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
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When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
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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
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
GROWTH SERIES
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.
