general partners of other investment companies in the Franklin Templeton Group
of Funds. They may receive fees from these funds for their services. The
following table provides the total fees paid to nonaffiliated Board members and
Mr. Brady by the Company and by other funds in the Franklin Templeton Group of
Funds for the year ended December 31, 1996.
<TABLE>
<CAPTION>
Total Fees Number of Boards in
Total Fees Received from the the Franklin Templeton
Received from Franklin Templeton Group of Funds on
Name the Company Group of Funds Which Each Serves*
<S> <C> <C> <C>
Harris J. Ashton... $ 11,250 $ 339,592 53
Nicholas F. Brady.. 11,250 119,275 23
Frank J. Crothers.. 12,245 29,550 5
S. Joseph Fortunato 11,250 356,412 55
John Wm. Galbraith. 9,950 102,475 22
Andrew H. Hines, Jr. 12,067 130,525 24
Edith E. Holiday**. 2,650 15,450 16
Betty P. Krahmer... 11,250 119,275 23
Gordon S. Macklin.. 11,250 331,542 50
Fred R. Millsaps... 12,067 130,525 24
C.D. Tseretopoulos. 12,246 29,550 5
</TABLE>
* We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 58 registered investment companies, with approximately 169 U.S. based
funds or series.
** Ms. Holiday was elected to the Board on December 3, 1996.
Nonaffiliated members of the Board and Mr. Brady are reimbursed for expenses
incurred in connection with attending board meetings, paid pro rata by each fund
in the Franklin Templeton Group of Funds for which they serve as director,
trustee or managing general partner. No officer or Board member received any
other compensation, including pension or retirement benefits, directly or
indirectly from the Company or other funds in the Franklin Templeton Group of
Funds. Certain officers or Board members who are shareholders of Resources may
be deemed to receive indirect remuneration by virtue of their participation, if
any, in the fees paid to its subsidiaries.
As of September 30, 1997, the officers and Board members did not own of record
or beneficially any shares of the Funds.
Investment Management and Other Services
Investment Manager and Services Provided. The Investment Manager of Growth
Series and Foreign Equity Series is Templeton Investment Counsel, Inc. ("TICI").
The Investment Manager of Emerging Markets Series is Templeton Asset Management
Ltd. - Hong Kong branch ("TAML"). The Investment Manager of Emerging Fixed
Income Markets Series is the Templeton Global Bond Managers division of TICI
("TGBM") (collectively, the "Investment Managers"). The Investment Managers
provide investment research and portfolio management services, including the
selection of securities for the respective Funds to buy, hold or sell, and the
selection of brokers through whom the Funds' portfolio transactions are
executed. The Investment Managers' activities are subject to the review and
supervision of the Board to whom the Investment Managers render periodic reports
of the respective Fund's investment activities. The Investment Managers and
their officers, directors and employees are covered by fidelity insurance for
the protection of the Funds.
The Investment Managers and their affiliates act as investment managers to
numerous other investment companies and accounts. An Investment Manager may give
advice and take action with respect to any of the other funds it manages, or for
its own account, that may differ from action taken by the Investment Manager on
behalf of a Fund. Similarly, with respect to the Funds, the Investment Managers
are not obligated to recommend, buy or sell, or to refrain from recommending,
buying or selling any security that an Investment Manager and access persons, as
defined by the 1940 Act, may buy or sell for its or their own account or the
accounts of any other funds. The Investment Managers are not obligated to
refrain from investing in securities held by the Funds or other funds they
manage. Of course, any transactions for the accounts of the Investment Managers
and other access persons will be made in compliance with the Funds' Code of
Ethics. Please see "Miscellaneous Information - Summary of Code of Ethics."
Management Fees. Under their management agreements, the Funds pay the Investment
Managers management fees, computed at the close of business on the last business
day of each month. 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, 1996, 1995, and
1994, TICI received from Foreign Equity Series fees of $16,525,094, $9,916,869,
and $5,740,479, respectively. During the fiscal years ended December 31, 1996,
1995, and 1994, TICI received from Growth Series fees of $1,656,913, $1,469,015,
and $1,365,883, respectively. Emerging Markets Series pays TAML a monthly fee
equal on an annual basis to 1.25% of its average daily net assets during the
year. During the fiscal years ended December 31, 1996, 1995, and 1994, TAML
received from Emerging Markets Series fees of $15,676,692, $8,488,442, and
$6,669,935, respectively. Emerging Fixed Income Markets Series will pay TGBM a
monthly fee equal on an annual basis to 0.70% of its average daily net assets
during the year.
Management Agreements. The management agreements between the Company, on behalf
of each Fund, and the Investment Managers are in effect until April 30, 1998.
Each management agreement may continue in effect for successive annual periods
if its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of the relevant Fund's
outstanding voting securities, and in either event by a majority vote of the
Board members who are not parties to the management agreement or interested
persons of any such party (other than as members of the Board), cast in person
at a meeting called for that purpose. A management agreement may be terminated
without penalty at any time by the Board or by a vote of the holders of a
majority of the relevant Fund's outstanding voting securities, or by the
Investment Manager, on 60 days' written notice, and will automatically terminate
in the event of its assignment, as defined in the 1940 Act.
Administrative Services. FT Services provides certain administrative services
and facilities for the Funds. These include preparing and maintaining books,
records, and tax and financial reports, and monitoring compliance with
regulatory requirements.
FT Services is a wholly owned subsidiary of Resources.
Under its administration agreement, the Company pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Funds' average daily
net assets up to $200 million, 0.135% of average daily net assets of $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.75% of average daily net assets over $1.2. billion.
During the fiscal years ended December 31, 1996, 1995 and 1994, administration
fees were paid to FT Services (and, prior to October 1, 1996, to Templeton
Global Investors Inc.) totaling $2,117,449, $1,412,755, and $912,500,
respectively, for administrative services to Foreign Equity Series, $211,998,
$208,881, and $216,577, respectively, for administrative services to Growth
Series, and $1,127,833, $681,225, and $589,648, respectively, for administrative
services to Emerging Markets Series.
Shareholder Servicing Agent. Investor Services, a wholly owned subsidiary of
Resources, is the Funds' shareholder servicing agent and acts as the Funds'
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account.
Custodian. The Chase Manhattan Bank, at its principal office at MetroTech
Center, Brooklyn, New York, 11245, and at the offices of its branches and
agencies throughout the world, acts as custodian of the Funds' assets. The
custodian does not participate in decisions relating to the purchase and sale of
portfolio securities.
Auditors. McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, New York, 10017,
are the Funds' independent auditors. During the fiscal year ended December 31,
1996, their auditing services consisted of rendering an opinion on the financial
statements of Growth Series, Foreign Equity Series and Emerging Markets Series
included in the Funds' Annual Report to shareholders for the fiscal year ended
December, 1996, and review of the Funds' filings with the SEC.
How do the Funds Buy Securities for their Portfolios?
The selection of brokers and dealers to execute transactions in the Funds'
portfolios is made by the Investment Managers in accordance with criteria set
forth in the management agreements and any directions that the Board may give.
When placing a portfolio transaction, the Investment Managers seek to obtain
prompt execution of orders at the most favorable net price. When portfolio
transactions are done on a securities exchange, the amount of commission paid by
a Fund is negotiated between that Investment Manager and the broker executing
the transaction. The determination and evaluation of the reasonableness of the
brokerage commissions paid in connection with portfolio transactions are based
to a large degree on the professional opinions of the persons responsible for
the placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. The Investment Managers will
ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in the
opinion of an Investment Manager, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
In placing orders to effect transactions for a Fund, an Investment Manager may
pay to particular brokers commissions that are higher than another broker might
charge, if the Investment Manager determines in good faith that the amount of
commission paid is reasonable in relation to the value of the brokerage and
research services to be received, viewed in terms of the particular transaction
or the Investment Manager's overall responsibilities with respect to client
accounts for which it exercises investment discretion. Services received by the
Investment Managers may include, among other things, information relating to
particular companies, markets or countries, local, regional, national or
transnational economies, statistical data, quotations and other securities
pricing information and other information which provide lawful and appropriate
assistance to the Investment Managers in carrying out their investment advisory
responsibilities. The services received may not always be of direct benefit to
the Funds but must be of value to an Investment Manager in carrying out it
overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services received by the Investment Managers from broker-dealers
effecting transactions in portfolio securities. The allocation of transactions
in order to obtain additional research services permits the Investment Managers
to supplement their own research and analysis activities and to receive the
views and information of individuals and research staff of other securities
firms. As long as it is lawful and appropriate to do so, the Investment Managers
and their affiliates may use this research and data in their investment advisory
capacities with other clients. If the Company's officers are satisfied that the
best execution is obtained, the sale of Fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, may also be considered a factor
in the selection of broker-dealers to execute the Funds' portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when a Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of a Fund, any
portfolio securities tendered by the Fund will be tendered through Distributors
if it is legally permissible to do so. In turn, the next management fee payment
to that Fund's Investment Manager will be reduced by the amount of any fees
received by Distributors in cash, less any costs and expenses incurred in
connection with the tender.
If purchases or sales of securities of a Fund and one or more other investment
companies or clients supervised by an Investment Manager are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to all
by the Investment Manager, taking into account the respective sizes of the funds
and the amount of securities to be purchased or sold. In some cases this
procedure could have a detrimental effect on the price or volume of the security
so far as the Funds are concerned. In other cases it is possible that the
ability to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Funds.
During the fiscal years ended December 31, 1996, 1995, and 1994, Foreign Equity
Series paid brokerage commissions totaling $2,138,850, $2,779,325, and
$1,856,075, respectively. During the fiscal years ended December 31, 1996, 1995
and 1994, Growth Series paid brokerage commissions totaling $173,658, $302,096,
and $196,751, respectively. During the fiscal years ended December 31, 1996,
1995 and 1994, Emerging Markets Series paid brokerage commissions totaling
$3,832,003, $1,949,885, and $1,442,148, respectively.
As of December 31, 1996, the Funds did not own securities of their regular
broker-dealers.
How do I Buy, Sell and Exchange Shares?
Additional Information on Buying Shares
The Funds continuously offer their shares through Securities Dealers who have an
agreement with Distributors.
Securities laws of states where the Funds offer their shares may differ from
federal law. Banks and financial institutions that sell shares of the Funds may
be required by state law to register as Securities Dealers.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Funds we may impose a $10 charge against your account for each returned
item.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
Reinvestment Date. Shares acquired through the reinvestment of dividends will be
purchased at the Net Asset Value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
Additional Information on Exchanging Shares
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of a Fund under the exchange privilege, that Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Funds' general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with that Fund's particular investment
objective exist immediately. This money will then be withdrawn from the
short-term money market instruments and invested in portfolio securities in as
orderly a manner as is possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the prospectus.
Additional Information on Selling Shares
Systematic Withdrawal Plan. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by a Fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the prior business day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from a Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
A Fund may discontinue a systematic withdrawal plan by notifying you in writing
and will automatically discontinue a systematic withdrawal plan if all shares in
your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
Through Your Securities Dealer. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Funds in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
Redemptions in Kind. The Funds have committed themselves to pay in cash (by
check) all requests for redemption by any shareholder of record, limited in
amount, however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the Funds' net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the SEC. In the case of
redemption requests in excess of these amounts, the Board reserves the right to
make payments in whole or in part in securities or other assets of the Funds, in
case of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Funds. In these circumstances,
the securities distributed would be valued at the price used to compute the
pertinent Fund's net assets and you may incur brokerage fees in converting the
securities to cash. The Funds do not intend to redeem illiquid securities in
kind. If this happens, however, you may not be able to recover your investment
in a timely manner.
General Information
If dividend checks are returned to a Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Funds must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in any
other currency or (b) honor the transaction or make adjustments to your account
for the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
How are Fund Shares Valued?
We calculate the Net Asset Value per share as of the scheduled close of the
NYSE, generally 4:00 p.m. Eastern time, each day that the NYSE is open for
trading. As of the date of this SAI, the Company is informed that the NYSE
observes the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of each Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Over-the-counter
portfolio securities are valued within the range of the most recent quoted bid
and ask prices. Portfolio securities that are traded both in the
over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market as determined by the Investment
Managers.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
a Fund is its last sale price on the relevant exchange before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the scheduled close of trading
on the NYSE, if that is earlier. The value is then converted into its U.S.
dollar equivalent at the foreign exchange rate in effect at noon, New York time,
on the day the value of the foreign security is determined. If no sale is
reported at that time, the mean between the current bid and ask prices is used.
Occasionally events that affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and the
close of the exchange and will, therefore, not be reflected in the computation
of a Fund's Net Asset Value. If events materially affecting the values of these
foreign securities occur during this period, the securities will be valued in
accordance with procedures established by the Board.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
of the NYSE on each day that the NYSE is open. Trading in European or Far
Eastern securities generally, or in a particular country or countries, may not
take place on every NYSE business day. Furthermore, trading takes place in
various foreign markets on days that are not business days for the NYSE and on
which a Fund's Net Asset Value is not calculated. Thus, the calculation of a
Fund's Net Asset Value does not take place contemporaneously with the
determination of the prices of many of the portfolio securities used in the
calculation and, if events materially affecting the values of these foreign
securities occur, the securities will be valued at fair value as determined by
management and approved in good faith by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the Net Asset Value of a Fund's shares is determined as of such times.
Occasionally, events affecting the values of these securities may occur between
the times at which they are determined and the scheduled close of the NYSE that
will not be reflected in the computation of a Fund's Net Asset Value. If events
materially affecting the values of these securities occur during this period,
the securities will be valued at their fair value as determined in good faith by
the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/ or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Funds may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
Additional Information on Distributions and Taxes
Distributions
You may receive two types of distributions from the Fund:
1. Income dividends. A Fund receives income generally in the form of dividends,
interest and other income derived from its investments. This income, less the
expenses incurred in the Funds' opera- tions, is their net investment income
from which income dividends may be distributed. Thus, the amount of dividends
paid per share may vary with each distribution.
2. Capital gain distributions. A Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any capital loss carryforward or post October
loss deferral) may generally be made twice each year, once in December and once
following the end of the Fund's fiscal year. The Fund may adjust the timing of
these distributions for operational or other reasons.
Taxes
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 U.S. 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. The Board reserves the right not to maintain the qualification of a
Fund as a regulated investment company if it determines this course of action to
be beneficial to shareholders. In that case, the Fund will be subject to federal
and possibly state corporate taxes on its taxable income and gains, and
distributions to shareholders will be taxable to the extent of the Fund's
available earnings and profits.
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. It is anticipated that only a small
percentage (if any) of a Fund's distributions will 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 Emerging
Fixed Income Markets 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 Emerging
Fixed Income Markets Series as a regulated investment company might be affected.
The Emerging Fixed Income Markets Series intends to monitor developments in this
area. Certain requirements that must be met under the Code in order for the
Emerging Fixed Income Markets 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.
The Funds' Underwriter
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering for shares of the Funds. The
underwriting agreement with respect to a Fund will continue in effect for
successive annual periods if its continuance is specifically approved at least
annually by a vote of the Board or by a vote of the holders of a majority of
that Fund's outstanding voting securities, and in either event by a majority
vote of the Board members who are not parties to the underwriting agreement or
interested persons of any such party (other than as members of the Board), cast
in person at a meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may be terminated by
either party on 60 days' written notice.
Distributors pays the expenses of the distribution of the Funds' shares,
including advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The Funds pay the expenses of
preparing and printing amendments to their registration statements and
prospectuses (other than those necessitated by the activities of Distributors)
and of sending prospectuses to existing shareholders.
How do the Funds Measure Performance?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Funds be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return quotations used by the Funds are based on the
standardized methods of computing performance mandated by the SEC. If a Rule
12b-1 plan is adopted, performance figures reflect fees from the date of the
plan's implementation. An explanation of these and other methods used by the
Funds to compute or express performance follows. Regardless of the method used,
past performance does not guarantee future results, and is an indication of the
return to shareholders only for the limited historical period used.
Total Return
Average Annual Total Return. Average annual total return is determined by
finding the average annual rates of return over one-, five- and ten-year
periods, or fractional portion thereof, that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes income dividends and capital gain distributions are reinvested at Net
Asset Value. The quotation assumes the account was completely redeemed at the
end of each one-, five- and ten-year period and the deduction of all applicable
charges and fees. If a change is made to the sales charge structure, historical
performance information will be restated to reflect the maximum front-end sales
charge currently in effect.
The average annual total return of Growth Series for the one-year period ended
December 31, 1996 and for the period from commencement of operations on May 3,
1993 to December 31, 1996 was 22.57% and 15.72%, respectively. The average
annual total return of Foreign Equity Series for the one and five-year periods
ended December 31, 1996 and for the period from commencement of operations on
October 18, 1990 to December 31, 1996 was 21.58%, 12.73%, and 13.12%,
respectively. The average annual total return of Emerging Markets Series for the
one-year period ended December 31, 1996 and for the period from commencement of
operations on May 3, 1993 to December 31, 1996 was 18.86% and 9.25%
respectively. The aggregate total return of Emerging Fixed Income Markets Series
for the period from commencement of operations on June 4, 1997 to September 30,
1997 was 7.20%.
These figures were calculated according to the SEC formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of
$1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a
hypothetical $1,000 payment made at the
beginning of the one-, five- or
ten-year periods at the end of
the one-, five- or ten-year periods(or
fractional portion thereof)
Cumulative Total Return. Like average annual total return, cumulative total
return assumes income dividends and capital gain distributions are reinvested at
Net Asset Value. Cumulative total return, however, will be based on each Fund's
actual return for a specified period rather than on its average annual return
over one-, five- and ten-year periods, or fractional portion thereof. The
cumulative total return of Growth Series for the one-year period ended December
31, 1996 and for the period from commencement of operations on May 3, 1993 to
December 31, 1996 was 22.57% and 70.72%, respectively. The cumulative total
return of Foreign Equity Series for the one- and five-year periods ended
December 31, 1996 and for the period from commencement of operations on October
18, 1990 to December 31, 1996 was 21.58%, 82.07% and 114.82%, respectively. The
cumulative total return of Emerging Markets Series for the one-year period ended
December 31, 1996 and for the period from commencement of operations on May 3,
1993 to December 31, 1996 was 18.86% and 38.29%, respectively. The cumulative
total return of Emerging Fixed Income Markets Series for the period from
commencement of operations on June 4, 1997 to September 30, 1997 was 7.20%.
Volatility
Occasionally statistics may be used to show a Fund's volatility or risk.
Measures of volatility or risk are generally used to compare a Fund's Net Asset
Value or performance to a market index. One measure of volatility is beta. Beta
is the volatility of a fund relative to the total market, as represented by an
index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
Other Performance Quotations
Sales literature referring to the use of a Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Funds may include in advertising or sales material information relating to
investment objectives and performance results of funds belonging to the Franklin
Templeton Group of Funds. Resources is the parent company of the advisors and
underwriter of both the Franklin Group of Funds and Templeton Group of Funds.
Comparisons
To help you better evaluate how an investment in a Fund may satisfy your
investment objective, advertisements and other materials about the Funds may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples: (i)
unmanaged indices so that you 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, Inc., a widely used independent research firm that
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 a Fund. Unmanaged indices may assume the reinvestment of dividends
but generally do not reflect deductions for administrative and management costs
and expenses.
From time to time, the Funds and the Investment Managers may also refer to the
following information:
(a) 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.
(b) 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.
(c) 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.
(d) The geographic and industry distribution of each Fund's portfolio and top
ten holdings.
(e) 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.
(f) To assist investors in understanding the different returns and risk
characteristics of various investments, the Funds may show historical
returns of various investments and published indices (e.g., Ibbotson
Associates, Inc. Charts and Morgan Stanley EAFE -- Index).
(g) The major industries located in various jurisdictions as published by the
Morgan Stanley Index.
(h) Rankings by DALBAR Surveys, Inc. with respect to mutual fund shareholder
services.
(i) Allegorical stories illustrating the importance of persistent long-term
investing.
(j) The Funds' portfolio turnover rates and their rankings relative to
industry standards as published by Lipper Analytical Services, Inc. or
Morningstar, Inc.
(k) 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.
(l) The number of shareholders in the Funds or the aggregate number of
shareholders of the open-end investment companies in the Franklin Templeton
Group of Funds or the dollar amount of fund and private account assets under
management.
(m) Comparison of the characteristics of various emerging markets, including
population, financial and economic conditions.
(n) Quotations from the Templeton organization's founder, Sir John Templeton,*
advocating the virtues of diversification and long-term investing, including
the following:
o "Never follow the crowd. Superior performance is possible only if you
invest differently from the crowd."
o "Diversify by company, by industry and by country."
o "Always maintain a long-term perspective."
o "Invest for maximum total real return."
o "Invest -- don't trade or speculate."
o "Remain flexible and open-minded about types of investment."
o "Buy low."
o "When buying stocks, search for bargains among quality stocks."
o "Buy value, not market trends or the economic outlook."
o "Diversify. In stocks and bonds, as in much else, there is safety in
numbers."
o "Do your homework or hire wise experts to help you."
o "Aggressively monitor your investments."
o "Don't panic."
o "Learn from your mistakes."
o "Outperforming the market is a difficult task."
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."
* Sir John Templeton sold the Templeton organization to Resources in October,
1992 and resigned from the Board on April 16, 1995. He is no longer involved
with the investment management process.
From time to time, advertisements or information for the Funds may include a
discussion of certain attributes or benefits to be derived from an investment in
the Funds. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare a Fund's performances to the
return on CDs or other investments. You should be aware, however, that an
investment in a Fund involves the risk of fluctuation of principal value, a risk
generally not present in an investment in a CD issued by a bank. For example, as
the general level of interest rates rise, the value of a Fund's fixed-income
investments, if any, as well as the value of its shares that are based upon the
value of such portfolio investments, can be expected to decrease. Conversely,
when interest rates decrease, the value of the Funds' shares can be expected to
increase. CDs are frequently insured by an agency of the U.S. government. An
investment in the Fund is not insured by any federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Funds' portfolios, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Funds to calculate their figures. In
addition, there can be no assurance that the Funds will continue their
performance as compared to these other averages.
Miscellaneous Information
The Company is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 49 years and
now services more than 2.7 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Mutual Series Fund Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $215 billion in
assets under management for more than 5.4 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 119
U.S. based open-end investment companies to the public. Each Fund may identify
itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past nine years.
As of September 30, 1997, the principal shareholders of the Fund, beneficial or
of record, were as follows:
Name and Address Share Amount Percentage
GROWTH SERIES
Princeton Theological 12,418,619 61%
Seminary
P.O. Box 821
Princeton, NJ 08542-0803
Utah State Retirement 3,201,090 15%
Board Defined
Contribution Plan
540 East 200 South
Salt Lake City, UT
84102-2099
T. Rowe Price, Trustee 1,428,506 7%
FBO Honeywell
10090 Red Run Boulevard
Owings Mills, MD 21117
Peter Norton, Trustee 1,250,813 6%
Norton Family Trust
225 Arizona Avenue
Santa Monica, CA
90401-1210
EMERGING MARKETS
SERIES
New York State Common 22,520,748 13%
Retirement Fund
Alfred E. Smith State
Office Building
Albany, NY 12236
Charles Schwab & Co., 8,092,118 5%
Inc.
Special Custody Account
for the Exclusive
Benefit of Customers
101 Montgomery Street
San Francisco, CA 94104
EMERGING FIXED INCOME
MARKETS SERIES
Templeton Global 200,000 100%
Investors, Inc.
ATTN: Corporate Treasury
1850 Gateway Drive
San Mateo, CA 94404
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of the Company, no other person holds beneficially or of record
more than 5% of a Fund's outstanding shares.
In the event of disputes involving multiple claims of ownership or authority to
control your account, a Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
Summary of Code of Ethics. Employees of Resources or its subsidiaries who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed within 24 hours after clearance; (ii) copies of all brokerage
confirmations must be sent to a 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; and (iii) access persons involved in
preparing and making investment decisions must, in addition to (i) and (ii)
above, file annual reports of their securities holdings each January and 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.
Financial Statements
The audited financial statements contained in the Annual Report to shareholders
of Growth Series, Foreign Equity Series and Emerging Markets Series, for the
fiscal year ended December 31, 1996, including the auditors' report, are
incorporated herein by reference. The unaudited financial statements dated
September 30, 1997, for Emerging Fixed Income Markets Series are included
herewith.
<PAGE>
Emerging Fixed Income Markets Series
Financial Highlights
June 4, 1997
(commencement of
operations) to
September 30, 1997
(unaudited)
Per Share Operating Performance
(for a share outstanding throughout the period)
Net asset value, beginning of period.................. $ 10.00
Income from investment operations:
Net investment income............................ .21
Net realized and unrealized gain (loss).......... .51
Total from investment operations...................... .72
Net asset value, end of period........................ $ 10.72
Total Return(1)....................................... 7.20%
Ratios/supplemental data:
Net assets, end of period (000)....................... $ 2,144
Ratio of expenses to average net assets............... 6.42%(2)
Ratio of expenses, net of reimbursement, to average
net assets............................................ 1.25%(2)
Ratio of net investment income to average net assets.. 6.40%(2)
Portfolio turnover rate............................... 111.57%
(1) Not annualized for periods less than one year.
(2) Annualized.
See Notes to Financial Statements.
<PAGE>
Emerging Fixed Income Markets Series
Statement of Investments, September 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Principal
Amount* Value
<S> <C> <C>
Long Term Securities: 96.4%
Argentina: 16.5%
Republic of Argentina, 9.75%, 9/19/27.......... 250,000 $ 251,625
Republic of Argentina, 8.75%, 5/09/02.......... 100,000 101,650
-----------
353,275
Brazil: 13.7%
Brazil C-Bond, 8.00%, 4/15/14.................. 224,130 194,446
Government of Brazil, 10.125%, 5/15/27......... 100,000 100,274
----------
294,721
Bulgaria: 4.7%
Republic of Bulgaria, 6.562%, FRN, 7/28/11..... 125,000 100,938
Ecuador: 2.6%
Republic of Ecuador, 3.25%, FRN, 2/28/25....... 100,000 56,125
Mexico: 27.7%
Banco Nacional de Comercio Exterior,7.25%,2/02/04. 100,000 95,063
United Mexican States, 6.25%, 12/31/19......... 600,000 498,000
-----------
593,063
Poland: 4.6%
Government of Poland, 6.937% FRN, 10/27/24..... 100,000 98,100
Russia: 4.9%
Ministry of Finance of Russia,10.00%,6/26/07,144A 100,000 106,100
Turkey: 7.2%
Republic of Turkey, 10.00%, 9/19/97, 144A...... 150,000 155,250
Venezuela: 14.5%
Republic of Venezuela, 9.25%, 9/15/27.......... 325,000 309,968
-----------
Total Long Term Securities 96.4%(Cost $1,985,497).. 2,067,540
Other Assets, less liabilities: 3.6%............. 76,795
Total Net Assets: 100.0%......................... $2,144,335
</TABLE>
* Securities traded in U.S. dollars.
See Notes to Financial Statements.
<PAGE>
Emerging Fixed Income Markets Series
Financial Statements
Statement of Assets and Liabilities
September 30, 1997 (unaudited)
<TABLE>
<CAPTION>
<S> <C>
Assets:
Investments in securities, at value (identified cost $1,995,497) $ 2,067,540
Cash.................................................... 8,786
Receivables:
Investment securities sold........................... 163,375
Dividends and interest............................... 40,910
From affiliates...................................... 17,507
Other assets............................................ 5,779
-----------
Total assets.................................... 2,303,897
===========
Liabilities:
Payables for investment securities purchased............ 159,562
------------
Total liabilities............................... 159,562
------------
Net assets, at value...................................... $ 2,144,335
===========
Net assets consist of:
Undistributed net investment income..................... 42,725
Net unrealized appreciation............................. 75,856
Undistributed net realized gain......................... 25,754
Capital shares.......................................... 2,000,000
-----------
Net assets, at value...................................... $ 2,144,335
===========
Shares outstanding........................................ 200,000
===========
Net asset value per share ($2,144,335/200,000shares outstanding) $ 10.72
===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
Emerging Fixed Income Markets Series
Financial Statements (cont.)
Statement of Operations
for the period June 4, 1997 through September 30, 1997 (unaudited)
Interest income $ 51,063
Expenses:
Management fees (Note 3).................. 581
Administrative fees (Note 3).............. 4,673
Custodian fees............................ 325
Reports to shareholders................... 200
Audit fees................................ 7,000
Registration and filing fees.............. 28,876
Directors' fees and expenses.............. 200
Legal fees................................ 300
Transfer agent............................ 200
Other..................................... 500
----------
Total expenses.................... 42,855
Less expenses waived...................... (34,517)
-----------
Total expenses less fees waived... 8,338
--------
Net investment income............. 42,725
--------
Realized and unrealized gains:
Net realized gain on investment........... 25,754
Net unrealized appreciation on investments 75,856
--------
Net realized and unrealized gain.. 101,610
--------
Net increase in net assets resulting from operations $ 144,335
=========
See Notes to Financial Statements.
<PAGE>
Emerging Fixed Income Markets Series
Financial Statements (cont.)
Statements of Changes in Net Assets
Period from
June 4, 1997
(commencement
of operations) to
September 30, 1997
(unaudited)
------------------
Increase (decrease) in net assets:
Operations:
Net investment income.......................... $ 42,725
Net realized gain on investments............... 25,754
Net unrealized appreciation.................... 75,856
----------
Net increase in net assets resulting from operations. 144,335
Capital share transactions (Note 2)............... 2,000,000
----------
Net increase in net assets................ 2,144,335
Net assets:
Beginning of period............................... --
End of period..................................... $2,144,335
==========
See Notes to Financial Statements.
<PAGE>
Emerging Fixed Income Markets Series
Notes to Financial Statements (unaudited)
1. Organization and Significant Accounting Policies
Emerging Fixed Income Markets Series (the Fund) is a separate, non-diversified
series of Templeton Institutional Funds, Inc. (the Company), which is an
open-end investment company registered under the Investment Company Act of 1940.
The Fund seeks high total return, by investing primarily in a portfolio of debt
obligations of companies, governments and government related entities in
emerging market countries. The following summarizes the Fund's significant
accounting policies.
A. Security Valuation
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Directors.
B. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the rate of exchange of
such currencies against U.S. dollars on the date of valuation. Purchases and
sales of securities and income items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. When the Fund purchases or sells foreign securities it will customarily
enter into a foreign exchange contract to minimize foreign exchange risk from
the trade date to the settlement date of such transactions.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, the differences between the recorded amounts
of dividends, interest, and foreign withholding taxes, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
C. Income Taxes
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute substantially all of its taxable income.
D. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
E. Accounting Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
F. Securities Issued on a When-Issued or Delayed Basis
The Fund may trade securities on a when-issued or delayed basis, with payment
and delivery scheduled for a future date. These transactions are subject to
market fluctuations and are subject to the risk that the value at delivery may
be more or less than the trade date purchase price. Although the Fund will
generally purchase these securities with the intention of acquiring such
securities, it may sell such securities before the settlement date.
Included in the statement of assets and liabilities as of September 30, 1997 are
receivables for investments securities sold and payables for investments
securities purchased of $163,375 and $159,562, respectively, related to the sale
and purchase of Russian when-issued securities. The realization of these
receivables and payables are subject to the risk that such securities may never
be issued. Included in net unrealized gains on investments is $3,813 which
related to positions sold as of September 30, 1997. In the event these
securities are not issued, such gains will not be realized.
2. Capital Stock
At September 30, 1997, there were 700 million shares authorized ($0.01 par
value) of which 70 million shares have been classified as Fund shares.
Transactions in the Fund's shares were as follows:
For the period
June 4, 1997 through
September 30, 1997
Shares Amount
--------- -----------
Shares sold. 200,000 $2,000,000
======== ==========
Net increase 200,000 $2,000,000
======= ==========
Templeton Global Investors, Inc., a subsidiary of Franklin Resources, is the
record owner of 100% of the outstanding Fund shares as of September 30, 1997.
3. Transactions with Affiliates and Related Parties
Certain officers of the Fund are also directors or officers of Templeton
Investment Counsel, Inc. (TICI), Franklin Templeton Services, Inc. (FT Services)
Franklin/Templeton Distributors, Inc. (Distributors), and Franklin/Templeton
Investor Services, Inc. (Investor Services), the Fund's investment manager,
administrative manager, principal underwriter and transfer agent, respectively.
The Fund pays an investment management fee to TICI of 0.70% per year of the
average daily net assets of the Fund. The Fund pays its allocated share of an
administrative fee to FT Services based on the Company's aggregate average daily
net assets as follows:
Annualized
Fee Rate Average Daily Net Assets
---------- -------------------------
0.15% First $200 million
0.135% Over $200 million, up to and
including $700 million
0.10% Over $700 million, up to and
including $1.2 billion
0.075% Over $1.2 billion
TICI and FT Services agreed in advance to limit total expenses of the Fund to an
annual rate of 1.25% of average daily net assets
through April 30, 1998.
4. Investment Transactions
Purchases and sales of securities (excluding short-term securities) for the
period ended September 30, 1997, aggregated $3,968,894 and $2,026,478,
respectively.
5. Income Taxes
The cost of securities for federal income tax purpose is the same as that shown
in the Statement of Investments. At September 30, 1997, the net unrealized
appreciation based on cost of investments for income tax purposes was $75,856.
Useful Terms and Definitions
1940 Act - Investment Company Act of 1940, as amended
AMEX - American Stock Exchange
Board - The Board of Directors of the Company
CD - Certificate of Deposit
CFTC - Commodity Futures Trading Commission
Class I and Class II - Certain funds in the Franklin Templeton Funds offer two
classes of shares, designated "Class I" and "Class II." The two classes have
proportionate interests in the same portfolio of investment securities. They
differ, however, primarily in their sales charge structures and Rule 12b-1
plans. Shares of the Funds are considered Class I shares for redemption,
exchange and other purposes.
Code - Internal Revenue Code of 1986, as amended
Company - Templeton Institutional Funds, Inc., an open-end management investment
company, currently consisting of four separate series: Growth Series, Foreign
Equity Series, Emerging Markets Series and Emerging Fixed Income Markets Series.
Distributors - Franklin/Templeton Distributors, Inc., the Funds' principal
underwriter
Franklin Templeton Funds - The U.S. registered funds in the Franklin Group of
Funds(R) and the Templeton Group of Funds except Franklin Valuemark Funds,
Franklin Government Securities Trust, Templeton Capital Accumulator Fund, Inc.,
Templeton Variable Annuity Fund, and Templeton Variable Products Series Fund.
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Franklin Templeton Group of Funds - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton
Group of Funds.
FT Services - Franklin Templeton Services, Inc., the Funds' administrator.
Funds - The four separate series of the Company: Growth Series, Foreign Equity
Series, Emerging Markets Series and Emerging Fixed Income Markets Series.
Investment Manager - A Fund's investment manager: Templeton Investment Counsel,
Inc. ("TICI") for Growth Series and Foreign Equity Series; Templeton Asset
Management Ltd. - Hong Kong Branch ("TAML") for Emerging Markets Series; and
Templeton Global Bond Managers ("TGBM"), a division of TICI, for Emerging Fixed
Income Markets Series.
Investor Services - Franklin/Templeton Investor Services, Inc., the Funds'
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
Moody's - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
Prospectus - The prospectus for the Funds dated May 1, 1997, as amended November
1, 1997, which may be further amended from time to time
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Ratings Service, a division of The McGraw-Hill
Companies, Inc.
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution which, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Funds. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TGBM - Templeton Global Bond Managers, a division of TICI, is the Investment
Manager for the Emerging Fixed Income Markets Series.
TAML - Templeton Asset Management Ltd. - Hong Kong branch is the Investment
Manager for the Emerging Markets Series.
TICI - Templeton Investment Counsel, Inc. is the Investment Manager for the
Growth Series and Foreign Equity Series.
U.S. - U.S.
We/Our/Us - Unless a different meaning is indicated by the context, these terms
refer to the Funds and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
(1) Audited Financial Statements filed in Part B.
Incorporated by reference to 1996 Annual Reports to
Shareholders of Growth Series, Foreign Equity Series,
and Emerging Markets Series:
Independent Auditor's Report as of December 31, 1996
Statement of Assets and Liabilities as of December
31, 1996 Statement of Operations for fiscal period
ended December 31, 1996 Statement of Changes in Net
Assets for the years ended December 31, 1996 and 1995
Portfolio of Investments as of December 31, 1996
Notes to Financial Statements
(2) Unaudited Finanical Statements filed in Part B.
Incorporated in the Statement of Additional Information:
Emerging Fixed Income Markets Series
Financial Highlights for the period June 4, 1997 through
September 30, 1997
Statement of Investments as of September 30, 1997
Statement of Assets and Liabilities as of September 30, 1997
Statement of Operations for fiscal period June 4, 1997 through
September 30, 1997
Statement of Changes in Net Assets for the period June 4, 1997
through September 30, 1997
Notes to Financial Statements
(b) EXHIBITS
(1) (a) Articles of Incorporation***
(b) Articles of Amendment dated January 11,1993***
(c) Articles Supplementary dated January 11, 1993***
(d) Articles Supplementary dated April 28, 1993***
(e) Articles Supplementary dated July 1, 1993***
(f) Articles Supplementary dated September 30, 1993***
(g) Articles Supplementary dated March 1, 1994****
(h) Articles Supplementary dated January 5,1995****
(i) Articles Supplementary dated January 17, 1996***
(j) Articles Supplementary dated April 15, 1996***
(k) Articles Supplementary dated December 27, 1996*
(l) Articles Supplementary dated April 10, 1997*
(2) By-Laws*
(3) Not Applicable
(4) Specimen Security*****
(5) (a) Amended and Restated Investment Management Agreement for
Foreign Equity Series***
(b) Amended and Restated Investment Management Agreement for
Growth Series***
(c) Amended and Restated Investment Management Agreement for
Emerging Markets Series***
(d)Form of Investment Management Agreement for
Emerging Fixed Income Markets Series**
(6) Form of Amended and Restated Distribution Agreement**
(7) Not Applicable
(8) Form of Amended and Restated Custody Agreement**
(9)(a)Form of Amended and Restated Transfer Agent Agreement*
(b Form of Amended and Restated Fund Administration
Agreement**
(10)Opinion and Consent of Counsel--filed with Rule 24f-2
Notice on February 27, 1997
(11) Consent of independent public accountants
(12) Not Applicable
(13) Letter concerning initial capital***
(14) Not Applicable
(15) Not Applicable
(16) Schedule showing computation of performance quotations
provided in response to Item 22****
(27) Financial Data Schedules
- ---------------------
* Filed with Post-Effective Amendment No. 11 to the Registration
Statement on May 1, 1997
** Filed with Post-Effective Amendment No. 10 to the Registration
Statement on February 14, 1997
*** Filed with Post-Effective Amendment No. 9 to the Registration
Statement on April 28, 1996
**** Filed with Post-Effective Amendment No. 8 to the Registration
Statement on May 1, 1995.
***** Filed with Pre-Effective Amendment No. 3 to the Registration
Statement on October 17, 1990.
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 26. NUMBER OF RECORD HOLDERS
<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD HOLDERS
<S> <C>
Growth Series
Class of Common Shares 25 as of September 30, 1997
Foreign Equity Series
Class of Common Shares 916 as of September 30, 1997
Emerging Markets Series
Class of Common Shares 461 as of September 30, 1997
Emerging Fixed Income Markets Series
Class of Common Shares 1 as of September 30, 1997
</TABLE>
ITEM 27. INDEMNIFICATION.
Reference is made to Articles Eight and Eleven of the Registrant's
Articles of Incorporation.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant by the Registrant pursuant to
the Articles of Incorporation or otherwise, the Registrant is aware
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and,
therefore, is unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by directors, officers or
controlling persons of the Registrant in connection with he
successful defense of any act, suit or proceeding) is asserted by such
directors, officers or controlling persons in connection with the
shares being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such ndemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issues.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER AND ITS
OFFICERS AND DIRECTORS
The business and other connections of Registrant's Investment Managers
are described in Part B of this Registration Statement.
For information relating to the Investment Managers' officers and
directors, reference is made to Forms ADV filed under the Investment
Advisers Act of 1940 by Templeton Investment Counsel, Inc. and
Templeton Asset Management Ltd., which are incorporated herein by
reference.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Franklin Templeton Distributors, Inc. also acts as principal
underwriter of shares of:
Franklin Templeton Japan Fund
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Variable Products Series Fund
Franklin Asset Allocation Fund
Franklin California Tax Free Income Fund, Inc.
Franklin California Tax Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Gold Fund
Franklin Government Securities Trust
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Municipal Securities Trust
Franklin Mutual Series Fund, Inc.
Franklin New York Tax-Free Income Fund, Inc.
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
(b) The directors and officers of FTD, located at 777 Mariners Island
Blvd., San Mateo, CA 94404, are as follows:
<TABLE>
<CAPTION>
POSITION WITH POSITION WITH
NAME UNDERWRITER THE REGISTRANT
<S> <C> <C>
Charles B. Johnson Chairman of the Board Vice President and Chairman
Gregory E. Johnson President None
Rupert H. Johnson, Jr. Executive Vice President and Vice President
Director
Harmon E. Burns Executive Vice President and Vice President
Director
Daniel T. O'Lear Executive Vice President None
Peter Jones Executive Vice President None
700 Central Avenue
St. Petersburg, Fl
Edward V. McVey Senior Vice President None
Deborah R. Gatzek Senior Vice President and Assistant Vice President
Secretary
Richard C. Stoker Senior Vice President None
Charles E. Johnson Senior Vice President Vice President
500 E. Broward Blvd.
Ft. Lauderdale, Fl
Richard O. Conboy Senior Vice President None
H.G. (Toby) Mumford, Jr. Senior Vice President None
Bert W. Feuss Vice President None
Loretta Fry Vice President None
James K. Blinn Vice President None
Robert N. Geppner Vice President None
Jimmy A. Escobedo Vice President None
Mike Hackett Vice President None
Phil J. Kearns Vice President None
Ken Leder Vice President None
Jack Lemein Vice President None
John R. McGee Vice President None
Vivian J. Palmieri Vice President None
Kent P. Strazza Vice President None
Sarah Stypa Vice President None
Laura Komar Vice President None
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH POSITION WITH
NAME UNDERWRITER THE REGISTRANT
<S> <C> <C>
John R. Kay Assistant Vice President Vice President
500 E. Broward Blvd.
Ft. Lauderdale
Francie Arnone Assistant Vice President None
Alison Hawksley Assistant Vice President None
Virginia Marans Assistant Vice President None
Bernadette Marino Howard Assistant Vice President None
Susan Thompson Assistant Vice President None
Mark Rankin Assistant Vice President None
Kenneth A. Lewis Treasurer None
Karen DeBellis Assistant Treasurer Assistant Treasurer
700 Central Avenue
St. Petersburg, Fl
Philip A. Scatena Assistant Treasurer None
Leslie M. Kratter Secretary None
</TABLE>
(c) Not Applicable (Information on unaffiliated underwriters).
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Certain accounts, books, and other documents required to be maintained
by Registrant pursuant to Section 31(a) of the Investment Company Act
of 1940 and rules promulgated thereunder are located at 500 East
Broward Blvd., Fort Lauderdale, Florida 33394. Others records are
maintained at the offices of Franklin Templeton Investor Services,
Inc., 100 Fountain Parkway, St. Petersburg, Florida 33716-1205 and
Franklin Resources, Inc., 777 Mariners Island Blvd., San Mateo,
California 94404.
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS.
(a) Not Applicable.
(b) Not Applicable.
(c) Registrant undertakes to furnish to each person to
whom its Prospectus is provided a copy of its latest
Annual Report, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has met the
requirements for effectiveness of the Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Ft. Lauderdale, Florida on the 31st day of
October, 1997.
TEMPLETON INSTITUTIONAL FUNDS, INC.
By:
Donald F. Reed, President*
*By:/s/BARBARA J. GREEN
Barbara J. Green
attorney-in-fact**
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
Charles B. Johnson* Director October 31, 1997
Constantine Dean Tseretopoulos* Director October 31, 1997
Frank J. Crothers* Director October 31, 1997
Harris J. Ashton* Director October 31, 1997
S. Joseph Fortunato* Director October 31, 1997
Fred R. Millsaps* Director October 31, 1997
Gordon S. Macklin* Director October 31, 1997
Andrew H. Hines, Jr.* Director October 31, 1997
John Wm. Galbraith* Director October 31, 1997
Nicholas F. Brady* Director October 31, 1997
Betty P. Krahmer* Director October 31, 1997
Edith E. Holiday* Director October 31, 1997
Donald F. Reed* President (Chief October 31, 1997
Executive Officer)
James R. Baio* Treasurer (Chief October 31, 1997
Financial and
Accounting
Officer)
</TABLE>
*By:/s/BARBARA J. GREEN
Barbara J. Green
as attorney-in-fact**
** Powers of Attorney are contained in Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A of Templeton Institutional Funds, Inc. (File
No. 33-35779), filed on February 14, 1997.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS FILED WITH
POST-EFFECTIVE AMENDMENT NO. 12 TO
REGISTRATION STATEMENT
ON
FORM N-1A
TEMPLETON INSTITUTIONAL FUNDS, INC.
<PAGE>
EXHIBIT LIST
EXHIBIT NUMBER NAME OF EXHIBIT
(11) Consent of Independent Public Accountants
(27) Financial Data Schedules
MCGLADREY & PULLEN, LLP
Certified Public Accountants and Consultants
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our report dated January 31, 1997 on the
financial statements of the Growth Series, the Foreign Equity Series and the
Emerging Markets Series of Templeton Institutional Funds, Inc. referred to
therein, which appears in the 1996 Annual Reports to Shareholders, and which is
incorporated herein by reference, in Post-Effective Amendment No. 12 to the
Registration Statement on Form N1-A, File No. 33-35779, as filed with the
Securities and Exchange Commission.
We also consent to the reference to our firm in the Prospectus under the caption
"Financial Highlights" and in the Statement of Additional Information under the
caption "Auditors".
/s/MCGLADREY & PULLEN, LLP
McGladrey & Pullen, LLP
New York, New York
October 28, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
TEMPLETON INSTITUTIONAL FUNDS FOREIGN EQUITY SERIES JUNE 30, 1997 SEMI-
ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000865722
<NAME>TEMPLETON INSTITUTIONAL FUNDS, INC.
<SERIES>
<NUMBER> 001
<NAME> FOREIGN EQUITY SERIES
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 2837783247
<INVESTMENTS-AT-VALUE> 3617791347
<RECEIVABLES> 31713879
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3649505226
<PAYABLE-FOR-SECURITIES> 38840918
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 37385885
<TOTAL-LIABILITIES> 76226803
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2709586922
<SHARES-COMMON-STOCK> 194000996
<SHARES-COMMON-PRIOR> 174840843
<ACCUMULATED-NII-CURRENT> 51477613
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 32205788
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 780008100
<NET-ASSETS> 3573278423
<DIVIDEND-INCOME> 14320495
<INTEREST-INCOME> 56159296
<OTHER-INCOME> 0
<EXPENSES-NET> 13578921
<NET-INVESTMENT-INCOME> 56900870
<REALIZED-GAINS-CURRENT> 46637452
<APPREC-INCREASE-CURRENT> 294197694
<NET-CHANGE-FROM-OPS> 397736016
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2754226)
<DISTRIBUTIONS-OF-GAINS> (919340)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 29948164
<NUMBER-OF-SHARES-REDEEMED> (11088733)
<SHARES-REINVESTED> 300722
<NET-CHANGE-IN-ASSETS> 715687690
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (2669031)
<OVERDIST-NET-GAINS-PRIOR> (13512324)
<GROSS-ADVISORY-FEES> 11099924
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 13578921
<AVERAGE-NET-ASSETS> 3198772187
<PER-SHARE-NAV-BEGIN> 16.34
<PER-SHARE-NII> .30
<PER-SHARE-GAIN-APPREC> 1.80
<PER-SHARE-DIVIDEND> (.01)
<PER-SHARE-DISTRIBUTIONS> (.01)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.42
<EXPENSE-RATIO> 0.86
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
TEMPLETON INSTITUTIONAL FUNDS GROWTH SERIES FUND JUNE 30, 1997 SEMI-
ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000865722
<NAME> TEMPLETON INSTITUTIONAL FUNDS, INC.
<SERIES>
<NUMBER> 002
<NAME> GROWTH SERIES
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 222017626
<INVESTMENTS-AT-VALUE> 307095535
<RECEIVABLES> 1384634
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 1215
<TOTAL-ASSETS> 308481384
<PAYABLE-FOR-SECURITIES> 2166283
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 522625
<TOTAL-LIABILITIES> 2688908
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 214823387
<SHARES-COMMON-STOCK> 20178323
<SHARES-COMMON-PRIOR> 19993055
<ACCUMULATED-NII-CURRENT> 4025284
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1865896
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 85077909
<NET-ASSETS> 305792476
<DIVIDEND-INCOME> 4587399
<INTEREST-INCOME> 956023
<OTHER-INCOME> 0
<EXPENSES-NET> 1243170
<NET-INVESTMENT-INCOME> 4300252
<REALIZED-GAINS-CURRENT> 4014212
<APPREC-INCREASE-CURRENT> 29182442
<NET-CHANGE-FROM-OPS> 37496906
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (408980)
<DISTRIBUTIONS-OF-GAINS> (1430488)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1734770
<NUMBER-OF-SHARES-REDEEMED> (1681075)
<SHARES-REINVESTED> 131573
<NET-CHANGE-IN-ASSETS> 37634685
<ACCUMULATED-NII-PRIOR> 134012
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (717828)
<GROSS-ADVISORY-FEES> 994705
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1243170
<AVERAGE-NET-ASSETS> 286550391
<PER-SHARE-NAV-BEGIN> 13.41
<PER-SHARE-NII> .21
<PER-SHARE-GAIN-APPREC> 1.62
<PER-SHARE-DIVIDEND> (.02)
<PER-SHARE-DISTRIBUTIONS> (.07)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.15
<EXPENSE-RATIO> .88
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
TEMPLETON INSTITUTIONAL FUNDS EMERGING MARKETS SERIES JUNE 30, 1997 SEMI-
ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000865722
<NAME> TEMPLETON INSTITUTIONAL FUNDS, INC.
<SERIES>
<NUMBER> 003
<NAME> EMERGING MARKETS SERIES
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 1816491555
<INVESTMENTS-AT-VALUE> 2216642206
<RECEIVABLES> 14891834
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 6011803
<TOTAL-ASSETS> 2237545843
<PAYABLE-FOR-SECURITIES> 13540988
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4211692
<TOTAL-LIABILITIES> 17752680
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1779889854
<SHARES-COMMON-STOCK> 149377290
<SHARES-COMMON-PRIOR> 125711773
<ACCUMULATED-NII-CURRENT> 18242869
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 21509789
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 400150651
<NET-ASSETS> 2219793163
<DIVIDEND-INCOME> 29192609
<INTEREST-INCOME> 5831455
<OTHER-INCOME> 0
<EXPENSES-NET> 14950650
<NET-INVESTMENT-INCOME> 20073414
<REALIZED-GAINS-CURRENT> 21865702
<APPREC-INCREASE-CURRENT> 294319327
<NET-CHANGE-FROM-OPS> 336258443
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2696021)
<DISTRIBUTIONS-OF-GAINS> (2695988)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 33653696
<NUMBER-OF-SHARES-REDEEMED> (10429294)
<SHARES-REINVESTED> 441115
<NET-CHANGE-IN-ASSETS> 654256544
<ACCUMULATED-NII-PRIOR> 865476
<ACCUMULATED-GAINS-PRIOR> 2340075
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11815603
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 14950650
<AVERAGE-NET-ASSETS> 1908245438
<PER-SHARE-NAV-BEGIN> 12.45
<PER-SHARE-NII> .14
<PER-SHARE-GAIN-APPREC> 2.31
<PER-SHARE-DIVIDEND> (.02)
<PER-SHARE-DISTRIBUTIONS> (.02)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.86
<EXPENSE-RATIO> 1.58
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
TEMPLETON INSTITUTIONAL FUND EMERGING MARKETS INCOME JUNE 30, 1997 SEMI-
ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000865722
<NAME> TEMPLETON INSTITUTIONAL FUNDS, INC.
<SERIES>
<NUMBER> 004
<NAME> EMERGING FIXED INCOME MARKETS SERIES
<S> <C>
<PERIOD-TYPE> 1-MO
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUN-04-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 1346220
<INVESTMENTS-AT-VALUE> 1338289
<RECEIVABLES> 834317
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 281
<TOTAL-ASSETS> 2172887
<PAYABLE-FOR-SECURITIES> 159563
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 11400
<TOTAL-LIABILITIES> 170963
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2000000
<SHARES-COMMON-STOCK> 200000
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 8593
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1262
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (7931)
<NET-ASSETS> 2001924
<DIVIDEND-INCOME> 1030
<INTEREST-INCOME> 9354
<OTHER-INCOME> 0
<EXPENSES-NET> 1791
<NET-INVESTMENT-INCOME> 8593
<REALIZED-GAINS-CURRENT> 1262
<APPREC-INCREASE-CURRENT> (7931)
<NET-CHANGE-FROM-OPS> 1924
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 200000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2001924
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1002
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11400
<AVERAGE-NET-ASSETS> 2011131
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .04
<PER-SHARE-GAIN-APPREC> (.03)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.01
<EXPENSE-RATIO> 1.25<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>THE EXPENSE RATION PER THE TIFI EMERGING MARKETS INCOME SEMI-ANNUAL REPORT
WITHOUT REIMBURSEMENT AT JUNE 30, 1997 IS 7.96%.
</FN>
</TABLE>
