Registration No. 33-35779
As filed with the Securities and Exchange Commission on May 1, 1997
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 11 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 13 X
(Check appropriate box or boxes)
TEMPLETON INSTITUTIONAL FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
700 CENTRAL AVENUE, P.O. BOX 33030, ST. PETERSBURG, FLORIDA 33701-8030
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (813) 823-8712
Jeffrey L. Steele
Dechert Price & Rhoads
1500 K Street, N.W.
WASHINGTON, DC 20005
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b) of Rule 485
X on MAY 1, 1997 pursuant to paragraph (b) of Rule 485
----------
60 days after filing pursuant to paragraph (a)(1) of Rule 485
on pursuant to paragraph (a)(1) of Rule 485
75 days after filing pursuant to paragraph (a)(2) of Rule 485
on pursuant to paragraph (a)(2) of Rule 485
this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
- -------------------------------------------------------------------------------
The Registrant has registered an indefinite number of shares of beneficial
interest under the Securities Act of 1933 pursuant to Rule 24f-2 under the
Investment Company Act of 1940, and filed its Rule 24f-2 Notice for the fiscal
year ended December 31, 1996 on February 27, 1997.
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
CROSS-REFERENCE SHEET
FORM N-1A
PART A
<TABLE>
<CAPTION>
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
<S> <C> <C>
1 Cover page Cover Page
2 Synopsis Expense Summary
3 Condensed Financial "Financial Highlights";
Information "How Do the Funds
Measure Performance?"
4 General Description "How Is the Company Organized?";
of Registrant "How Do the Funds Invest Their Assets?";
"What Are the Funds' Potential Risks?"
5 Management of the Fund "Who Manages the Funds?"
5A Management's Discussion Contained in Registrant's Annual
of Fund Performance Report to Shareholders
6 Capital Stock and Other "How Is the Company Organized?"; "Services
Securities to Help You Manage Your Account"; "What
Distributions Might I Received From the
Funds?"; "How Taxation Affects You and the
Funds?"
7 Purchase of Securities "How Do I Buy Shares?"; "May I Exchange
Being Offered Shares for Shares of Another Fund?";
"Transaction Procedures and Special
Requirements"; "Services to Help You Manage
Your Account"; "Who Manages the Funds?" "Useful
Terms and Definitions"
8 Redemption or Repurchase "May I Exchange Shares for Shares of Another
Fund?"; "How Do I Sell Shares?"; "Transaction
Procedures and Special Requirements"; "Services
to Help You Manage Your Account"
9 Pending Legal Procedures Not Applicable
</TABLE>
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
CROSS-REFERENCE SHEET
FORM N-1A
PART B
<TABLE>
<CAPTION>
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
<S> <C> <C>
10 Cover Page Cover Page
11 Table of Contents Table of Contents
12 General Information and Not Applicable
History
13 Investment Objectives and "How Do the Funds Invest Their Assets?";
Policies "Investment Restrictions"; "What Are the
Funds' Potential Risks?"
14 Management of the "Officers and Directors"; "Investment
Registrant Management and Other Services"
15 Control Persons and "Officers and Directors"; "Investment
Principal Holders of Management and Other Services"; "Miscellaneous
Securities Information?"
16 Investment Advisory and "Investment Management and Other Services";
Other Services "The Funds' Underwriter"
17 Brokerage Allocation and "How Do the Funds Buy Securities
Other Practices For Their Portfolio?"
18 Capital Stock and Other "Miscellaneous Information"; See Prospectus
Securities "How Is The Company Organized?"
19 Purchase, Redemption and "How Do I Buy, Sell and Exchange Shares?";
Pricing of Securities "How Are Fund Shares Valued?";
Being Offered "Financial Statements"
20 Tax Status "Additional Information on Distributions
and Taxes"
21 Underwriters "The Funds' Underwriter"
22 Calculation of Performance "How Do the Funds Measure Performance?"
Data
23 Financial Statements Financial Statements
</TABLE>
<PAGE>
PART A
PROSPECTUS
<PAGE>
P R O S P E C T U S
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
T E M P L E T O N
I N S T I T U T I O N A L F U N D S, I N C.
_______________________
MAY 1, 1997
GROWTH SERIES
FOREIGN EQUITY SERIES
EMERGING MARKETS SERIES
EMERGING FIXED INCOME MARKETS SERIES
[FRANKLIN TEMPLETON LOGO]
________________________________________________________________________________
This prospectus describes the four funds listed
above (the "Funds") which are series of Templeton
Institutional Funds, Inc. (the "Company"). This
prospectus contains information you should know
before investing in the Funds. Please keep it for
future reference.
INVESTMENTS IN EMERGING MARKETS INVOLVE CERTAIN
CONSIDERATIONS WHICH ARE NOT NORMALLY INVOLVED IN
INVESTMENT IN SECURITIES OF U.S. COMPANIES, AND AN
INVESTMENT IN THE FUNDS MAY BE CONSIDERED
SPECULATIVE. THE FUNDS MAY BORROW MONEY FOR
INVESTMENT PURPOSES, WHICH MAY INVOLVE GREATER
RISK AND ADDITIONAL COSTS TO THE FUNDS. IN
ADDITION, THE FUNDS MAY INVEST UP TO 10% OF THEIR
ASSETS IN RESTRICTED SECURITIES, WHICH MAY INVOLVE
GREATER RISK AND INCREASED FUND EXPENSES. SEE
"WHAT ARE THE FUNDS' POTENTIAL RISKS?"
The Company has a Statement of Additional
Information ("SAI") dated May 1, 1997, which may
be amended from time to time. It includes more
information about the Funds' procedures and
policies. It has been filed with the SEC and is
incorporated by reference into this prospectus.
For a free copy or a larger print version of this
prospectus, call 1-800/DIAL BEN or write the Funds
at their address.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR
OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY ANY
BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT.
SHARES OF THE FUNDS INVOLVE INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SEC OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
TEMPLETON
INSTITUTIONAL
FUNDS, INC.
- -------------------------------------------------------------------------------
May 1, 1997
When reading this prospectus, you will see certain terms beginning with
capital letters. This means the term is explained in our glossary section.
700 Central Avenue
P.O. Box 33030
St. Petersburg, Florida 33733-8030
1-800/DIAL BEN
TABLE OF CONTENTS
<TABLE>
<S> <C>
ABOUT THE FUND
Expense Summary............................................................. 1
Financial Highlights........................................................ 2
How do the Funds Invest Their Assets?....................................... 5
What are the Funds' Potential Risks?........................................ 16
Who Manages the Funds?...................................................... 19
How do the Funds Measure Performance?....................................... 21
How is the Company Organized?............................................... 22
How Taxation Affects You and the Funds...................................... 22
ABOUT YOUR ACCOUNT
How Do I Buy Shares?........................................................ 23
May I Exchange Shares for Shares of Another Fund?........................... 25
How Do I Sell Shares?....................................................... 26
What Distributions Might I Receive from the Funds?.......................... 27
Transaction Procedures and Special Requirements............................. 27
Services to Help You Manage Your Account.................................... 30
GLOSSARY
Useful Terms and Definitions................................................ 32
Appendix.................................................................... 33
Corporate Bond Ratings...................................................... 34
</TABLE>
<PAGE>
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Funds. For Growth Series, Foreign Equity Series and Emerging Markets Series,
the table is based on historical expenses for the fiscal year ended December
31, 1996. For Emerging Fixed Income Markets Series, the table is based on
estimated expenses, after fee reductions and expense limitations, for the
current fiscal year. The Funds' actual expenses may vary. The information in
the table does not reflect an administrative service fee of $5.00 per exchange
for market timing or allocation service accounts.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
EMERGING
FIXED
FOREIGN EMERGING INCOME
GROWTH EQUITY MARKETS MARKETS
SERIES SERIES SERIES SERIES
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management Fees (after fee reduction)*...... 0.70% 0.70% 1.25% 0.55%
Other Expenses.............................. 0.17% 0.17% 0.31% 0.70%
Total Fund Operating Expenses (after fee
reduction)*................................ 0.87% 0.87% 1.56% 1.25%
</TABLE>
EXAMPLE: Assume the annual return for each Fund is 5% and operating
expenses are as described above. For each $1,000 investment, you would pay
the following projected expenses if you sold your shares after the number
of years shown.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GROWTH SERIES................................. $ 9 $28 $48 $107
FOREIGN EQUITY SERIES......................... $ 9 $28 $48 $107
EMERGING MARKETS SERIES....................... $ 16 $49 $85 $186
EMERGING FIXED INCOME MARKETS SERIES.......... $ 13 $40 $69 $151
</TABLE>
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The Funds pay their operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each Fund and are not
directly charged to your account.
* The Investment Managers and FT Services have agreed in advance to reduce
their respective fees in order to limit the total expenses of each Fund to an
annual rate of 1% of average net assets for Growth Series, 1% of average net
assets for Foreign Equity Series, 1.6% of average net assets for Emerging
Markets Series, and 1.25% of average net assets for Emerging Fixed Income
Markets Series through April 30, 1998. If these fee reductions are insufficient
to so limit the Funds' expenses, the FT Services has agreed to make certain
payments to reduce the Funds' expenses. After April 30, 1998, these agreements
may end at any time upon notice to the Board. These voluntary agreements did
not result in any fee reductions for Growth Series, Foreign Equity Series and
Emerging Markets Series for the fiscal year ended December 31, 1996. If this
voluntary agreement were not in effect for Emerging Fixed Income Markets
Series, the Fund's "Management Fee" and estimated "Total Fund Operating
Expenses" would be 0.70% and 1.40%, respectively.
Templeton Institutional Funds, Inc. . 1
<PAGE>
FINANCIAL HIGHLIGHTS
These tables summarize the financial history for Growth Series, Foreign Equity
Series and Emerging Markets Series. Information is not presented for the
Emerging Fixed Income Markets Series because that Fund had not commenced
operations prior to the date of this prospectus. The information has been
audited by McGladrey & Pullen, LLP, the Funds' independent auditors for the
periods indicated in their reports which appear in the Funds' Annual Reports to
Shareholders for the fiscal year ended December 31, 1996. The Annual Reports to
Shareholders also include more information about the Funds' performance. For a
free copy, please call Fund Information.
GROWTH SERIES
<TABLE>
<CAPTION>
Period from May 3,
1993 (commencement
Year Ended December 31 of operations) to
---------------------------- ------------------
1996 1995 1994 December 31, 1993
-------- -------- -------- ------------------
<S> <C> <C> <C> <C>
Per Share Operating
Performance
(For a share outstanding
throughout the period)
Net asset value, beginning of
period $ 11.86 $ 10.94 $ 11.80 $ 10.00
-------- -------- -------- --------
Income from investment
operations:
Net investment income .30 .27 .20 .06
Net realized and unrealized
gain (loss) 2.32 1.62 (.36) 1.94
-------- -------- -------- --------
Total from investment
operations 2.62 1.89 (.16) 2.00
-------- -------- -------- --------
Distributions:
Dividends from net
investment income (.29) (.27) (.20) (.05)
Dividends from net realized
gains (.74) (.70) (.50) (.15)
Amount in excess of net
realized gains (.04) -- -- --
-------- -------- -------- --------
Total Distributions (1.07) (.97) (.70) (.20)
-------- -------- -------- --------
Change in net asset value 1.55 .92 (.86) 1.80
-------- -------- -------- --------
Net asset value, end of
period $ 13.41 $ 11.86 $ 10.94 $ 11.80
======== ======== ======== ========
Total Return/1/ 22.57% 17.59% (1.32)% 20.04%
Ratios/supplemental data
Net assets, end of period
(000) $268,158 $226,963 $194,059 $184,013
Ratio of expenses to average
net assets .87% .88% .95% 1.00%/2/
Ratio of net investment
income to average net assets 2.34% 2.28% 1.69% 1.19%/2/
Portfolio turnover rate 15.61% 30.20% 17.23% 17.32%
Average commission rate paid
(per share) $ .0242
</TABLE>
/1/Not annualized for periods less than one year.
/2/Annualized.
2 . Templeton Institutional Funds, Inc.
<PAGE>
FOREIGN EQUITY SERIES
<TABLE>
<CAPTION>
Period from
October 18, 1990
(commencement of
Year Ended December 31 operations) to
------------------------------------------------------------- ----------------
December 31,
1996 1995 1994 1993/1/ 1992/1/ 1991 1990
---------- ---------- ---------- -------- ------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Per-
formance (for a share
outstanding throughout
the period)
Net asset value, begin-
ning of period $ 14.04 $ 12.86 $ 13.32 $ 10.05 $10.63 $10.16 $10.00
---------- ---------- ---------- -------- ------ ------ ------
Income from investment
operations:
Net investment income .45 .31 .20 .23 .27 .31 .12
Net realized and
unrealized gain (loss) 2.54 1.35 (.16) 3.19 (.41) 1.30 .04
---------- ---------- ---------- -------- ------ ------ ------
Total from investment op-
erations 2.99 1.66 .04 3.42 (.14) 1.61 .16
---------- ---------- ---------- -------- ------ ------ ------
Distributions:
Dividends from net
investment income (.45) (.31) (.19) (.09) (.24) (.44)
Amount in excess of net
investment income (.02) -- -- -- -- -- --
Distributions from net
realized gains (.14) (.17) (.31) (.06) (.20) (.70)
Amount in excess of net
realized gains (.08) -- -- -- -- -- --
---------- ---------- ---------- -------- ------ ------ ------
Total distributions (.69) (.48) (.50) (.15) (.44) (1.14)
---------- ---------- ---------- -------- ------ ------ ------
Change in net asset value 2.30 1.18 (.46) 3.27 (.58) .47 .16
---------- ---------- ---------- -------- ------ ------ ------
Net asset value, end of
period $ 16.34 $ 14.04 $ 12.86 $ 13.32 $10.05 $10.63 $10.16
========== ========== ========== ======== ====== ====== ======
Total Return/2/ 21.58% 13.00% 0.24% 34.03% (1.33)% 16.13% 1.60%
Ratios/supplemental data
Net assets, end of period
(000) $2,857,591 $1,817,883 $1,093,227 $407,970 $ 566 $1,181 $1,015
Ratio of expenses to
average net assets 0.87% 0.88% 0.95% 1.03% 8.82% 9.15% 9.24%/3/
Ratio of expenses, net of
reimbursement, to aver-
age net assets 0.87% 0.88% 0.95% 1.00% 1.00% 1.00% 1.00%/3/
Ratio of net investment
income to average net
assets 3.20% 2.70% 2.03% 1.73% 2.38% 2.47% 5.77%/3/
Portfolio turnover rate 7.39% 20.87% 7.90% 42.79% 8.45% 76.16% 0.00%
Average commission rate
paid (per share) $ .0021
</TABLE>
/1/Based on average weighted shares outstanding.
/2/Not annualized for periods less than one year.
/3/Annualized.
Templeton Institutional Funds, Inc. . 3
<PAGE>
EMERGING MARKETS SERIES
<TABLE>
<CAPTION>
Period from May 3,
1993 (commencement
Year Ended December 31 of operations) to
------------------------------- ------------------
1996 1995 1994 December 31, 1993
---------- -------- -------- ------------------
<S> <C> <C> <C> <C>
Per Share Operating Per-
formance
(for a share outstanding
throughout the period)
Net asset value, begin-
ning of period $ 10.75 $ 11.21 $ 13.22 $ 10.00
---------- -------- -------- --------
Income from investment
operations:
Net investment income .15 .19 .17 .04
Net realized and
unrealized gain (loss) 1.86 (.34) (1.65) 3.25
---------- -------- -------- --------
Total from investment op-
erations 2.01 (.15) (1.48) 3.29
---------- -------- -------- --------
Distributions:
Dividends from net in-
vestment income (.15) (.17) (.17) (.04)
Dividends from net re-
alized gains (.16) (.14) (.36) (.03)
---------- -------- -------- --------
Total Distributions (.31) (.31) (.53) (.07)
---------- -------- -------- --------
Change in net asset value
for the period 1.70 (.46) (2.01) 3.22
---------- -------- -------- --------
Net asset value, end of
period $ 12.45 $ 10.75 $ 11.21 $ 13.22
========== ======== ======== ========
Total Return/1/ 18.86% (1.23)% (11.39)% 32.93%
Ratios/supplemental data
Net assets, end of period
(000) $1,565,537 $798.515 $582,878 $422,433
Ratio of expenses to av-
erage net assets 1.56% 1.52% 1.66% 1.60%/2/
Ratio of expenses, net of
reimbursement, to aver-
age net assets 1.56% 1.52% 1.60% 1.60%/2/
Ratio of net investment
income to average net
assets 1.56% 2.00% 1.59% 0.91%/2/
Portfolio turnover rate 7.92% 13.47% 12.51% 9.42%
Average commission rate
paid (per share) $ 0.0019
</TABLE>
/1/Not annualized for periods less than one year.
/2/Annualized.
4 . Templeton Institutional Funds, Inc.
<PAGE>
HOW DO THE FUNDS INVEST THEIR ASSETS?
The Funds' Investment Objectives
Growth Series, Foreign Equity Series and Emerging Markets Series each seeks
long-term growth of capital. Emerging Fixed Income Markets Series seeks high
total return, consisting of current income and capital appreciation. The
investment objective of each Fund is a fundamental policy and may not be
changed without shareholder approval. Of course, there is no assurance that a
Fund's objective will be achieved.
Certain types of investments and investment techniques are described in greater
detail under "Investment Techniques" in this prospectus and in the SAI.
Primary Investment Policies Of The Funds
Described below are the primary investment policies of each Fund. Each of the
Funds may, however, also invest in various types of securities and use various
investment strategies described under the headings "Types of Securities in
Which the Funds May Invest" and "Other Investment Policies of the Funds." With
the exception of investment objectives and the investment restrictions
specifically identified as fundamental, all investment policies and practices
described in this prospectus and in the SAI are not fundamental, meaning that
the Board may change them without shareholder approval.
Growth Series. Growth Series seeks to achieve long-term capital growth through
a flexible policy of investing in stocks and debt obligations of companies and
governments of any nation, including developing nations. Although Growth Series
generally invests in common stock, it may also invest in preferred stocks and
certain debt securities that offer the potential for capital growth. In
selecting securities for Growth Series, the Investment Manager attempts to
identify those companies in various countries and industries where economic and
political factors, including currency movements, are likely to produce above-
average opportunities for capital appreciation.
Growth Series may invest up to 5% of its assets in warrants (excluding warrants
acquired in units or attached to securities), and up to 10% of its assets in
illiquid securities. Growth Series will not invest more than 5% of its total
assets in any of the following: (i) debt securities rated lower than BBB by S&P
or Baa by Moody's, (ii) structured investments, and (iii) securities of Russian
issuers. Growth Series may borrow up to one-third of the value of its total
assets and may lend portfolio securities with an aggregate market value of up
to one-third of its total assets. Growth Series may purchase and sell put and
call options on securities or indices, provided that (i) the value of the
underlying securities on which options may be written at any one time will not
exceed 25% of the Fund's total assets, and (ii) the Fund will not purchase put
or call options if the aggregate premium paid for such options would exceed 5%
of its total assets. Growth Series may enter into forward foreign currency
contracts and may purchase and write put and call options on foreign currencies.
For hedging purposes only, Growth Series may buy and sell financial futures
contracts, stock index futures contracts, foreign currency futures contracts and
options on any of these futures contracts, provided that (i) the Fund will not
commit more than 5% of its total assets to initial margin deposits on futures
contracts and related options, and (ii) the value of the underlying securities
on which futures contracts will be written at any one time will not exceed 25%
of the total assets of the Fund.
Foreign Equity Series. Foreign Equity Series seeks to achieve long-term capital
growth through a flexible policy of investing in equity securities and debt
obligations of companies and governments outside the U.S. Foreign Equity Series
will invest at least 65% of its total assets in foreign equity securities, as
defined below. Foreign Equity Series may also invest up to 35% of its total
assets in debt securities when, in the judgment of the Investment Manager, the
capital appreciation available through such investment outweighs the potential
for capital growth through investment in stocks. In selecting securities for
Foreign Equity Series, the Investment Manager attempts to identify those
companies in various countries and industries where economic and political
factors, including currency movements, are likely to produce above-average
opportunities for capital appreciation.
Templeton Institutional Funds, Inc. . 5
<PAGE>
Foreign Equity Series may invest up to 5% of its assets in warrants (excluding
warrants acquired in units or attached to securities), and up to 10% of its
assets in illiquid securities. Foreign Equity Series will not invest more than
5% of its total assets in any of the following: (i) debt securities rated lower
than BBB by S&P or Baa by Moody's, (ii) structured investments, and (iii)
securities of Russian issuers. Foreign Equity Series may borrow up to one-third
of the value of its total assets and may lend portfolio securities with an
aggregate market value of up to one-third of its total assets. Foreign Equity
Series may purchase and sell put and call options on securities or indices,
provided that (i) the value of the underlying securities on which options may be
written at any one time will not exceed 25% of the Fund's total assets, and (ii)
the Fund will not purchase put or call options if the aggregate premium paid for
such options would exceed 5% of its total assets. Foreign Equity Series may
enter into forward foreign currency contracts and may purchase and write put and
call options on foreign currencies. For hedging purposes only, Foreign Equity
Series may buy and sell financial futures contracts, stock index futures
contracts, foreign currency futures contracts and options on any of these
futures contracts, provided that (i) the Fund will not commit more than 5% of
its total assets to initial margin deposits on futures contracts and related
options, and (ii) the value of the underlying securities on which futures
contracts will be written at any one time will not exceed 25% of the total
assets of the Fund.
Emerging Markets Series. Emerging Markets Series seeks to achieve long-term
capital growth by investing primarily in equity securities of issuers in
countries having emerging markets. Under normal conditions at least 65% of
Emerging Markets Series' total assets will be invested in equity securities of
emerging market companies. Emerging Markets Series will, at all times except
during defensive periods, maintain investments in at least three countries
having emerging markets. The Investment Manager may, from time to time, use
various methods of selecting securities for Emerging Markets Series' portfolio
and may also employ and rely on independent or affiliated sources of
information and ideas in connection with management of the portfolio. Emerging
Markets Series may invest up to 35% of its total assets in debt securities that
offer the potential for capital growth.
Emerging Markets Series seeks to benefit from economic and other developments
in emerging markets. The investment objective of Emerging Markets Series
reflects the belief that investment opportunities may result from an evolving
long-term international trend favoring more market-oriented economies, a trend
that may especially benefit certain countries having emerging markets. This
trend may be facilitated by local or international political, economic or
financial developments that could benefit the capital markets of emerging
market countries. Certain emerging market countries, which may be in the
process of developing more market-oriented economies, may experience relatively
high rates of economic growth. Other countries, although having relatively
mature emerging markets, may also be in a position to benefit from local or
international developments encouraging greater market orientation and
diminishing governmental intervention in economic affairs.
Emerging Markets Series may invest up to 5% of its assets in warrants (excluding
warrants acquired in units or attached to securities), and up to 15% of its
assets in illiquid securities. Emerging Markets Series will not invest more than
5% of its total assets in any of the following: (i) debt securities rated lower
than BBB by S&P or Baa by Moody's, (ii) structured investments, and (iii)
securities of Russian issuers. Emerging Markets Series may borrow up to
one-third of the value of its total assets and may lend portfolio securities
with an aggregate market value of up to one-third of its total assets. Emerging
Markets Series may purchase and sell put and call options on securities or
indices, provided that (i) the value of the underlying securities on which
options may be written at any one time will not exceed 25% of the Fund's total
assets, and (ii) the Fund will not purchase put or call options if the aggregate
premium paid for such options would exceed 5% of its total assets. Emerging
Markets Series may enter into forward foreign currency contracts and may
purchase and write put and call options on foreign currencies. For hedging
purposes only, Emerging Markets Series may buy and sell financial futures
contracts, stock index futures contracts, foreign currency futures contracts and
options on any of these futures contracts, provided that (i) the Fund will not
commit more than 5% of its total assets to initial margin deposits on futures
contracts and related options, and (ii) the value of the underlying securities
on which futures contracts will be written at any one time will not exceed 25%
of the total assets of the Fund.
6 . Templeton Institutional Funds, Inc.
<PAGE>
Emerging Fixed Income Markets Series. Emerging Fixed Income Markets Series
seeks high total return, consisting of current income and capital appreciation,
by investing at least 65% of its total assets in a portfolio of "fixed income"
or debt obligations of sovereign or sovereign-related entities of emerging
market countries, as well as debt obligations of emerging market companies. For
purposes of this restriction, the Fund uses the term "fixed income" generically
to mean debt obligations of all types, including debt obligations which pay a
variable or floating rate of interest as well as a fixed rate of interest. In
selecting investments for Emerging Fixed Income Markets Series, the Investment
Manager will draw on its experience in global investing in seeking to identify
those markets and issuers around the world which are anticipated to provide the
opportunity for high current income and capital appreciation. Debt securities
issued in emerging markets are generally rated below investment grade.
Consequently, the Fund anticipates that a substantial percentage of its assets
may be invested in higher risk, lower quality debt securities, commonly known
as "junk bonds." These investments are speculative in nature. See "Debt
Securities" in this section and "What are the Funds' Potential Risks?"
Emerging Fixed Income Markets Series' investments in sovereign or sovereign-
related debt obligations may consist of (i) bonds, notes, bills, debentures or
other fixed income or floating rate securities issued or guaranteed by
governments, governmental agencies or instrumentalities, or government owned,
controlled or sponsored entities, including central banks, located in emerging
market countries (including loans and participations in and assignments of
portions of loans between governments and financial institutions), (ii) debt
securities issued by entities organized and operated for the purpose of
restructuring the investment characteristics of securities issued by any of the
entities described above, including indexed or currency-linked securities, and
(iii) debt securities issued by supra-national organizations such as the Asian
Development Bank, the Inter-American Development Bank, and the Corporacion
Andina de Fomento, among others. These securities may be issued in either
registered or bearer form. Many of these securities are trading at substantial
discounts to their par value and it is expected that initially a significant
portion of Emerging Fixed Income Markets Series' assets will be invested in
securities purchased at a discount to par value. These securities may include
Brady Bonds discussed below under "Types of Securities in Which the Funds May
Invest."
Emerging Fixed Income Markets Series' investments in debt obligations of
private sector companies in emerging market countries will take the form of
bonds, notes, bills, debentures, convertible securities, warrants, indexed or
currency-linked securities, bank debt obligations, short-term paper, loan
participations, loan assignments and interests issued by entities organized and
operated for the purpose of restructuring the investment characteristics of
instruments issued by emerging market country issuers. Emerging market country
debt securities held by Emerging Fixed Income Markets Series may or may not be
listed or traded on a securities exchange. Emerging Fixed Income Markets Series
will not be subject to any restrictions on the maturities of the emerging
market country debt securities it holds; those maturities may range from
overnight to more than 30 years.
Emerging Fixed Income Markets Series may invest up to 35% of its assets in
securities issued or guaranteed by the U.S. government, its agencies and
instrumentalities.
Emerging Fixed Income Markets Series may invest up to 5% of its assets in
warrants (excluding warrants acquired in units or attached to securities), and
up to 15% of its assets in illiquid securities. Emerging Fixed Income Markets
Series will not invest more than 5% of its total assets in securities of Russian
issuers. Emerging Fixed Income Markets Series may invest in debt securities
rated below BBB by S&P or Baa by Moody's (or unrated debt securities determined
by the Fund's Investment Manager to be of comparable quality). Emerging Fixed
Income Markets Series may borrow up to one-third of the value of its total
assets may lend portfolio securities with an aggregate market value of up to
one- third of its total assets. Emerging Fixed Income Markets Series may
purchase and sell put and call options on securities or indices, provided that
(i) the value of the underlying securities on which options may be written at
any one time will not exceed 25% of the Fund's total assets, and (ii) the Fund
will not purchase put or call options if the aggregate premium paid for such
options would exceed 5% of its total assets. Emerging Fixed Income Markets
Series may enter into forward foreign currency contracts and may purchase and
write put and call options on foreign currencies. For hedging purposes only
(including anticipatory
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hedges where the Investment Manager seeks to anticipate an intended shift in
maturity, duration or asset allocation), Emerging Fixed Income Markets Series
may buy and sell financial futures contracts, stock index futures contracts,
foreign currency futures contracts and options on any of these futures
contracts, provided that (i) the Fund will not commit more than 5% of its total
assets to initial margin deposits on futures contracts and related options, and
(ii) the value of the underlying securities on which futures contracts will be
written at any one time will not exceed 25% of the total assets of the Fund.
Emerging Fixed Income Markets Series may enter into swap agreements as
discussed below, provided that the Fund will not enter into an agreement with
any single party if the amount owed or to be received under any existing
contracts with that party would exceed 5% of the Fund's assets.
Types Of Securities In Which The Funds May Invest
Each Fund is authorized to invest in certain of the types of securities
described below.
Equity Securities. As used in this prospectus, "equity securities" refers to
common stock, preferred stock, securities convertible into common or preferred
stock, warrants or rights to subscribe to or purchase such securities, and
sponsored or unsponsored American Depositary Receipts, European Depositary
Receipts and Global Depositary Receipts (see "Depositary Receipts" below).
Emerging Markets Securities. As used in this prospectus, an "emerging market"
country is any country that is generally considered to be developing or
emerging by the International Bank for Reconstruction and Development (more
commonly referred to as the World Bank) and the International Finance
Corporation, as well as countries that are classified by the United Nations or
otherwise regarded by their authorities as developing. Currently, the countries
not in this category include Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Iceland, Ireland, Italy, Japan, Luxembourg, the
Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland, the United
Kingdom, and the United States. In addition, as used in this prospectus,
emerging market companies means (i) companies whose principal securities
trading markets are in emerging market countries, as defined above, (ii)
companies that derive 50% or more of their total revenue from either goods or
services produced in emerging market countries or sales made in emerging market
countries, or (iii) companies organized under the laws of, and with principal
offices in, emerging market countries.
Debt Securities. Each of the Funds may invest a portion of its assets in debt
securities including bonds, notes, debentures, commercial paper, certificates
of deposit, time deposits and bankers' acceptances, and which may include
structured investments. The Funds are not limited as to the type of debt
securities in which they may invest. For example, bonds may include Eurobonds,
Global Bonds, Yankee Bonds, bonds sold under SEC Rule 144A, restructured
external debt such as Brady Bonds as well as restructured external debt that
has not undergone a Brady-style debt exchange, or other types of instruments
structured or denominated as bonds. Issuers of debt securities may include the
U.S. government, its agencies or instrumentalities; a foreign sovereign
government, its agencies or instrumentalities; supra-national organizations;
U.S. or foreign corporations; and U.S. or foreign banks, savings and loan
associations, and bank holding companies.
Debt securities purchased by the Funds may be rated C or better by S&P or
Moody's or, if unrated, of comparable quality as determined by each Fund's
Investment Manager. As an operating policy, which may be changed by the Board
without shareholder approval, each Fund except Emerging Fixed Income Markets
Series will limit its investment in debt securities rated below BBB by S&P or
Baa by Moody's (or unrated debt securities determined by a Fund's Investment
Manager to be of comparable quality) to 5% of its total assets. The Board may
consider a change in this operating policy if, in its judgment, economic
conditions change such that a different level of investment in high risk, lower
quality debt securities would be consistent with the interests of the Funds and
their shareholders. Debt securities rated C by Moody's are the lowest rated
class of bonds and may be regarded as having extremely poor prospects of ever
8 . Templeton Institutional Funds, Inc.
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attaining any real investment standing. Debt securities rated C by S&P are
typically subordinated to senior debt which is vulnerable to default and is
dependent on favorable conditions to meet timely payment of interest and
repayment of principal.
Commercial paper purchased by the Funds will meet the credit quality criteria
set forth under "How Do the Funds Invest Their Assets?" in the SAI. Certain
debt securities can provide the potential for capital appreciation based on
various factors such as changes in interest rates, economic and market
conditions, improvement in an issuer's ability to repay principal and pay
interest, and ratings upgrades. Each of the Funds may invest in debt or
preferred securities which have equity features, such as conversion or exchange
rights, or which carry warrants to purchase common stock or other equity
interests. Such equity features enable the holder of the bond or preferred
security to benefit from increases in the market price of the underlying
equity.
Brady Bonds and Other Sovereign-Related Debt. Emerging Fixed Income Markets
Series may invest a portion of its assets in certain debt obligations
customarily referred to as "Brady Bonds," which are created through the
exchange of existing commercial bank loans to sovereign entities for new
obligations in connection with debt restructuring under a plan introduced by
former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Plan debt restructurings have been implemented to date in Argentina,
Bolivia, Brazil, Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Jordon,
Mexico, Nigeria, Panama, Peru, the Philippines, Poland, Uruguay, and Venezuela
(collectively, the "Brady Countries"). In addition, some countries have reached
an agreement in principle to restructure their bank debt according to a Brady
Plan and other countries are expected to negotiate similar restructurings in
the future. In some cases countries have restructured their external bank debt
into new loans or promissory notes.
Brady Bonds have been issued relatively recently, and, accordingly, do not have
a long payment history. They may be collateralized or uncollateralized and
issued in various currencies (although most are dollar-denominated) and they
have been actively traded in the over-the-counter secondary market.
Dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are generally collateralized in full as
to principal by U.S. Treasury zero coupon bonds which have the same maturity as
the Brady Bonds. Interest payments on these Brady Bonds generally are
collateralized on a one-year or longer rolling-forward basis by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of interest payments or, in the case of floating rate bonds,
initially is equal to at least one year's interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter. Certain Brady Bonds are entitled to "value recovery payments" in
certain circumstances, which in effect constitute supplemental interest
payments. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In light of
the residual risk of Brady Bonds and, among other factors, the history of
defaults with respect to commercial bank loans by public and private entities
of countries issuing Brady Bonds, investments in Brady Bonds are considered
speculative.
Loan Participations and Assignments. Emerging Fixed Income Markets Series may
invest in fixed and floating rate loans ("Loans") arranged through private
negotiations between a sovereign, sovereign-related or corporate entity and one
or more financial institutions ("Lenders"). Emerging Fixed Income Markets
Series may invest in such Loans in the form of participations
("Participations") in Loans and assignments ("Assignments") of all or a portion
of Loans from third parties. Participations typically will result in Emerging
Fixed Income Markets Series having a contractual relationship only with the
Lender, not with the borrower. Emerging Fixed Income Markets Series will have
the right to receive payments of principal, interest and any fees to which it
is entitled only from the Lender selling the Participation and only upon
receipt by the Lender of the payments from the borrower. In connection with
purchasing Participations, Emerging Fixed Income Markets Series generally will
have no right to enforce compliance by the borrower with the terms of the loan
agreement relating to the Loan, nor any rights of set-off against the borrower,
and Emerging Fixed Income Markets Series may not benefit directly from any
collateral supporting the Loan in which
Templeton Institutional Funds, Inc. . 9
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it has purchased the Participation. As a result, Emerging Fixed Income Markets
Series will assume the credit risk of both the borrower and the Lender that is
selling the Participation. In the event of the insolvency of the Lender selling
a Participation, Emerging Fixed Income Markets Series may be treated as a
general creditor of the Lender and may not benefit from any set-off between the
Lender and the borrower. Emerging Fixed Income Markets Series will
acquire Participations only if the Lender interpositioned between Emerging
Fixed Income Markets Series and the borrower is determined by its Investment
Manager to be creditworthy. When Emerging Fixed Income Markets Series purchases
Assignments from Lenders, Emerging Fixed Income Markets Series will acquire
direct rights against the borrower on the Loan, except that under certain
circumstances such rights may be more limited than those held by the assigning
Lender.
Emerging Fixed Income Markets Series may have difficulty disposing of
Assignments and Participations. Because the market for such instruments is not
highly liquid, Emerging Fixed Income Markets Series anticipates that such
instruments could be sold only to a limited number of institutional investors.
The lack of a highly liquid secondary market will have an adverse impact on the
value of such instruments and on the ability of Emerging Fixed Income Markets
Series to dispose of particular Assignments or Participations in response to a
specific economic event, such as deterioration in the creditworthiness of the
borrower.
Structured Investments. Included among the issuers of emerging market country
debt securities in which the Funds may invest are entities organized and
operated solely for the purpose of restructuring the investment characteristics
of various securities. These entities are typically organized by investment
banking firms which receive fees in connection with establishing each entity
and arranging for the placement of its securities. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, of specified instruments (such as Brady Bonds) and the issuance by that
entity of one or more classes of securities ("structured investments") backed
by, or representing interests in, the underlying instruments. The cash flow on
the underlying instruments may be apportioned among the newly issued structured
investments to create securities with different investment characteristics such
as varying maturities, payment priorities or interest rate provisions; the
extent of the payments made with respect to structured investments is dependent
on the extent of the cash flow on the underlying instruments. Because
structured investments of the type in which the Funds anticipate investing
typically involve no credit enhancement, their credit risk will generally be
equivalent to that of the underlying instruments.
The Funds are permitted to invest in a class of structured investments that is
either subordinated or unsubordinated to the right of payment of another class.
Subordinated structured investments typically have higher yields and present
greater risks than unsubordinated structured investments. Because the right of
payment of subordinated structured investments is subordinated to the right of
payment of another class, subordinated structured investments bear an increased
risk of non-payment or decreased payments in the event of a decrease in the
cash flow of the underlying securities. Although the purchase of subordinated
structured investments would have a similar economic effect to that of
borrowing against the underlying securities, the purchase will not be deemed to
be leverage for purposes of the limitations placed on the extent of assets that
may be used for borrowing activities. See "Other Investment Policies of the
Funds - Borrowing."
Certain issuers of structured investments may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, a Fund's investment in
these structured investments may be limited by the restrictions contained in
the 1940 Act. Structured investments are typically sold in private placement
transactions, and there currently is no active trading market for structured
investments. Each of the Funds, except Emerging Fixed Income Markets Series,
will limit its investment in structured investments to 5% of its total assets.
Forward Foreign Currency Contracts and Options on Foreign Securities. The Funds
will normally conduct foreign currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market, or through entering into forward contracts to purchase or sell foreign
currencies.
The Funds will generally not enter into forward contracts with terms of greater
than one year. A forward contract is an obligation to purchase or sell a
specific currency for an agreed price at a future date which is individually
10 . Templeton Institutional Funds, Inc.
<PAGE>
negotiated and privately traded by currency traders and their customers. The
Funds will generally enter into forward contracts under two circumstances.
First, when a Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock" in the U.S. dollar
price of the security in relation to another currency by entering into a forward
contract to buy the amount of foreign currency needed to settle the transaction.
Second, when a Fund's Investment Manager believes that the currency of a
particular foreign country may suffer or enjoy a substantial movement against
another currency, it may enter into a forward contract to sell or buy the former
foreign currency (or another currency which acts as a proxy for that currency)
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. This second investment practice is
generally referred to as "cross-hedging." A Fund's forward transactions may call
for the delivery of one foreign currency in exchange for another foreign
currency and may at times not involve currencies in which its portfolio
securities are then denominated. The Funds have no specific limitation on the
percentage of assets they may commit to forward contracts, subject to their
stated investment objectives and policies, except that a Fund will not enter
into a forward contract if the amount of assets set aside to cover the contract
would impede portfolio management or the Fund's ability to meet redemption
requests. Although forward contracts will be used primarily to protect the Funds
from adverse currency movements, they also involve the risk of loss in the event
that anticipated currency movements will not be accurately predicted.
The Funds may purchase and write put and call options on foreign currencies for
the purpose of protecting against declines in the U.S. dollar value of foreign
currency denominated portfolio securities and against increases in the U.S.
dollar cost of such securities to be acquired. As in the case of other kinds of
options, however, the writing of an option on a foreign currency constitutes
only a partial hedge, up to the amount of the premium received, and a Fund
could be required to purchase or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on a
foreign currency may constitute an effective hedge against fluctuations in
exchange rates although, in the event of rate movements adverse to a Fund's
position, it may forfeit the entire amount of the premium plus related
transaction costs. Options on foreign currencies to be written or purchased by
the Funds are traded on U.S. and foreign exchanges or over-the-counter.
Warrants. A warrant is typically a long-term option issued by a corporation
that gives the holder the privilege of buying a specified number of shares of
the underlying common stock at a specified exercise price at any time on or
before the expiration date. Stock index warrants entitle the holder to receive,
upon exercise, an amount in cash determined by reference to fluctuations in the
level of a specified stock index. If a Fund does not exercise or dispose of a
warrant before its expiration, it will expire worthless.
Common and Preferred Convertible Securities. Convertible securities are, in
general, debt obligations or preferred stocks that may be converted within a
specified period of time into a certain amount of common stock of the same or a
different issuer. A convertible security provides a fixed-income stream and the
opportunity, through its conversion feature, to participate in the capital
appreciation resulting from a market price advance in its underlying common
stock. As with a straight fixed-income security, a convertible security tends
to increase in market value when interest rates decline and decrease in value
when interest rates rise. Like common stock, the value of a convertible
security tends to increase as the market value of the underlying stock rises,
and it tends to decrease as the market value of the underlying stock declines.
Because its value can be influenced by both interest rate and market movements,
a convertible security is not as sensitive to interest rates as a similar
fixed-income security, nor is it as sensitive to changes in share price as its
underlying stock.
Depositary Receipts. The Funds may purchase sponsored or unsponsored American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global
Depositary Receipts ("GDRs") (collectively, "depositary receipts"). ADRs are
depositary receipts typically issued by a U.S. bank or trust company which
evidence ownership of underlying securities issued by a foreign corporation.
EDRs and GDRs are typically issued by foreign banks or trust companies,
although they also may be issued by U.S. banks or trust companies, and evidence
ownership of underlying securities issued by either a foreign or a United
States corporation. Generally, depositary receipts in registered form are
designed for use in the U.S. securities market and depositary receipts in
bearer form are designed for use in
Templeton Institutional Funds, Inc. . 11
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securities markets outside the U.S. Depositary receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. Depositary receipts may be issued pursuant to sponsored or
unsponsored programs. In sponsored programs, an issuer has made arrangements to
have its securities traded in the form of depositary receipts. In unsponsored
programs, the issuer may not be directly involved in the creation of the
program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the depositary receipts. Depositary receipts also involve the risks of other
investments in foreign securities, as discussed below. For purposes of the
Funds' investment policies, the Funds' investments in depositary receipts will
be deemed to be investments in the underlying securities.
Other Investment Policies Of The Funds
Each Fund is authorized to engage in certain investment techniques and
strategies. Although these strategies are regularly used by some investment
companies and other institutional investors in various markets, some of these
strategies cannot at the present time be used to a significant extent by the
Funds in some of the markets in which the Funds will invest and may not be
available for extensive use in the future.
Temporary Investments. For temporary defensive purposes, each Fund may invest
up to 100% of its total assets in the following money market securities,
denominated in U.S. dollars or in the currency of any foreign country, issued
by entities organized in the United States or any foreign country: short-term
(less than twelve months to maturity) and medium-term (not greater than five
years to maturity) obligations issued or guaranteed by the U.S. government or
the governments of foreign countries, their agencies or instrumentalities;
finance company and corporate commercial paper, and other short-term corporate
obligations, in each case rated Prime-1 by Moody's or A or better by S&P or, if
unrated, of comparable quality as determined by each Fund's Investment Manager;
obligations (including certificates of deposit, time deposits and bankers'
acceptances) of banks having total assets in excess of $1 billion; and
repurchase agreements with banks and broker-dealers with respect to such
securities. In addition, for temporary defensive purposes, each Fund may invest
up to 25% of its total assets in obligations (including certificates of
deposit, time deposits and bankers' acceptances) of U.S. and foreign banks;
provided that a Fund will limit its investment in time deposits for which there
is a penalty for early withdrawal to 10% of its total assets.
Concentration and Diversification. Each Fund reserves the right to invest more
than 25% of its assets in any one country, but will not invest more than 25% of
its total assets in any one industry (excluding the U.S. government). Under
normal circumstances, each Fund will invest at least 65% of its assets in
issuers domiciled in at least three different nations (one of which may be the
United States). Each Fund, except Emerging Fixed Income Markets Series, may
invest no more than 5% of its total assets in securities issued by any one
company or government, exclusive of U.S. government securities.
Repurchase Agreements. When a Fund acquires a security from a U.S. bank or a
registered broker-dealer, it may simultaneously enter into a repurchase
agreement, wherein the seller agrees to repurchase the security at a specified
time and price. The repurchase price is in excess of the purchase price by an
amount which reflects an agreed-upon rate of return, which is not tied to the
coupon rate on the underlying security. Under the 1940 Act, repurchase
agreements are considered to be loans collateralized by the underlying security
and therefore will be fully collateralized. However, if the seller should
default on its obligation to repurchase the underlying security, a Fund may
experience delay or difficulty in its ability to dispose of the underlying
security and might incur a loss if the value of the security declines, as well
as incur disposition costs in liquidating the security.
Borrowing. Each Fund may borrow up to one-third of the value of its total
assets from banks to increase its holdings of portfolio securities, to meet
redemption requests, to pay expenses or for other temporary needs. Under the
1940 Act, a Fund is required to maintain continuous asset coverage of 300% with
12 . Templeton Institutional Funds, Inc.
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respect to such borrowings and to sell (within three days) sufficient portfolio
holdings to restore such coverage if it should decline to less than 300% due to
market fluctuations or otherwise, even if such liquidations of a Fund's
holdings may be disadvantageous from an investment standpoint. Leveraging by
means of borrowing may exaggerate the effect of any increase or decrease in the
value of portfolio securities on a Fund's net asset value, and money borrowed
will be subject to interest and other costs (which may include commitment fees
and/or the cost of maintaining minimum average balances) which may or may not
exceed the income received or capital appreciation realized from the securities
purchased with borrowed funds.
Loans of Portfolio Securities. Each Fund may lend to broker-dealers portfolio
securities with an aggregate market value of up to one-third of its total
assets to generate income. Such loans must be secured by collateral (consisting
of any combination of cash, U.S. government securities or irrevocable letters
of credit) in an amount at least equal (on a daily marked-to-market basis) to
the current market value of the securities loaned. A Fund may terminate the
loans at any time and obtain the return of the securities loaned within five
business days. A Fund will continue to receive any interest or dividends paid
on the loaned securities and will continue to retain any voting rights with
respect to the securities. Loans of portfolio securities involve the risk of
default by the counter-party to the loan transaction, which could involve delay
or difficulty in a Fund's exercise of its right to realize upon the collateral
for such loans, as well as transaction costs.
When-Issued and Delayed Delivery Securities. Each Fund may purchase securities
on a when-issued or delayed delivery basis. Securities purchased on a when-
issued or delayed delivery basis are purchased for delivery beyond the normal
settlement date at a stated price and yield. No income accrues to the purchaser
of a security on a when-issued or delayed delivery basis prior to delivery.
Such securities are recorded as an asset and are subject to changes in value
based upon changes in the general level of interest rates. The Funds will only
make commitments to purchase securities on a when-issued or delayed delivery
basis with the intention of actually acquiring the securities, but may sell
them before the settlement date to attempt to "lock" in gains or avoid losses,
or if otherwise deemed advisable by the Investment Manager.
Purchasing a security on a when-issued or delayed delivery basis can involve a
risk that the market price at the time of delivery may be lower than the
agreed-upon purchase price, and therefore there could be an unrealized loss at
the time of delivery. In addition, while an issuer of when-issued securities
has made a commitment to issue the securities as of a specified future date,
there can be no assurance that the securities will be issued and that the trade
will settle. In the event settlement does not occur, any appreciation in the
value of the when-issued security would be lost, including the amount of any
appreciation "locked" in by the sale of an appreciated security prior to
settlement. Each Fund will establish a segregated account in which it will
maintain liquid assets in an amount at least equal in value to the Fund's net
commitments to purchase securities on a when-issued or delayed delivery basis.
If the value of these assets declines, the Fund will place additional liquid
assets in the account on a daily basis so that the value of the assets in the
account is equal to the amount of such commitments.
Options on Securities or Indices. In order to hedge against market shifts, each
Fund may purchase put and call options on securities or securities indices. In
addition, each Fund may seek to generate income to offset operating expenses
and/or may hedge a portion of its portfolio investments through writing (i.e.,
selling) covered put and call options. Options purchased or written by the
Funds will be traded on United States and foreign exchanges or in the over-the-
counter markets. An option on a security is a contract that permits the
purchaser of the option, in return for the premium paid, the right to buy a
specified security (in the case of a call option) or to sell a specified
security (in the case of a put option) from or to the writer of the option at a
designated price during the term of the option. An option on a securities index
permits the purchaser of the option, in return for the premium paid, the right
to receive from the seller cash equal to the difference between the closing
price of the index and the exercise price of the option. A Fund may write a
call or put option only if the option is "covered." This means that so long as
a Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the call, or hold a call at the same exercise
Templeton Institutional Funds, Inc. . 13
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price, for the same exercise period, and on the same securities as the written
call. A put is covered if a Fund maintains liquid assets with a value equal to
the exercise price in a segregated account, or holds a put on the same
underlying securities at an equal or greater exercise price. The value of the
underlying securities on which options may be written at any one time will not
exceed 25% of the total assets of a Fund. A Fund will not purchase put or call
options if the aggregate premium paid for such options would exceed 5% of its
total assets at the time of purchase.
Futures Contracts. For hedging purposes only (including anticipatory hedges
where the Investment Manager seeks to anticipate an intended shift in maturity,
duration or asset allocation), the Funds may buy and sell covered financial
futures contracts, stock index futures contracts, foreign currency futures
contracts and options on any of the foregoing. A financial futures contract is
an agreement between two parties to buy or sell a specified debt security at a
set price on a future date. An index futures contract is an agreement to take
or make delivery of an amount of cash based on the difference between the value
of the index at the beginning and at the end of the contract period. A futures
contract on a foreign currency is an agreement to buy or sell a specified
amount of a currency for a set price on a future date. When a Fund enters into
a futures contract, it must make an initial deposit, known as "initial margin,"
as a partial guarantee of its performance under the contract. As the value of
the security, index or currency fluctuates, either party to the contract is
required to make additional margin payments, known as "variation margin," to
cover any additional obligation it may have under the contract. In addition,
when a Fund enters into a futures contract, it will segregate assets or "cover"
its position in accordance with the 1940 Act. See "How Do the Funds Invest
Their Assets? - Futures Contracts" in the SAI.
A Fund may not commit more than 5% of its total assets to initial margin
deposits on futures contracts and related options. The value of the underlying
securities on which futures contracts will be written at any one time will not
exceed 25% of the total assets of a Fund.
Swap Agreements. Emerging Fixed Income Markets Series may enter into interest
rate, index and currency exchange rate swap agreements for purposes of
attempting to obtain a particular desired return at a lower cost to the Fund
than if the Fund had invested directly in an instrument that yielded that
desired return. Swap agreements are two-party contracts entered into primarily
by institutional investors for periods ranging from a few weeks to more than
one year. In a standard "swap" transaction, two parties agree to exchange the
returns (or differentials in rates of return) earned or realized on particular
predetermined investments or instruments. The gross returns to be exchanged or
"swapped" between the parties are calculated with respect to a "notional
amount," i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency, or in
a "basket" of securities representing a particular index. The "notional amount"
of the swap agreement is only a fictive basis on which to calculate the
obligations which the parties to a swap agreement have agreed to exchange.
Emerging Fixed Income Markets Series' obligations (or rights) under a swap
agreement will generally be equal only to the net amount to be paid or received
under the agreement based on the relative values of the positions held by each
party to the agreement (the "net amount"). Emerging Fixed Income Markets
Series' obligations under a swap agreement will be accrued daily (offset
against any amounts owing to the Fund) and any accrued but unpaid net amounts
owed to a swap counterparty will be covered by the maintenance of a segregated
account consisting of cash, U.S. Government securities, or high grade debt
obligations, to avoid any potential leveraging of the Fund's portfolio.
Emerging Fixed Income Markets Series will not enter into a swap agreement with
any single party if the net amount owed or to be received under existing
contracts with that party would exceed 5% of the Fund's assets.
Whether Emerging Fixed Income Markets Series' use of swap agreements will be
successful in furthering its investment objective will depend on the ability of
the Investment Manager correctly to predict whether certain types of
investments are likely to produce greater returns than other investments.
Because they are two-party contracts and because they may have terms of greater
than seven days, swap agreements may be considered to be illiquid. Moreover,
Emerging Fixed Income Markets Series bears the risk of loss of the amount
expected to be received under a swap agreement in the event of the default or
bankruptcy of a swap agreement counterparty. The Investment Manager will
14 . Templeton Institutional Funds, Inc.
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cause Emerging Fixed Income Markets Series to enter into swap agreements only
with counterparties that would be eligible for consideration as repurchase
agreement counterparties under the Funds' repurchase agreement guidelines.
Certain restrictions imposed on Emerging Fixed Income Markets Series by the
Code may limit its ability to use swap agreements. The swap market is a
relatively new market and is largely unregulated. It is possible that
developments in the swap market and the laws relating to swaps, including
potential government regulation, could adversely affect Emerging Fixed Income
Markets Series' ability to terminate existing swap agreements, to realize
amounts to be received under such agreements, or to enter into swap
agreements, or could have tax consequences. See "Additional Information on
Distributions and Taxes" in the SAI for more information regarding the tax
considerations relating to swap agreements.
Closed-End and Open-End Investment Companies. Some countries have authorized
the formation of closed-end investment companies to facilitate indirect
foreign investment in their capital markets. In accordance with the 1940 Act,
each Fund may invest up to 10% of its total assets in securities of closed-end
investment companies which invest principally in securities in which that Fund
is authorized to invest. This restriction on investment in securities of
closed-end investment companies may limit opportunities for a Fund to invest
indirectly in certain emerging markets. Shares of certain closed-end
investment companies may at times be acquired only at market prices
representing premiums to their net asset values. Investment by a Fund in
shares of closed-end investment companies would involve duplication of fees,
in that shareholders would bear both their proportionate share of expenses of
the Fund (including management and advisory fees) and, indirectly, the
expenses of such closed-end investment companies. Emerging Fixed Income
Markets Series may invest in open-end investment companies as well, subject to
the above restrictions, and subject to a maximum of 10% of its total assets in
closed and open-end funds combined.
Portfolio Turnover. Growth Series, Foreign Equity Series and Emerging Markets
Series each invests for long-term growth of capital and does not intend to
place emphasis upon short-term trading profits. Accordingly, each of these
Funds expects to have a portfolio turnover rate of less than 50%. The
Investment Manager may engage in short-term trading in the portfolio of
Emerging Fixed Income Markets Series when such trading is considered
consistent with the Fund's investment objective. Also, a security may be sold
and another of comparable quality simultaneously purchased to take advantage
of what the Investment Manager believes to be a temporary disparity in the
normal yield relationship between the two securities. As a result of its
investment policies, under certain market conditions, the portfolio turnover
rate of Emerging Fixed Income Markets Series may be higher than that of other
mutual funds, and is expected to be between 400% and 500%. Because a higher
turnover rate increases transaction costs and may increase capital gains, the
Investment Manager carefully weighs the anticipated benefits of short-term
investment against these consequences.
Illiquid Investments. Growth Series' and Foreign Equity Series' policy is not
to invest more than 10% of net assets, at the time of purchase, in illiquid
securities. Emerging Markets Series' and Emerging Fixed Income Markets Series'
policy is not to invest more than 15% of net assets, at the time of purchase,
in illiquid securities. Illiquid securities are generally securities that
cannot be sold within seven days in the normal course of business at
approximately the amount at which a Fund has valued them.
The Investment Managers, based on a continuing review of the trading markets,
may consider certain restricted securities which may otherwise be deemed to be
illiquid, that are offered and sold to "qualified institutional buyers," to be
liquid. The Board has adopted guidelines and delegated to the Investment
Managers the daily function of determining and monitoring the liquidity of
restricted securities. The Board, however, will oversee and be ultimately
responsible for the determinations. If the Fund invests in restricted
securities that are deemed liquid, the general level of illiquidity in a Fund
may be increased if qualified institutional buyers become uninterested in
purchasing these securities or the market for these securities contracts.
Other Policies and Restrictions. Each Fund has a number of additional
investment restrictions that limit its activities to some extent. Some of
these restrictions may only be changed with shareholder approval. For a list
of these restrictions
Templeton Institutional Funds, Inc. . 15
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and more information about each Fund's investment policies, please see "How do
the Funds Invest their Assets?" and "Investment Restrictions" in the SAI.
Each Fund's policies and restrictions discussed in this prospectus and in the
SAI are considered at the time the Fund makes an investment. The Funds are
generally not required to sell a security because of a change in circumstances.
WHAT ARE THE FUNDS' POTENTIAL RISKS?
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Funds, nor can
there be any assurance that a Fund's investment objective will be attained. As
with any investment in securities, the value of, and income from, an investment
in the Funds can decrease as well as increase, depending on a variety of
factors which may affect the values and income generated by the Funds'
portfolio securities, including general economic conditions and market factors.
Additionally, investment decisions made by the Investment Managers will not
always be profitable or prove to have been correct. In addition to the factors
which affect the value of individual securities, a shareholder may anticipate
that the value of the shares of the Funds will fluctuate with movements in the
broader equity and bond markets, as well. A decline in the stock market of any
country in which a Fund is invested in equity securities may also be reflected
in declines in the price of the shares of the Fund. Changes in prevailing rates
of interest in any of the countries in which a Fund is invested in fixed income
securities will likely affect the value of such holdings and thus the value of
Fund shares. Increased rates of interest which frequently accompany inflation
and/or a growing economy are likely to have a negative effect on the value of a
Fund's shares. In addition, changes in currency valuations will affect the
price of the shares of a Fund. History reflects both decreases and increases in
stock markets and interest rates in individual countries and throughout the
world and in currency valuations, and these may occur unpredictably in the
future. The Funds are not intended as a complete investment program.
The Funds have the right to purchase securities in any foreign country,
developed or underdeveloped. Investors should consider carefully the risks
associated with investing in foreign securities, which are in addition to the
usual risks inherent in domestic investments. These risks are often heightened
for investments in developing markets. See "What Are the Funds' Potential
Risks?" in the SAI. There is the possibility of expropriation, nationalization
or confiscatory taxation, taxation of income earned in foreign nations or other
taxes imposed with respect to investments in foreign nations, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), foreign investment controls on daily stock market movements,
default in foreign government securities, political or social instability, or
diplomatic developments which could affect investments in securities of issuers
in foreign nations. Some countries may withhold portions of interest and
dividends at the source. In addition, in many countries there is less publicly
available information about issuers than is available in reports about
companies in the U.S. Foreign companies are not generally subject to
uniform accounting or financial reporting standards, and auditing practices and
requirements may not be comparable to those applicable to U.S.companies. The
Funds may encounter difficulties or be unable to vote proxies, exercise
shareholder rights, pursue legal remedies, and obtain judgments in foreign
courts.
As a non-fundamental policy, each Fund will limit its investments in Russian
securities to 5% of its total assets. Russian securities involve additional
significant risks, including political and social uncertainty (for example,
regional conflicts and risk of war), currency exchange rate volatility,
pervasiveness of corruption and crime in the Russian economic system, delays in
settling portfolio transactions and risk of loss arising out of Russia's system
of share registration and custody. Russia's system of share registration and
custody creates certain risks of loss (including the risk of total loss) that
are not normally associated with investments in other securities markets. These
risks and other risks associated with the Russia securities market are
discussed more fully in the SAI under the caption "What Are the Funds'
Potential Risks?" and investors should read this section in detail.
16 . Templeton Institutional Funds, Inc.
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Brokerage commissions, custodial services, and other costs relating to
investment in foreign countries are generally more expensive than in the U.S.
Foreign securities markets have different clearance and settlement
procedures and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of a Fund are uninvested and no return is earned
thereon. The inability of a Fund to make intended security purchases due to
settlement problems could cause a Fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security due to settlement
problems could result either in losses to a Fund due to subsequent declines in
value of the portfolio security or, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser.
In many foreign countries there is less government supervision and regulation
of business and industry practices, stock exchanges, brokers and listed
companies than in the U.S. There is an increased risk, therefore, of
uninsured loss due to lost, stolen, or counterfeit stock certificates. In
addition, the foreign securities markets of many of the countries in which the
Funds may invest may also be smaller, less liquid, and subject to greater price
volatility than those in the U.S. For a discussion of special risks,
see "What Are the Funds' Potential Risks?" in the SAI. Prior governmental
approval of non-domestic investments may be required under certain
circumstances in some developing countries, and the extent of foreign
investment in domestic companies may be subject to limitation in other
developing countries. Foreign ownership limitations also may be imposed by the
charters of individual companies in developing countries to prevent, among
other concerns, violation of foreign investment limitations. Repatriation of
investment income, capital and proceeds of sales by foreign investors may
require governmental registration and/or approval in some developing
countries. The Funds could be adversely affected by delays in or a refusal to
grant any required governmental registration or approval for such repatriation.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
The Funds may effect currency exchange transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign exchange market. However, some
price spread on currency exchange (to cover service charges) will be incurred
when a Fund converts assets from one currency to another. Further, the Funds
may be affected either unfavorably or favorably by fluctuations in the relative
rates of exchange between the currencies of different nations. Cross-hedging
transactions by the Funds involve the risk of imperfect correlation between
changes in the values of the currencies to which such transactions relate and
changes in the value of the currency or other asset or liability that is the
subject of the hedge.
The Funds may purchase securities issued by companies with comparatively
smaller capitalization although the Funds do not emphasize smaller companies.
Securities of smaller capitalization companies involve additional risks. For
example, smaller capitalization issuers include relatively new or unseasoned
companies which are in their early stages of development, or small companies
positioned in new and emerging industries where the opportunity for rapid
growth is expected to be above average. Historically, smaller capitalization
stocks have been more volatile in price than larger capitalization stocks.
Among the reasons for the greater price volatility of these securities are the
less certain growth prospects of smaller firms, the lower degree of liquidity
in the markets for these stocks, and the greater sensitivity of small companies
to changing economic conditions. Besides exhibiting greater volatility, small
company stocks may, to a degree, fluctuate independently of larger company
stocks. Small company stocks may decline in price as large company stocks rise,
or rise in price as large company stocks decline. You should therefore expect
the shares of a fund that invests a substantial portion of its assets in small
company stocks to be more volatile than the shares of a fund that invests
solely in larger capitalization stocks.
Templeton Institutional Funds, Inc. . 17
<PAGE>
Emerging Fixed Income Markets Series is a "non-diversified" Fund, which means
the Fund is not limited in the proportion of its assets that may be invested in
the securities of a single issuer. However, Emerging Fixed Income Markets
Series intends to conduct its operations so as to qualify as a "regulated
investment company" for purposes of the Code, which generally will relieve the
Fund of any liability for Federal income tax to the extent its earnings are
distributed to shareholders. See "How Taxation Affects You and the Funds." To
so qualify, among other requirements, Emerging Fixed Income Markets Series will
limit its investments so that, at the close of each quarter of the taxable
year, (i) not more than 25% of the market value of the Fund's total assets will
be invested in the securities of a single issuer, and (ii) with respect to 50%
of the market value of its total assets, not more than 5% of the market value
of its total assets will be invested in the securities of a single issuer and
the Fund will not own more than 10% of the outstanding voting securities of a
single issuer. Emerging Fixed Income Markets Series' investments in U.S.
government securities are not subject to these limitations. Because Emerging
Fixed Income Markets Series, as a non-diversified fund, may invest in a smaller
number of individual issuers than a diversified investment company, and may be
more susceptible to any single economic, political or regulatory occurrence, an
investment in the Fund may present greater risk to an investor than an
investment in a diversified fund.
The Funds are authorized to invest in medium quality or high-risk, lower
quality debt securities (see "Types of Securities in Which the Funds May Invest
- - Debt Securities"). High-risk, lower quality debt securities, commonly known
as junk bonds, are regarded, on balance, as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation and may be in default. Unrated debt
securities are not necessarily of lower quality than rated securities but they
may not be attractive to as many buyers. Regardless of rating levels, all debt
securities considered for purchase (whether rated or unrated) will be carefully
analyzed by a Fund's Investment Manager to insure, to the extent possible, that
the planned investment is sound. The Funds may, from time to time, purchase
defaulted debt securities if, in the opinion of a Fund's Investment Manager,
the issuer may resume interest payments in the near future. A Fund will not
invest more than 10% of its total assets in defaulted debt securities, which
may be illiquid.
Although they may offer higher yields than do higher rated securities, low
rated and unrated debt securities generally involve greater volatility of price
and risk of principal and income, including the possibility of default by, or
bankruptcy of, the issuers of the securities. In addition, the markets in which
low rated and unrated debt securities are traded are more limited than those in
which higher rated securities are traded. The existence of limited markets for
particular securities may diminish a Fund's ability to sell the securities at
fair value either to meet redemption requests or to respond to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
Reduced secondary market liquidity for certain low rated or unrated debt
securities may also make it more difficult for a Fund to obtain accurate market
quotations for the purposes of valuing the Fund's portfolio. Market quotations
are generally available on many low rated or unrated securities only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of low rated debt securities,
especially in a thinly traded market. Analysis of the creditworthiness of
issuers of low rated debt securities may be more complex than for issuers of
higher rated securities, and the ability of a Fund to achieve its investment
objective may, to the extent of investment in low rated debt securities, be
more dependent upon such creditworthiness analysis than would be the case if
the Fund were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of low rated debt securities have been found to be less sensitive to
interest rate changes than higher rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. A projection
of an economic downturn or of a period of rising interest rates, for example,
could cause a decline in low rated debt securities prices because the advent of
a recession could lessen the
18 . Templeton Institutional Funds, Inc.
<PAGE>
ability of a highly leveraged company to make principal and interest payments
on its debt securities. If the issuer of low rated debt securities defaults, a
Fund may incur additional expenses to seek recovery.
Leveraging by means of borrowing may exaggerate the effect of any increase or
decrease in the value of portfolio securities on a Fund's net asset value and
money borrowed will be subject to interest and other costs (which may include
commitment fees and/or the cost of maintaining minimum average balances) which
may or may not exceed the income received from the securities purchased with
borrowed funds.
Successful use of futures contracts and related options is subject to special
risk considerations. A liquid secondary market for any futures or options
contract may not be available when a futures or options position is sought to
be closed. In addition, there may be an imperfect correlation between movements
in the securities or foreign currency on which the futures or options contract
is based and movements in the securities or currency in a Fund's portfolio.
Successful use of futures or options contracts is further dependent on the
ability of a Fund's Investment Manager to correctly predict movements in the
securities or foreign currency markets and no assurance can be given that its
judgment will be correct. Successful use of options on securities or stock
indices is subject to similar risk considerations. In addition, by writing
covered call options, a Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price.
Hong Kong is scheduled to revert to the sovereignty of China on July 1, 1997.
As with any major political transfer of power, this could result in political,
social, economic, market or other developments in Hong Kong, China or other
countries that could affect the value of a Fund's investments.
There are further risk factors, including possible losses through the holding
of securities in domestic and foreign custodian banks and depositories,
described elsewhere in this prospectus and in the SAI.
WHO MANAGES THE FUNDS?
The Board. The Board oversees the management of the Funds and elects their
officers. The officers are responsible for the Funds' day-to-day operations.
Investment Managers. The Investment Manager of Growth Series and Foreign Equity
Series is Templeton Investment Counsel, Inc. ("TICI"). The Investment Manager of
Emerging Markets Series is Templeton Asset Management Ltd. - Hong Kong Branch
("TAML"). The Investment Manager of Emerging Fixed Income Markets Series is
Templeton Global Bond Managers ("TGBM"), a division of TICI. The Investment
Managers manage the Funds' assets and make their investment decisions. TICI and
TAML are wholly owned by Resources, a publicly owned company engaged in the
financial services industry through its subsidiaries. Charles B. Johnson and
Rupert H. Johnson, Jr. are the principal shareholders of Resources. Together,
the Investment Managers and their affiliates manage over $188 billion in assets.
The Templeton organization has been investing globally since 1940. The
Investment Managers and their affiliates have offices in Argentina, Australia,
Bahamas, Canada, France, Germany, Hong Kong, India, Italy, Korea, Luxembourg,
Poland, Russia, Singapore, South Africa, Taiwan, United Kingdom, U.S., and
Vietnam. Please see "Investment Management and Other Services" and
"Miscellaneous Information" in the SAI for information on securities
transactions and a summary of the Funds' Code of Ethics.
Portfolio Management. The lead portfolio manager for Growth Series and Foreign
Equity Series since its inception is Gary P. Motyl, an executive vice president
of TICI. Mr. Motyl holds a BS degree in finance from Lehigh University and an
MBA in finance from Pace University. He is a Chartered Financial Analyst. Prior
to joining the Templeton organization in 1981, Mr. Motyl worked from 1974 to
1979 as a security analyst with Standard & Poor's Corporation and as a research
analyst and portfolio manager from 1979 to 1981 with Landmark First National
Bank, where he had responsibility for equity research and managed several
pension and profit-sharing plans. Mark Beveridge, Gary R. Clemons and Edward
Ramos exercise secondary portfolio management responsibilities with
Templeton Institutional Funds, Inc. . 19
<PAGE>
respect to Growth Series and Foreign Equity Series. Mr. Beveridge is a senior
vice president of TICI. He holds a BBA in finance from the University of Miami.
He is a Chartered Financial Analyst and a Chartered Investment Counselor, and a
member of the South Florida Society of Financial Analysts and the International
Society of Financial Analysts. Before joining the Templeton organization in 1985
as a security analyst, Mr. Beveridge was a principal with a financial accounting
software firm based in Miami, Florida. He is currently a portfolio manager with
research responsibilities for appliances and household durables, industrial
components, waste management and business and public services. He also has
market coverage of Argentina. Mr. Clemons is a senior vice president of TICI. He
holds a BS degree from the University of Nevada-Reno and an MBA with emphases in
finance and investment banking from the University of Wisconsin-Madison. He
joined TICI in 1993. Prior to that time he was a research analyst at Templeton
Quantitative Advisors, Inc. in New York, where he was also responsible for
management of a small capitalization fund. As a research analyst with Templeton,
Mr. Clemons has responsibility for the telecommunications industry and country
coverage of Columbia, Peru, Sweden and Norway. Mr. Ramos is vice president of
TICI. He holds a BS in finance from Lehigh University and an MBA with emphases
in finance, accounting and international business from The Columbia Graduate
School of Business. Prior to joining the Templeton organization in 1993, Mr.
Ramos worked as assistant to the chief investment officer of Prudential Equity
Management Association. He is currently a portfolio manager and research analyst
with responsibility for the merchandising, finance and brokerage service
industries as well as country coverage of Turkey, Egypt and Israel.
The lead portfolio manager for Emerging Markets Series since its inception is
Dr. J. Mark Mobius. Dr. Mobius is managing director of TAML. In addition, Dr.
Mobius serves as a director and/or officer of many of the funds in the Franklin
Templeton Group of Funds and many investment advisory subsidiaries of
Resources. He holds a BA in Fine Arts from Boston University, an MA in Mass
Communications from Boston University, and a Ph.D. in Economics from the
Massachusetts Institute of Technology. Prior to joining the Templeton
organization in 1987, Dr. Mobius was president of the International Investment
Trust Company Limited (investment manager of Taiwan R.O.C. Fund) (1986-1987)
and a director of Vickers da Costa, Hong Kong (an international securities
firm) (1983-1986). Dr. Mobius began working in Vickers da Costa's Hong Kong
office in 1980 and moved to Taiwan in 1983 to open the firm's office there and
to direct operations in India, Indonesia, Thailand, the Philippines, and Korea.
Messrs. Allan Lam and Tom Wu exercise secondary portfolio management
responsibilities with respect to Emerging Markets Series. Mr. Lam holds a BA in
Accounting from Rutgers University. Prior to joining the Templeton organization
in 1987, he worked as an auditor with two international accounting firms in
Hong Kong: Deloitte Haskins & Sells CPA and KPMG Peat Marwick CPA. Mr. Wu is a
director of TAML. He holds a BSS in economics from the University of Hong Kong
and an MBA in Finance from the University of Oregon. Prior to joining the
Templeton organization in 1987, Mr. Wu worked as an investment analyst,
specializing in Hong Kong companies, with Vickers da Costa.
The portfolio managers of the Emerging Fixed Income Markets Series since its
inception are Neil S. Devlin, Ronald A. Johnson and Umran Demirors. Mr. Devlin
is the chief investment officer and executive vice president of TGBM. He holds
a BA in economics and philosophy from Brandeis University and is a Chartered
Financial Analyst. Before joining the Templeton organization in 1987, he was a
portfolio manager and bond analyst with Constitution Capital Management of
Boston. Prior to that, Mr. Devlin was a bond trader and research analyst for
the Bank of New England. Mr. Devlin currently directs investment strategies in
both the developed and emerging fixed income markets. He also manages numerous
Franklin Templeton mutual funds as well as corporate pension accounts. Dr.
Johnson is vice president of TGBM. He holds a PhD and an MA in economics from
Stanford University, and an MBA in finance and a BA in economics from Adelphi
University. Prior to joining the Templeton organization in 1995, Dr. Johnson
was chief strategist and head of research for JPBT Advisers, Inc. in Miami.
Before joining JPBT Advisers Inc., he was chief economist and head of research
at Vestrust Asset Management Corporation in Miami. In addition, Dr. Johnson has
held several positions at the Federal Reserve Bank of New York, including chief
of the Domestic Financial
20 . Templeton Institutional Funds, Inc.
<PAGE>
Markets Division. Currently, Dr. Johnson co-directs the fixed income research
process and manages several emerging markets fixed income portfolios. Dr.
Demirors is vice president of TGBM. He holds a PhD and an MA in economics from
New York University, and a BA in economics from Bursa Academy of Economics and
Business Administration in Turkey. Prior to joining the Templeton organization
in 1996, Dr. Demirors was a principal and portfolio manager for Socimer
Advisory Inc. in New York. Before joining Socimer Advisory Inc., Dr. Demirors
was the head of research and strategy at Vestcor Partners Group in Miami.
Currently, Dr. Demirors co-directs the fixed income process and manages several
emerging markets fixed income portfolios.
Management Fees. During the fiscal year ended December 31, 1996, management
fees as a percentage of each Fund's average net assets were as follows: Foreign
Equity Series, 0.70%; Growth Series, 0.70%; Emerging Markets Series, 1.25%. The
Investment Managers voluntarily agreed to reduce their fees in order to limit
total expenses of the Funds. This voluntary agreement did not result in any
management fee reductions for the Funds. After April 30, 1998, these agreements
may end at any time upon notice to the Board. Total expenses of the Funds
during the fiscal year ended December 31, 1996, including fees paid to the
Investment Managers, were as follows: Foreign Equity Series, 0.87%; Growth
Series, 0.87%; Emerging Markets Series, 1.56%. Emerging Fixed Income Markets
Series had not commenced operations as of December 31, 1996.
Emerging Fixed Income Markets Series pays its own operating expenses. These
expenses include the Investment Manager's management fees; taxes, if any;
custodian, legal, and auditing fees; the fees and expenses of Board members who
are not members of, affiliated with, or interested persons of the Investment
Manager; fees of any personnel not affiliated with the Investment Manager;
insurance premiums; trade association dues; expenses of obtaining quotations
for calculating the Fund's Net Asset Value; and printing and other expenses
that are not expressly assumed by the Investment Manager. Under its management
agreement, the Fund pays the Investment Manager a management fee equal on an
annual basis to 0.70% of its average daily net assets. The fee is computed at
the close of business on the last business day of each month.
Portfolio Transactions. The Investment Managers try to obtain the best
execution on all transactions. If an Investment Manager believes more than one
broker or dealer can provide the best execution, it may consider research and
related services and the sale of shares of a Fund, as well as shares of other
funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "How Do the Funds Buy Securities For their Portfolios?" in
the SAI for more information.
Administrative Services. FT Services (and, prior to October 1, 1996, Templeton
Global Investors, Inc.) provides certain administrative services and facilities
for the Funds. For its services, the Company pays the Administrator a monthly
fee equivalent on an annual basis to 0.15% of combined average daily net assets
of the Funds during the year, reduced to 0.135% of such net assets of $200
million, further reduced to 0.10% of such net assets in excess of $700 million,
and further reduced to 0.075% of such net assets in excess of $1,200 million.
Please see "Investment Management and Other Services" in the SAI for more
information.
HOW DO THE FUNDS MEASURE PERFORMANCE?
From time to time, the Funds advertise their performance. The most commonly used
measure of performance is total return. Total return is the change in value of
an investment over a given period. It assumes any dividends and capital gains
are reinvested.
The Funds' investment results will vary. Performance figures are always based
on past performance and do not guarantee future results. For a more detailed
description of how each Fund calculates its performance figures, please see
"How do the Funds Measure Performance?" in the SAI.
Templeton Institutional Funds, Inc. . 21
<PAGE>
HOW IS THE COMPANY ORGANIZED?
Each of the Funds, with the exception of the Emerging Fixed Income Markets
Series, is a diversified series of the Company, which is an open-end management
investment company, commonly called a mutual fund. The Emerging Fixed Income
Markets Series is a non-diversified series of the Company. The Company was
organized as a Maryland corporation on July 6, 1990, and is registered with the
SEC. Each share of the Funds has one vote. All shares have equal voting,
participation and liquidation rights. Shares of the Funds are considered Class
I shares for redemption, exchange and other purposes. In the future, the Funds
may offer additional classes of shares. As of April 1, 1997, Princeton
Theological Seminary owned 62% of the outstanding shares of Growth Series.
The Funds have noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Funds do not intend to hold annual shareholder meetings. The Company or a
Fund may hold special meetings, however, for matters requiring shareholder
approval. The Funds will call a special meeting of shareholders for the purpose
of considering the removal of a Board member if requested in writing to do so
by shareholders holding at least 10% of the outstanding shares. In certain
circumstances, we are required to help you communicate with other shareholders
about the removal of a Board member.
HOW TAXATION AFFECTS YOU AND THE FUNDS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Funds and their shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
Each Fund is treated as a separate entity for federal income tax purposes. Each
Fund intends to elect to be treated and to qualify each year as a regulated
investment company under Subchapter M of the Code. A regulated investment
company generally is not subject to federal income tax on income and gains
distributed in a timely manner to its shareholders.
The Funds intend to distribute to shareholders substantially all of their net
investment income and net realized capital gains, which generally will be
taxable income or capital gains in their hands. If a Fund experiences losses
from certain investments or positions denominated in foreign currency, the
ordinary income distributable to you may decrease and amounts distributed to
you may constitute a non-taxable return of capital. If a distribution is
treated as a return of capital, your tax basis in your Fund shares will be
reduced by a like amount (to the extent of such basis), and any excess of the
distribution over your tax basis in your Fund shares will be treated as capital
gain. Similarly, certain foreign currency gains realized by a Fund may increase
the amount of ordinary income distributable to you.
Distributions declared in October, November or December to shareholders of
record on a date in such month and paid during the following January will be
treated as having been received by shareholders on December 31 in the year such
distributions were declared. The Funds will inform you each year of the amount
and nature of such income or gains. Sales or other dispositions of Fund shares
generally will give rise to taxable gain or loss.
22 . Templeton Institutional Funds, Inc.
<PAGE>
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
Shares of the Funds may be purchased at net asset value without a sales charge
through any broker that has a dealer agreement with Distributors, the Principal
Underwriter of the shares of the Funds, or directly from Distributors, upon
receipt by Distributors of an Institutional Account Application Form and
payment. Distributors may establish minimum requirements with respect to amount
of purchase.
Minimum Investment
There is a minimum initial investment of $5 million ($25 for subsequent
investments) for all investors except the following:
(a) Employer stock, bonus, pension or profit-sharing plans that meet the
requirements for qualification under Section 401(k) of the Code, are
subject to no minimum initial investment if the number of employees is
equal to or greater than 200. Plans with less than 200 employees are
subject to a $1 million initial investment or an investment of $1 million
over the subsequent 13-month period in the Funds or any other funds in the
Franklin Templeton Group of Funds ;
(b) Trust companies or bank trust departments exercising exclusive
discretionary investment authority over funds which are held in a
fiduciary, agency, advisory, custodial or similar capacity and over which
the trust companies, bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion are subject to a $1 million initial investment or an
investment of $1 million over the subsequent 13-month period in the Funds
or any other funds in the Franklin Templeton Group of Funds. Trust companies
and bank trust departments making such purchases may be required to register
as dealers pursuant to state law; or
(c) Government, municipalities and other tax-exempt entities that meet the
requirements for qualification under Section 501 of the Code are subject to
an initial investment in the Funds of $1 million.
(d) Service agents and broker dealers who have entered into an agreement with
Distributors may purchase shares of the Funds for clients of associated
registered investment advisors participating in fee-based programs until
May 31, 1997. After this date, additional purchases of a Fund may be made
only for clients who already own or hold shares of that Fund.
Letter of Intent
An initial investment of less than $5 million may be made if the investor
executes a Letter of Intent ("Letter") which expresses the investor's intention
to invest at least $5 million within a 13-month period in the Franklin
Templeton Group of Funds, including at least $1 million in the Funds. See the
Institutional Account Application Form. The minimum initial investment under a
Letter is $1 million. If the investor does not invest at least $5 million in
shares of the Funds or other funds in the Franklin Templeton Groupof Funds
within the 13-month period, the shares actually purchased will be involuntarily
redeemed and the proceeds sent the investor at the address of record. Any
redemptions made by the shareholder during the 13-month period will be
subtracted from the amount of the purchases for purposes of determining whether
the terms of the Letter have been completed.
Group Purchases
Any other investor, including a private investment vehicle such as a family
trust or foundation, who is a member of a qualified group may also purchase
shares of the Funds if the group as a whole meets the minimum initial
investment of $5 million, at least $1 million of which is invested or to be
invested in the Funds. The minimum initial investment is based upon the
aggregate dollar value of shares previously purchased and still owned by the
group, plus the amount
Templeton Institutional Funds, Inc. . 23
<PAGE>
of the current purchase. A "qualified group" is one which (i) has formalized
operations which have been in existence for more than six months, (ii) has a
purpose other than acquiring Fund shares, and (iii) satisfies uniform criteria,
such as centralized accounting and communications, which enable Distributors to
realize economies of scale in its costs of distributing shares.
Purchases by Telephone. Shares of the Funds may be purchased for existing
accounts by telephone, and paid for by wire, in the following manner:
1. Call Institutional Services at 1-800/321-8563 or 1-415/312-3600 to advise
of the intention to wire funds for investment. The call must be received
prior to 4:00 p.m. Eastern time to receive that day's price. Each Fund will
supply a wire control number for the investment. It is necessary to obtain
a new wire control number every time money is wired into an account in a
Fund. Wire control numbers are effective for one transaction only and
cannot be used more than once. Wired money which is not properly identified
with a currently effective wire control number will be returned to the bank
from which it was wired and will not be credited to the shareholder's
account.
2. On the next business day, wire funds to Bank of America, ABA Routing No.
121000358, for credit to account no. 1493304779. Be sure to include the
wire control number, the investor's Franklin or Templeton account number
and account registration. Wired funds received by the bank and reported by
the bank to the Funds by the close of the Federal Reserve Wire System are
available for credit on that day. Later wires are credited the following
business day. In order to maximize efficient Fund management, investors are
urged to place and wire their investments as early in the day as possible.
If the purchase is not for an existing account, identify the Fund in which the
investment is being made and send a
Purchases by Mail. Shares of the Funds may be purchased by mail, and paid for
by check, Federal Reserve draft or negotiable bank draft in the following
manner:
1. For an initial investment, send a completed Institutional Account
Application Form to Institutional Services.
2. Make the check, Federal Reserve draft or negotiable bank draft payable to
the Fund in which the investment is being made.
3. Send the check, Federal Reserve draft or negotiable bank draft to
Institutional Services. Investments in good order and received by the Fund
prior to 4:00 p.m. Eastern time on any business day will receive the price
next calculated on that day. Items received after 4:00 p.m. Eastern time
will receive the price calculated on the next business day.
Orders mailed to Distributors by dealers or individual investors do not require
advance notice. Checks or negotiable bank drafts must be in U.S. currency drawn
on a commercial bank in the U.S. and, if over $100,000, may not be deemed to
have been received until the proceeds have been collected, unless the check is
certified or issued by such bank. Any subscription may be rejected by
Distributors or by the Company.
Shares of the Funds may be purchased with "in-kind" securities, if approved in
advance by the Company. Securities used to purchase Fund shares must be
appropriate investments for that Fund, consistent with its investment
objective, policies and limitations, as determined by the Company, and must
have readily available market quotations. The securities will be valued in
accordance with the Company's policy for calculating net asset value (as set
forth above), determined as of the close of the day on which the securities are
received by the Company in salable form. A prospective shareholder will receive
shares of the applicable Fund next computed after such receipt. To obtain the
approval of the Company, call Institutional Services. Investors who are
affiliated persons of the Company (as defined in the 1940 Act) may not purchase
shares in this manner in the absence of SEC approval.
24 . Templeton Institutional Funds, Inc.
<PAGE>
If an investment in the Funds is made through a broker that has executed a
dealer agreement with respect to the Templeton Funds, Distributors or one of
its affiliates may make a payment out of its own resources to such dealer in an
amount not to exceed 0.25% of the amount invested. Dealers may contact
Institutional Services for additional information.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums. In general,
no sales charge applies, and in the case of an exchange into a Franklin
Templeton Fund that offers two classes of shares, a shareholder would receive
Class I shares, which generally bear lower Rule 12b-1 distribution fees than
Class II shares of the same fund.
<TABLE>
<CAPTION>
Method Steps to Follow
- -----------------------------------------------------------------------------
<C> <S>
BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares you're
exchanging
- -----------------------------------------------------------------------------
BY PHONE Call Institutional Services at 1-800/321-8563
>> IF YOU DO NOT WANT THE ABILITY TO EXCHANGE BY PHONE TO APPLY TO
YOUR ACCOUNT, PLEASE LET US KNOW.
- -----------------------------------------------------------------------------
</TABLE>
Exchange Restrictions
Please be aware that the following restrictions apply to exchanges:
. The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically registered
money fund account requiring only one signature for all transactions. Please
notify us in writing if you do not want this option to be available on your
account(s). Additional procedures may apply. Please see "Transaction
Procedures and Special Requirements."
. Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
. The fund you are exchanging into must be eligible for sale in your state.
. We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
. Your exchange may be restricted or refused if you: (i) request an exchange
out of a Fund within two weeks of an earlier exchange request, (ii) exchange
shares out of a Fund more than twice in a calendar quarter, or (iii) exchange
shares equal to at least $5 million, or more than 1% of a Fund's net assets.
Shares under common ownership or control are combined for these limits. If
you exchange shares as described in this paragraph, you will be considered a
Market Timer. Each exchange by a Market Timer, if accepted, will be charged
$5.00. Some of our funds do not allow investments by Market Timers.
Templeton Institutional Funds, Inc. . 25
<PAGE>
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe a Fund would be harmed or
unable to invest effectively, or (ii) a Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
HOW DO I SELL SHARES?
You may sell (redeem) your shares any time.
<TABLE>
<CAPTION>
Method Steps to Follow
- ------------------------------------------------------------------------------
<C> <S>
BY MAIL 1. Send us written instructions signed by all
account owners. If you would like your
redemption proceeds wired to a bank account,
other than the bank account previously
designated, your instructions should include:
. The Federal Reserve ABA routing number
. The name, address and telephone number of the
bank where you want the proceeds sent
. Your bank account number
. If you are using a savings and loan or credit
union, the name of the corresponding bank and
the account number
2. Include any outstanding share certificates for
the shares you are selling
3. Provide a signature guarantee
4. Corporate, partnership and trust accounts may
need to send additional documents. Accounts
under court jurisdiction may have other
requirements.
- ------------------------------------------------------------------------------
BY PHONE Call Institutional Services at 1-800/321-8563. If
(Only available if you you would like your redemption proceeds wired to a
have completed and sent bank account, you must complete the Institutional
the Institutional Telephone Privileges Agreement.
Telephone Privileges
Agreement.)
Telephone requests will be accepted:
.If you have filed an Institutional Telephone
Privileges Agreement.
.If the redemption is to be sent to the address of
record.
.If the redemption is to be sent via previously
designated wiring instructures.
- ------------------------------------------------------------------------------
</TABLE>
If you redeem your shares by mail or by phone, we will send your redemption
check within seven days after we receive your request in proper form. If you
would like the check to be sent to an address other than the address of record
or to be made payable to someone other than the registered owners on the
account, send us written instructions signed by all account owners, with a
signature guarantee. We are not able to pay out cash in the form of currency.
The wiring of redemption proceeds is a service that we make available whenever
possible for redemption requests of $1,000 or more. If we receive your request
in proper form before 4:00 p.m. Eastern time, your wire payment will be sent
the next business day. For requests received in proper form after 4:00 p.m.
Eastern time, the payment will be sent the second business day. By offering
this service to you, the Funds are not bound to meet any redemption request in
less than the seven day period prescribed by law. Neither the Funds nor their
agents shall be liable to you or any other person if, for any reason, a
redemption request by wire is not processed as described in this section.
26 . Templeton Institutional Funds, Inc.
<PAGE>
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment
for more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
Trust Company Retirement Plan Accounts
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under
age 59 1/2, unless the distribution meets an exception stated in the Code. To
obtain the necessary forms, please call our Retirement Plans Department.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUNDS?
Each Fund intends to pay a dividend at least annually representing
substantially all of the Fund's net investment income and any net realized
capital gains. Income dividends and capital gain distributions paid by a Fund,
other than on those shares whose owners keep them registered in the name of a
broker-dealer, are automatically reinvested on the payment date in whole or
fractional shares of the Fund at net asset value as of the ex-dividend date,
unless a shareholder makes a written request for payments in cash.
Dividend payments are not guaranteed, are subject to the Board's discretion
and may vary with each payment. THE FUNDS DO NOT PAY "INTEREST" OR GUARANTEE
ANY FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
IF YOU BUY SHARES SHORTLY BEFORE THE RECORD DATE, PLEASE KEEP IN MIND THAT ANY
DISTRIBUTION WILL LOWER THE VALUE OF THE FUND'S SHARES BY THE AMOUNT OF THE
DISTRIBUTION.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
How and When Shares are Priced
The Company is open for business each day the NYSE is open. We determine the
Net Asset Value per share as of the scheduled close of the NYSE, generally
4:00 p.m. Eastern time. You can find the prior day's closing Net Asset Value
and Offering Price for each Fund in many newspapers.
To calculate Net Asset Value per share of each Fund, the assets of each Fund
are valued and totaled, liabilities are subtracted, and the balance, called
net assets, is divided by the number of shares of the Fund outstanding. Each
Fund's assets are valued as described under "How are Fund Shares Valued?" in
the SAI.
The Price We Use When You Buy or Sell Shares
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest
between the time we receive the order from your dealer and the time we receive
any required documents.
Templeton Institutional Funds, Inc. . 27
<PAGE>
Written Instructions
Written instructions must be signed by all registered owners. To avoid any
delay in processing your transaction, they should include:
. Your name,
. The Fund's name,
. Your account number,
. A description of the request,
. The dollar amount or number of shares,
. For exchanges, the name of the fund you're exchanging into
. A telephone number where we may reach you during the day, or in the evening
if preferred,
. The address the check is to be sent to if different from the address of
record, and
. The name of the payee if different from the registered owner(s).
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1. You wish to sell over $50,000 worth of shares,
2. You want the proceeds to be paid to someone other than the registered
owners,
3. You want the proceeds sent to an address other than the address of record,
or
4. We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. YOU SHOULD
BE ABLE TO OBTAIN A SIGNATURE GUARANTEE FROM A BANK, BROKER, CREDIT UNION,
SAVINGS ASSOCIATION, CLEARING AGENCY, OR SECURITIES EXCHANGE OR ASSOCIATION. A
NOTARIZED SIGNATURE IS NOT SUFFICIENT.
Share Certificates
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate
is lost, stolen or destroyed, you may have to pay an insurance premium of up to
2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares. The certificates should be properly endorsed.
You can do this either by completing a share assignment form, and you should
return the certificate and assignment form in separate envelopes.
Telephone Transactions
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make. You may
also call Institutional Services for instructions.
When you call, we will request personal or other identifying information to
confirm that your instructions are genuine. We will also record calls. We will
not be liable for following instructions communicated by telephone if we
reasonably believe they are genuine. For your protection, we may delay a
transaction or not implement one if we are not reasonably satisfied that the
instructions are genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are
unable to execute a transaction by telephone, we will not be liable for any
loss.
28 . Templeton Institutional Funds, Inc.
<PAGE>
Trust Company Retirement Plan Accounts. You may not sell shares or change
distribution options on Trust Company retirement plans by phone. While you may
exchange shares of Trust Company IRA and 403(b) retirement accounts by phone,
certain restrictions may be imposed on other retirement plans.
To obtain any required form or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
Account Registrations and Required Documents
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights
and ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
Joint Ownership. If you open an account with two or more owners, we register
the account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of
survivorship" is shown as "Jt Ten" on your account statement. For any account
with two or more owners, ALL owners must sign instructions to process
transactions and changes to the account. Even if the law in your state says
otherwise, you will not be able to change owners on the account unless all
owners agree in writing. If you would like another person or owner to sign for
you, please send us a current power of attorney.
Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Trusts. If you register your account as a trust, you should have a valid
written trust document to avoid future disputes or possible court action over
who owns the account. The registration of your account should also include the
name and date of the trust.
Required Documents. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account. A transfer letter of instructions is required in addition to the
following documentation:
<TABLE>
<CAPTION>
Type of Account Documents Required
- ------------------------------------------------------------------------------
<C> <S>
CORPORATION Corporation Resolution
- ------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify
the general partners, or
2. A certification for a partnership agreement
- ------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- ------------------------------------------------------------------------------
</TABLE>
Street or Nominee Accounts. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the
shares to the street or nominee name account of another Securities Dealer.
Both dealers must have an agreement with Distributors or we will not process
the transfer. Contact your Securities Dealer to initiate the transfer. We will
process the transfer after we receive authorization in proper form from your
delivering Securities Dealer. Accounts may be transferred electronically
through the NSCC. For accounts registered in street or nominee name, we may
take instructions directly from the Securities Dealer or your nominee.
Templeton Institutional Funds, Inc. . 29
<PAGE>
Tax Identification Number
For tax reasons, we must have your correct Social Security or tax
identification number on a signed shareholder application or applicable tax
form. Federal law requires us to withhold 31% of your taxable distributions and
sale proceeds if (i) you have not furnished a certified correct taxpayer
identification number, (ii) you have not certified that withholding does not
apply, (iii) the IRS or a Securities Dealer notifies a Fund that the number
you gave us is incorrect, or (iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $1,000.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
Institutional Accounts
Institutional investors will be required to complete an institutional account
application. There may be additional methods of opening accounts and
purchasing, redeeming or exchanging shares of the Funds available for
institutional accounts. To obtain an institutional application or additional
information regarding institutional accounts, contact Institutional Services at
1-800/321-8563 Monday through Friday, from 9:00 a.m. - 8:00 p.m. Eastern time.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or
annual basis. The value of your account must be at least $5,000 and the minimum
payment amount for each withdrawal must be at least $50. For retirement plans
subject to mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete
the systematic withdrawal plan section of the shareholder application included
with this prospectus and indicate how you would like to receive your payments.
You may choose to direct your payments to buy the same class of shares of
another Franklin Templeton Fund or have the money sent directly to you, to
another person, or to a checking account. If you choose to have the money sent
to a checking account, another location, or an address other than the address
of record, a signature guarantee is required.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us in
writing at least seven business days before the end of the month preceding a
scheduled payment. Please see "How Do I Buy, Sell and Exchange Shares? -
Systematic Withdrawal Plan" in the SAI for more information.
30 . Templeton Institutional Funds, Inc.
<PAGE>
TeleFACTS
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
. obtain information about your account;
. obtain price and performance information about any Franklin Templeton Fund;
and
. request duplicate statements and deposit slips for your account.
You will need the Funds' code numbers to use TeleFACTS. The Funds' codes are:
453, for Emerging Fixed Income Markets Series; 454, for Foreign Equity Series;
455, for Growth Series; and 456, for Emerging Markets Series.
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
. Confirmation and account statements reflecting transactions in your account,
including transfers from your account and dividend reinvestments. PLEASE
VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
. Financial reports of the Funds will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of a Fund's financial reports or an interim quarterly
report.
Availability of These Services
The services above are available to most shareholders. If, however, your
shares are held by a financial institution, in a street name account, or
networked through the NSCC, a Fund may not be able to offer these services
directly to you. Please contact your investment representative.
What If I have Questions About My Account?
If you have any questions about your account, you may write to Institutional
Services, PO Box 7777, San Mateo, CA 94403-7777. The Funds and Distributors are
located at PO Box 33030, St. Petersburg, FL 33733-8030. TICI and TGBM are
located at 500 East Broward Boulevard, Ft. Lauderdale, FL 33394-3091.
TAML is located at Two Exchange Square, Hong Kong. You may also contact us by
phone at one of the numbers listed below.
<TABLE>
<CAPTION>
Hours of Operation
(Eastern time)
Department Name Telephone No. (Monday through Friday)
- ---------------------------------------------------------------------------
<C> <C> <S>
Institutional Services 1-800/321-8563 9:00 a.m. to 8:00 p.m.
Shareholder Services 1-800/632-2301 8:30 a.m. to 8:00 p.m.
Dealer Services 1-800/524-4040 8:30 a.m. to 8:00 p.m.
Fund Information 1-800/DIAL BEN 8:30 a.m. to 11:00 p.m.
(1-800/342-5236) 9:30 a.m. to 5:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 8:30 a.m. to 8:00 p.m.
TDD (hearing impaired) 1-800/851-0637 8:30 a.m. to 8:00 p.m.
</TABLE>
Your phone call may be monitored or recorded to ensure we provide you with
high quality service. You will hear a regular beeping tone if your call is
being recorded.
Templeton Institutional Funds, Inc. . 31
<PAGE>
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1940 Act - Investment Company Act of 1940, as amended
Board - The Board of Directors of the Company
CD - Certificate of Deposit
Class I and Class II - Certain funds in the Franklin Templeton Funds offer two
classes of shares, designated "Class I" and "Class II." The two classes have
proportionate interests in the same portfolio of investment securities. They
differ, however, primarily in their sales charge structures and Rule 12b-1
plans. Shares of the Funds are considered Class I shares for redemption,
exchange and other purposes.
Code - Internal Revenue Code of 1986, as amended.
Distributors - Franklin/Templeton Distributors, Inc., the Funds' principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Directors."
Franklin Templeton Funds - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund.
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries.
Franklin Templeton Group of Funds - All U.S. registered investment companies in
the Franklin Group of Funds and the Templeton Group of Funds.
FT Services - Franklin Templeton Services, Inc., the Funds' administrator.
Investment Manager - A Fund's investment manager: Templeton Investment
Counsel, Inc. ("TICI") for Growth Series and Foreign Equity Series; Templeton
Asset Management Ltd. - Hong Kong Branch (("TAML") for Emerging
Markets Series; and Templeton Global Bond Managers ("TGBM"), a division of
TICI, for Emerging Fixed Income Markets Series.
Investor Services - Franklin/Templeton Investor Services, Inc., the Funds'
shareholder servicing and transfer agent.
IRS - Internal Revenue Service.
Letter - Letter of Intent
Market Timer(s) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
Moody's - Moody's Investors Service, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NSCC - National Securities Clearing Corporation.
NYSE - New York Stock Exchange, Inc.
Offering Price - The public offering price is the Net Asset Value per share.
32 . Templeton Institutional Funds, Inc.
<PAGE>
Templeton Institutional Funds, Inc. .
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Ratings Service, a division of The McGraw-Hill
Companies, Inc.
SEC - U.S. Securities and Exchange Commission.
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Funds. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TeleFACTS - Franklin Templeton's automated customer servicing system.
TAML - Templeton Asset Management Ltd. - Hong Kong branch, the investment
manager for Emerging Markets Series.
TGBM - Templeton Global Bond Managers, the investment manager of Emerging Fixed
Income Markets Series, is a division of TICI.
TFTC - Templeton Funds Trust Company.
TICI - Templeton Investment Counsel, Inc., the investment manager of Growth
Series and Foreign Equity Series.
Trust Company - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States.
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Funds and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
<PAGE>
APPENDIX
CORPORATE BOND RATINGS
Moody's
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt-
edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest
a susceptibility to impairment sometime in the future.
Templeton Institutional Funds, Inc. . 33
<PAGE>
Baa - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
34 . Templeton Institutional Funds, Inc.
<PAGE>
This prospectus is not an
offering of the securities
herein described in any
state, jurisdiction or
country in which the offering TIFI
is not authorized. No sales ------------------------------
representative, dealer or Templeton
other person is authorized to Institutional
give any information or make Funds, Inc.
any representations other
than those contained in this May 1, 1997
prospectus. Further Prospectus
information may be obtained
from Distributors.
Principal Underwriter:
Franklin Templeton Distributors, Inc.
700 Central Avenue
St. Petersburg, Florida 33701
Institutional Services and Fund Information: 800-321-8563
TLINS P 5/97
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
TEMPLETON INSTITUTIONAL
FUNDS, INC.
STATEMENT OF
ADDITIONAL INFORMATION LOGO
700 CENTRAL AVENUE
MAY 1, 1997 ST. PETERSBURG, FL 33701 1-800/DIAL BEN
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
How do the Funds Invest their Assets?...
What are the Funds' Potential Risks?....
Investment Restrictions.................
Officers and Directors..................
Investment Management and Other
Services..............................
How do the Funds Buy Securities for
their Portfolios?.....................
How Do I Buy, Sell and Exchange
Shares?...............................
How are Fund Shares Valued?.............
Additional Information on Distributions
and Taxes.............................
The Funds' Underwriter..................
How do the Funds Measure Performance?...
Miscellaneous Information...............
Financial Statements....................
Useful Terms and Definitions............
</TABLE>
- ---------------------------------------------------------
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
- ---------------------------------------------------------
Templeton Institutional Funds, Inc. (the "Company") is an open-end management
investment company currently consisting of four separate series (the "Funds,"
individually a "Fund"). The Funds are the Growth Series, the Foreign Equity
Series, the Emerging Markets Series and the Emerging Fixed Income Markets
Series. All of the Funds, with the exception of the Emerging Fixed Income
Markets Series, are diversified series of the Company. The Emerging Fixed Income
Markets Series is a non-diversified series of the Company.
The Growth Series' investment objective is to achieve long-term capital
growth. The Fund seeks to achieve its objective by investing in stocks and
debt obligations of companies and governments of any nation.
The Foreign Equity Series' investment objective is to achieve long-term
capital growth. The Fund seeks to achieve its objective by investing in stocks
and debt obligations of companies and governments outside the United States.
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 may be 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:
- ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
- ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
- ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
1
<PAGE>
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, Templeton Investment
Counsel, Inc. ("TICI") in the case of Growth Series and Foreign Equity Series;
Templeton Asset Management Ltd. -- Hong Kong Branch, ("Templeton Hong Kong") in
the case of Emerging Markets Series; and the Templeton Global Bond Managers
division of TICI ("TGBM") in the case of Emerging Fixed Income Markets Series
(collectively, the "Investment Managers"), will monitor the value of such
securities daily to determine that the value equals or exceeds the repurchase
price. Repurchase agreements may involve risks in the event of default or
insolvency of the seller, including possible delays or restrictions upon a
Fund's ability to dispose of the underlying securities. A Fund will enter into
repurchase agreements only with parties who meet creditworthiness standards
approved by the Company's Directors, i.e., banks or broker-dealers which have
been determined by a Fund's Investment Manager to present no serious risk of
becoming involved in bankruptcy proceedings within the time frame contemplated
by the repurchase transaction.
Debt Securities. Each of the Funds may invest a portion of its assets in
debt securities, including bonds, notes, debentures, commercial paper,
certificates of deposit, time deposits and bankers' acceptances. Debt securities
purchased by a Fund may be rated as low as C by S&P or Moody's or, if unrated,
of comparable quality as determined by the Fund's Investment Manager. As an
operating policy, which may be changed by the Board 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
higher level of investment in high risk, lower quality debt securities would be
consistent with the interests of the Funds and their shareholders. Commercial
paper purchased by the Funds will meet the credit quality criteria set forth
under "Investment Policies" above.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the Funds' net asset value.
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 it receives no corresponding cash payment until a later time,
generally the security's maturity date. In order to qualify for beneficial tax
treatment, a Fund must distribute substantially all of its net investment income
to shareholders on an annual basis (see "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.
2
<PAGE>
At the time a Fund purchases a futures contract, an amount of cash, U.S.
government securities, or other highly liquid debt securities equal to the
market value of the futures contract will be deposited in a segregated account
with the Fund's Custodian. When writing a futures contract, a Fund will maintain
with its Custodian liquid assets that, when added to the amounts deposited with
a futures commission merchant or broker as margin, are equal to the market value
of the instruments underlying the contract. Alternatively, a Fund may "cover"
its position by owning the instruments underlying the contract (or, in the case
of an index futures contract, a portfolio with a volatility substantially
similar to that of the index on which the futures contract is based), or holding
a call option permitting the Fund to purchase the same futures contract at a
price no higher than the price of the contract written by the Fund (or at a
higher price if the difference is maintained in liquid assets with the Fund's
Custodian).
Options on Securities or Indices. The Funds may write (I.E., sell) covered put
and call options and purchase put and call options on securities or securities
indices that are traded on United States and foreign exchanges or in the
over-the-counter markets.
An option on a security is a contract that gives the purchaser of the option, in
return for the premium paid, the right to buy a specified security (in the case
of a call option) or to sell a specified security (in the case of a put option)
from or to the writer of the option at a designated price during the term of the
option. An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.
A Fund may write a call or put option only if the option is "covered." A call
option on a security written by a Fund is "covered" if a 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
3
<PAGE>
of a Fund's investments does not decline as anticipated, or if the value of the
option does not increase, the Fund's loss will be limited to the premium paid
for the option plus related transaction costs. The success of this strategy will
depend, in part, on the accuracy of the correlation between the changes in value
of the underlying security or index and the changes in value of a Fund's
security holdings being hedged.
A Fund may purchase call options on individual securities to hedge against an
increase in the price of securities that the Fund anticipates purchasing in the
future. Similarly, a Fund may purchase call options on a securities index to
attempt to reduce the risk of missing a broad market advance, or an advance in
an industry or market segment, at a time when the Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options, a
Fund will bear the risk of losing all or a portion of the premium paid if the
value of the underlying security or index does not rise.
There can be no assurance that a liquid market will exist when a Fund seeks to
close out an option position. Trading could be interrupted, for example, because
of supply and demand imbalances arising from a lack of either buyers or sellers,
or the options exchange could suspend trading after the price has risen or
fallen more than the maximum specified by the exchange. Although a Fund may be
able to offset to some extent any adverse effects of being unable to liquidate
an option position, the Fund may experience losses in some cases as a result of
such inability.
Foreign Currency Hedging Transactions. In order to hedge against foreign
currency exchange rate risks, the Funds may enter into forward foreign currency
exchange contracts and foreign currency futures contracts, as well as purchase
put or call options on foreign currencies, as described below. The Funds may
also conduct their foreign currency exchange transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market.
A Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to minimize the risk to the Fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. A Fund may enter into a forward contract,
for example, when it enters into a contract for the purchase or sale of a
security denominated in a foreign currency in order to "lock in" the U.S. dollar
price of the security. In addition, for example, when a Fund believes that a
foreign currency may suffer a substantial decline against the U.S. dollar, it
may enter into a forward contract to sell an amount of that foreign currency
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency, or when a Fund believes that the U.S.
dollar may suffer a substantial decline against a foreign currency, it may enter
into a forward contract to buy that foreign currency for a fixed dollar amount.
This second investment practice is generally referred to as "cross-hedging."
Because in connection with a Fund's forward foreign currency transactions an
amount of the Fund's assets equal to the amount of the purchase will be held
aside or segregated to be used to pay for the commitment, a Fund will always
have cash, cash equivalents or high quality debt securities available sufficient
to cover any commitments under these contracts or to limit any potential risk.
The segregated account will be marked-to-market on a daily basis. While these
contracts are not presently regulated by the Commodity Futures Trading
Commission ("CFTC"), the CFTC may in the future assert authority to regulate
forward contracts. In such event, a Fund's ability to utilize forward contracts
in the manner set forth above may be restricted. Forward contracts may limit
potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance for a Fund than if it had not engaged in
such contracts.
The Funds may purchase and write put and call options on foreign currencies for
the purpose of protecting against declines in the dollar value of foreign
portfolio securities and against increases in the dollar cost of foreign
securities to be acquired. As is the case with other kinds of options, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received, and a Fund could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may constitute
an effective hedge against fluctuation in exchange rates, although, in the event
of rate movements adverse to a Fund's position, the Fund may forfeit the entire
amount of the premium plus related transaction costs. Options on foreign
currencies to be written or purchased by a Fund will be traded on U.S. and
foreign exchanges or over-the-counter.
The Funds may enter into exchange-traded contracts for the purchase or sale for
future delivery of
4
<PAGE>
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 pro-
5
<PAGE>
vide 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 the Funds 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 United
States. Foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards, and auditing practices and
requirements may not be comparable to those applicable to United States
companies. The Funds, therefore, may encounter difficulty in obtaining market
quotations for purposes of valuing its portfolio and calculating its net asset
value. Foreign markets have substantially less volume than the New York Stock
Exchange ("NYSE"), and securities of some foreign companies are less liquid and
more volatile than securities of comparable United States companies. Commission
rates in foreign countries, which are generally fixed rather than subject to
negotiation as in the United States, are likely to be higher. In many foreign
countries there is less government supervision and regulation of stock
exchanges, brokers and listed companies than in the United States.
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,
resources 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
develop-
6
<PAGE>
ments in Eastern Europe may be slowed or reversed by unanticipated political or
social events in such countries.
In addition, many countries in which the Funds may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the United States economy in such respects
as growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resources self-sufficiency and balance of payments
position.
Investments in Eastern European countries may involve risks of nationalization,
expropriation and confiscatory taxation. The communist governments of a number
of Eastern European countries expropriated large amounts of private property in
the past, in many cases without adequate compensation, and there can be no
assurance that such expropriation will not occur in the future. In the event of
such expropriation, a Fund could lose a substantial portion of any investments
it has made in the affected countries. Finally, even though certain Eastern
European currencies may be convertible into U.S. dollars, the conversion rates
may be artificial to the actual market values and may be adverse to Fund
shareholders. Further, no accounting standards exist in Eastern European
countries.
Investing in Russian securities involves a high degree of risk and special
considerations not typically associated with investing in the United States
securities markets, and should be considered highly speculative. Such risks
include: (1) delays in settling portfolio transactions and risk of loss arising
out of Russia's system of share registration and custody; (2) the risk that it
may be impossible or more difficult than in other countries to obtain and/or
enforce a judgment; (3) pervasiveness of corruption and crime in the Russian
economic system; (4) currency exchange rate volatility and the lack of available
currency hedging instruments; (5) higher rates of inflation (including the risk
of social unrest associated with periods of hyper-inflation); (6) controls on
foreign investment and local practices disfavoring foreign investors and
limitations on repatriation of invested capital, profits and dividends, and on a
Fund's ability to exchange local currencies for U.S. dollars; (7) the risk that
the government of Russia or other executive or legislative bodies may decide not
to continue to support the economic reform programs implemented since the
dissolution of the Soviet Union and could follow radically different political
and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, or a return to the centrally planned
economy that existed prior to the dissolution of the Soviet Union; (8) the
financial condition of Russian companies, including large amounts of
inter-company debt which may create a payments crisis on a national scale; (9)
dependency on exports and the corresponding importance of international trade;
(10) the risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation; and (11) possible
difficulty in identifying a purchaser of securities held by a Fund due to the
underdeveloped nature of the securities markets.
There is little historical data on Russian securities markets because they are
relatively new and a substantial proportion of securities transactions in Russia
are privately negotiated outside of stock exchanges. Because of the recent
formation of the securities markets as well as the underdeveloped state of the
banking and telecommunications systems, settlement, clearing and registration of
securities transactions are subject to significant risks. Ownership of shares
(except where shares are held through depositories that meet the requirements of
the 1940 Act) is defined according to entries in the company's share register
and normally evidenced by extracts from the register or by formal share
certificates. However, there is no central registration system for shareholders
and these services are carried out by the companies themselves or by registrars
located throughout Russia. These registrars are not necessarily subject to
effective state supervision and it is possible for a Fund to lose its
registration through fraud, negligence or even mere oversight. While each Fund
will endeavor to ensure that its interest continues to be appropriately recorded
either itself or through a custodian or other agent inspecting the share
register and by obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability and it is possible
that subsequent illegal amendment or other fraudulent act may deprive the Fund
of its ownership rights or improperly dilute its interests. In addition, while
applicable Russian regulations impose liability on registrars for losses
resulting from their errors, it may be difficult for a Fund to enforce any
rights it may have against the registrar or issuer of the securities in the
event of loss of share registration. Furthermore, although a
7
<PAGE>
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 invest-
8
<PAGE>
ment 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 Franklin Resources, Inc. or their
subsidiaries, are permitted to engage in personal securities transaction subject
to the following general restrictions and procedures: (1) The trade must receive
advance clearance from a Compliance Officer and must be completed within 24
hours after this clearance; (2) Copies of all brokerage confirmations must be
sent to the Compliance Officer and, within 10 days after the end of each
calendar quarter, a report of all securities transactions must be provided to
the Compliance Officer; (3) In addition to items (1) and (2), access persons
involved in preparing and making investment decisions must file annual reports
of their securities holdings each January and also inform the Compliance Officer
(or other designated personnel) if they own a security that is being considered
for a Fund or other client transaction or if they are recommending a security in
which they have an ownership interest for purchase or sale by a fund or other
client.
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 of the Fund's Investment Manager, individually owning more
than 1/2 of 1% of the securities of such company, in the aggregate own more
than 5% of the securities of such company.
3. Purchase any security (other than obligations of the U.S. government, its
agencies or instrumentalities) if, as a result, as to 75% of the Fund's
total assets (i) more than 5% of the Fund's total assets would then be
invested in securities of any single issuer, or (ii) the Fund would then own
more than 10% of the voting securities of any single issuer; provided,
however, that this restriction does not apply to the 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 United States
government obligations with a simultaneous agreement by the seller to
repurchase them within no more than seven days at the original purchase
price plus accrued interest and loan its portfolio securities. 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
9
<PAGE>
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 New York or American Stock Exchange, including no more than 2% of its
total assets which may be invested in warrants that are not listed on those
exchanges. Warrants acquired by the Fund in units or attached to securities
are not included in this Restriction; provided that this restriction does
not apply to Emerging Fixed Income Markets Series.
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?" 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, Age and Address 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 (U.S.A.) Inc. (a bank holding company)
Age 64 and Bar-S Foods; and director or trustee of 55
of the investment companies in the Franklin
Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Positions and
Offices
Name, Age and Address with the Company Principal Occupation During the Past Five Years
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
* NICHOLAS F. BRADY Director Chairman of Templeton Emerging Markets Invest-
The Bullitt House ment Trust, PLC; chairman of Templeton Latin
102 East Dover Street America Investment Trust PLC; chairman of Darby
Easton, Maryland Overseas Investments, Ltd. (an investment firm)
Age 67 (1994-present); Chairman and director of
Templeton Central and Eastern European Fund;
director of Amerada Hess Corporation,
Christiana Companies, and the H.J. Heinz
Company; formerly Secretary of the United
States 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 chairman
Nassau, Bahamas of Caribbean Utilities Co., Ltd.; president of
Age 52 Provo Power Corporation; director of various
other business and nonprofit organizations; and
director or trustee of 4 other investment
companies in the Franklin Templeton Group of
Funds.
- ---------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO Director Member of the law firm of Pitney, Hardin, Kipp
200 Campus Drive & Szuch; director of General Host Corporation
Florham Park, New Jersey (nursery and craft centers); and director or
Age 64 trustee of 57 of 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 Gulf
Suite 1300 West Banks, Inc. (bank holding company)
St. Petersburg, Florida (1995-present), formerly director of Mercantile
Age 75 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. chairman and director of Precise Power
St. Petersburg, Florida Corporation; executive-in-residence of Eckerd
Age 74 College (1991- present); director of Checkers
Drive-In Restaurants, Inc.; formerly, chairman
of the board and chief executive officer of
Florida Progress Corporation (1982-1990) and
director of various to its subsidiaries; and
director or trustee of 24 of the investment
companies in the Franklin Templeton Group of
Funds.
- ---------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Positions and
Offices
Name, Age and Address with the Company Principal Occupation During the Past Five Years
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Edith E. Holiday Director Director (1993-present) of Amerada Hess
3239 38th St., N.W. Corporation and Hercules Incorporated; director
Washington, D.C. of Beverly Enterprises, Inc. (1995-present) and
Age 44 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 United States
and Secretary of the Cabinet (1990-1993),
general counsel to the United States Treasury
Department (1989-1990), and counselor to the
Secretary and Assistant Secretary for Public
Affairs and Public Liaison -- United States
Treasury Department (1988-1989); and director
or trustee of 15 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.; chairman
San Mateo, California President of the board and director of Franklin Advisers,
Age 64 Inc. and Franklin Templeton Distributors, Inc.;
director of General Host Corporation (nursery
and craft centers) and Franklin Templeton
Investor Services, Inc.; and officer and/or
director, trustee or managing general partner,
as the case may be, of most other subsidiaries
of Franklin Resources, Inc. and 56 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, U.S.
Wilmington, Delaware government; and director or trustee of 23 of
Age 67 the investment companies in the Franklin
Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
GORDON S. MACKLIN Director Chairman of White River Corporation
8212 Burning Tree Road (information services); director of Fund
Bethesda, Maryland America Enterprises Holdings, Inc., MCI
Age 68 Communications Corporation, Fusion Systems
Corporation, Infovest Corporation, MedImmune,
Inc., Source One Mortgage Services Corporation,
and Shoppers Express, Inc. (on-line shopping
service); formerly: chairman of Hambrecht and
Quist Group; director of H&Q Healthcare
Investors and Lockheed Martin Corporation, and
president of the National Association of
Securities Dealers, Inc.; and director or
trustee of 52 of the investment companies in
the Franklin Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Positions and
Offices
Name, Age and Address with the Company Principal Occupation During the Past Five Years
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
FRED R. MILLSAPS Director Manager of personal investments (1978-present);
2665 N.E. 37th Drive director of various business and non-profit
Fort Lauderdale, Florida corporations; formerly, chairman and chief
Age 68 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
Age 43 (1982-1985); and director or trustee of 4 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 52 Limited; co-founder and director of
International Society of Financial Analysts;
chairman of 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.; executive
San Mateo, California vice president and director of Franklin
Age 52 Templeton Distributors, Inc.; executive vice
president of Franklin Advisers, Inc.; officer
and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and
officer and/or director or trustee of 60 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 Templeton
San Mateo, California Distributors, Inc.; president and director of
Age 56 Franklin Advisers, Inc.; director of Franklin
Templeton Investor Services, Inc.; and officer
and/or director, trustee or managing partner,
as the case may be, of most other subsidiaries
of Franklin Resources, Inc. and 60 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 president
San Mateo, California of Franklin Templeton Distributors, Inc.; vice
Age 48 president of Franklin Advisers, Inc.; and
officer of 60 of the investment companies in
the Franklin Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Positions and
Offices
Name, Age and Address with the Company Principal Occupation During the Past Five Years
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
CHARLES E. JOHNSON Vice President Senior vice president and director of Franklin
500 East Broward Blvd. Resources, Inc.; senior vice president of
Fort Lauderdale, Florida Franklin Templeton Distributors, Inc.;
Age 40 president and director of Templeton Worldwide,
Inc.; president and director of Franklin
Institutional Services Corporation; chairman of
the board of Templeton Investment Counsel,
Inc.; officer and/or director, as the case may
be, of other subsidiaries of Franklin
Resources, Inc.; and officer and/or director,
as the case may be, of 39 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 Worldwide,
Age 37 Inc.; president or vice president of the
Templeton Funds; formerly, investment
administrator with Roy West 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, treasurer and chief
777 Mariners Island Blvd. financial officer of Franklin Resources, Inc.;
San Mateo, California director and executive vice president of
Age 36 Templeton Investment Counsel, Inc.; a member of
the International Society of Financial Analysts
and the American Institute of Certified Public
Accountants; formerly, with Arthur Andersen &
Company (1982-1983); officer and/or director,
as the case may be, of other subsidiaries of
Franklin Resources, Inc.; and officer and/or
director or trustee of 60 of the investment
companies in the Franklin Templeton Group of
Funds.
- ---------------------------------------------------------------------------------------------------
J. MARK MOBIUS Vice President Portfolio manager of various Templeton advisory
Two Exchange Square affiliates; managing director of Templeton
Suite 908 Asset Management Ltd.; formerly, president of
Hong Kong International Investment Trust Company Limited
Age 60 (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 division of Templeton Investment
Ft. Lauderdale, Florida Counsel, Inc., formerly, portfolio manager at
Age 36 Forester & Hairston (1988-1991) and investment
advisor at Merrill, Lynch, Pierce, Fenner &
Smith, Inc. (1981-1988).
- ---------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Positions and
Offices
Name, Age and Address with the Company Principal Occupation During the Past Five Years
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
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 56 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.; formerly, vice president and associate
Age 42 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; senior vice
500 East Broward Blvd. president of Templeton Worldwide, Inc. and
Ft. Lauderdale, Florida Templeton Funds Trust Company; formerly, senior
Age 42 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.; formerly, deputy
Age 49 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
15
<PAGE>
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 55
Nicholas F. Brady..................... 11,250 119,275 23
Frank J. Crothers..................... 12,245 29,550 4
S. Joseph Fortunato................... 11,250 356,412 57
John Wm. Galbraith.................... 9,950 102,475 22
Andrew H. Hines, Jr. ................. 12,067 130,525 24
Edith E. Holiday**.................... 2,650 15,450 15
Betty P. Krahmer...................... 11,250 119,275 23
Gordon S. Macklin..................... 11,250 331,542 52
Fred R. Millsaps...................... 12,067 130,525 24
C.D. Tseretopoulos.................... 12,246 29,550 4
</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 62 registered investment companies, with approximately 170 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 April 1, 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 ("Templeton Hong Kong"). 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 the Funds. 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 the Investment Managers and
access persons, as defined by the 1940 Act, may buy or sell for its or their own
account or for any fund or other account. 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
16
<PAGE>
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 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 Templeton Hong Kong a
monthly fee equal on an annual basis to 1.25% of its average daily net assets
during the year. This fee is higher than advisory fees paid by most other U.S.
investment companies, primarily because investing in equity securities of
companies in emerging markets, which are not widely followed by professional
analysts, requires Templeton Hong Kong to invest additional time and incur added
expense in developing specialized resources, including research facilities.
During the fiscal years ended December 31, 1996, 1995, and 1994, Templeton Hong
Kong 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 TICI and the Company on
behalf of Foreign Equity Series and the Growth Series are in effect until April
30, 1998. The management agreement between Templeton Hong Kong and the Company
on behalf of Emerging Markets Series is in effect until April 30, 1998. The
management agreement between TGBM and the Company on behalf of Emerging Fixed
Income Markets Series is 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
17
<PAGE>
ended December, 1996, and review of the Funds' filings with the SEC and the IRS.
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 broker-
18
<PAGE>
age 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 the 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 week-
19
<PAGE>
end 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 the 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.
The 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 Fund 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 the 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
20
<PAGE>
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' operations, 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 United States Federal income tax on
that portion of its net investment income and net realized capital gains which
it distributes to its shareholders. Amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement also are subject to a
nondeductible 4% excise tax. To prevent application of the excise tax,
21
<PAGE>
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 the 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.
22
<PAGE>
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
23
<PAGE>
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 FUND'S 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 automati-
24
<PAGE>
cally 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 DOES THE FUND 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 Fund 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. There is no historical total return information for Emerging Fixed
Income Markets Series as of the date of this Statement of Additional
Information.
These figures were calculated according to the SEC formula:
P(1+T)(n) = ERV
where:
<TABLE>
<S> <C> <C>
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)
</TABLE>
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.
VOLATILITY
Occasionally statistics may be used to show a Fund's volatility or risk.
Measures of volatility or risk
25
<PAGE>
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 the 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 the Funds 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 the Funds' 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 the 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
26
<PAGE>
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:
- "Never follow the crowd. Superior performance is possible only if you
invest differently from the crowd."
- "Diversify by company, by industry and by country."
- "Always maintain a long-term perspective."
- "Invest for maximum total real return."
- "Invest -- don't trade or speculate."
- "Remain flexible and open-minded about types of investment."
- "Buy low."
- "When buying stocks, search for bargains among quality stocks."
- "Buy value, not market trends or the economic outlook."
- "Diversify. In stocks and bonds, as in much else, there is safety in
numbers."
- "Do your homework or hire wise experts to help you."
- "Aggressively monitor your investments."
- "Don't panic."
- "Learn from your mistakes."
- "Outperforming the market is a difficult task."
- "An investor who has all the answers doesn't even understand all the
questions."
- "There's no free lunch."
- "And now the last principle: Do not be fearful or negative too often."
* 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 $188 billion in
assets under management for more than 5.2 million U.S. based mutual fund
shareholder and other accounts. The
27
<PAGE>
Franklin Templeton Group of Funds offers 122 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 April 1, 1997, the principal shareholders of the Fund, beneficial or of
record, were as follows:
<TABLE>
<CAPTION>
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
- --------------------------------------------------
<S> <C> <C>
GROWTH SERIES
Peter Norton, Trustee 1,250,813 6%
Norton Family Trust
225 Arizona Avenue
Santa Monica, CA
90401-1210
Princeton Theological 12,878,262 62%
Seminary
P.O. Box 821
Princeton, NJ 08542-0803
Utah State Retirement 2,714,598 13%
Board Defined
Contribution Plan
540 East 200 South
Salt Lake City, UT
84102-2099
EMERGING MARKETS SERIES
New York State Common 12,163,409 8%
Retirement Fund
Alfred E. Smith State
Office Building
Albany, NY 12236
</TABLE>
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, the 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.
USEFUL TERMS AND DEFINITIONS
- ---------------------------------------------------------
1940 Act - Investment Company Act of 1940, as amended
Board - The Board of Directors of the Company
CD - Certificate of deposit
Class I and Class II - Certain funds in the Franklin Templeton Funds offer two
classes of shares, designated "Class I" and "Class II." The two classes have
proportionate interests in the same portfolio of investment securities. They
differ, however, primarily in their sales charge structures and Rule 12b-1
plans. Shares of the Fund 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.
28
<PAGE>
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
Franklin Funds - The mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust
Franklin Templeton Funds - The Franklin Funds and the Templeton Funds
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.
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 Fund dated May 1, 1997, as may be 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 Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
Templeton Asset Management Ltd. - Hong Kong branch - The Investment Manager of
Emerging Markets Series, is located at Two Exchange Square, Hong Kong.
Templeton Funds - The U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund
TICI - Templeton Investment Counsel, Inc., the Investment Manager for the Growth
Series and Foreign Equity Series and, through its Global Bond Managers division,
the Investment Manager for the Emerging Fixed Income Markets Series, is located
at Broward Financial Centre, Fort Lauderdale, FL 33394-3091.
U.S. - United States
We/Our/Us - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
29
<PAGE>
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
Incorporated by reference to 1996 Annual Reports to
Shareholders of Growth Series, Foreign Equity Series,
and Emerging Markets Series:
Independent Auditor's Report
Statement of Assets and Liabilities as of December
31, 1996
Statement of Operations for fiscal period ended
December 31, 1996
Statement of Changes in Net Assets for the years
ended December 31, 1996 and 1995
Portfolio of Investments as of December 31, 1996
Notes to Financial Statements
(Not applicable for the Emerging Fixed Income Markets
Series, which had not commenced operations as of
December 31, 1996)
(b) EXHIBITS
(1) (a)Articles of Incorporation**
(b)Articles of Amendment dated January 11, 1993**
(c)Articles Supplementary dated January 11,
1993**
(d)Articles Supplementary dated April 28, 1993**
(e)Articles Supplementary dated July 1, 1993**
(f)Articles Supplementary dated September 30,
1993**
(g)Articles Supplementary dated March 1, 1994***
(h)Articles Supplementary dated January 5,
1995***
(i)Articles Supplementary dated January 17,
1996**
(j)Articles Supplementary dated April 15, 1996**
(k)Articles Supplementary dated December 27, 1996
(l)Articles Supplementary dated April 10, 1997
(2) By-Laws
(3) Not Applicable
(4) Specimen Security****
(5) (a) Amended and Restated Investment Management
Agreement for Foreign Equity Series**
<PAGE>
(b)Amended and Restated Investment Management
Agreement for Growth Series**
(c)Amended and Restated Investment Management
Agreement for Emerging Markets Series**
(d)Form of Investment Management Agreement for
Emerging Fixed Income Markets Series*
(6) Form of Amended and Restated Distribution
Agreement*
(7) Not Applicable
(8) Form of Amended and Restated Custody Agreement*
(9) (a) Form of Amended and Restated Transfer Agent
Agreement
(b) Form of Amended and Restated Fund
Administration Agreement*
(10) Opinion and Consent of Counsel--filed with
Rule 24f-2 Notice on February 27, 1997
(11) Consent of independent public accountants
(12) Not Applicable
(13) Letter concerning initial capital**
(14) Not Applicable
(15) Not Applicable
(16) Schedule showing computation of performance
quotations provided in response to Item 22***
(27) Financial Data Schedules
- ---------------------
* Filed with Post-Effective Amendment No. 10 to the Registration
Statement on February 14, 1997
** Filed with Post-Effective Amendment No. 9 to the Registration
Statement on April 28, 1996
*** Filed with Post-Effective Amendment No. 8 to the Registration Statement on
May 1, 1995.
**** Filed with Pre-Effective Amendment No. 3 to the Registration Statement on
October 17, 1990.
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 26. NUMBER OF RECORD HOLDERS
<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD HOLDERS
<S> <C>
Growth Series
Class of Common Shares 25 as of March 31, 1997
Foreign Equity Series
Class of Common Shares 916 as of March 31, 1997
Emerging Markets Series
Class of Common Shares 461 as of March 31, 1997
</TABLE>
ITEM 27. INDEMNIFICATION.
Reference is made to Articles Eight and Eleven of the
Registrant's Articles of Incorporation.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Registrant by the Registrant
pursuant to the Articles of Incorporation or otherwise, the
Registrant is aware that in the opinion of the Securities and
Exchange Commission, such indemnification is against public
policy as expressed in the Act and, therefore, is
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by directors, officers
or controlling persons of the Registrant in connection with
the successful defense of any act, suit or proceeding) is
asserted by such directors, officers or controlling persons in
connection with the shares being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issues.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER AND ITS OFFICERS
AND DIRECTORS
The business and other connections of Registrant's Investment
Managers are described in Part B of this Registration
Statement.
<PAGE>
For information relating to the Investment Managers' officers
and directors, reference is made to Forms ADV filed under the
Investment Advisers Act of 1940 by Templeton Investment
Counsel, Inc. and Templeton Asset Management Ltd., which are
incorporated herein by reference.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Franklin Templeton Distributors, Inc. also acts as
principal underwriter of shares of:
Franklin Templeton Japan Fund
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Variable Products Series Fund
Franklin Asset Allocation Fund
Franklin California Tax Free Income Fund, Inc.
Franklin California Tax Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund, Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund,Inc.
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Advantaged High Yield Securities Fund
Franklin Tax-Advantaged International Bond Fund
Franklin Tax-Advantaged U.S. Government Securities
Fund
Franklin Tax Exempt Money Fund
Franklin Tax Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
<PAGE>
Franklin Value Investors Trust
Institutional Fiduciary Trust
(b) The directos and officers of FTD, located at 777
Mariners Island Blvd., San Mateo, CA 94404, are as
follows:
<TABLE>
<CAPTION>
POSITION WITH POSITION WITH
NAME UNDERWRITER THE REGISTRANT
<S> <C> <C>
Charles B. Johnson Chairman of the Board Vice President and Chairman
Gregory E. Johnson President None
Rupert H. Johnson, Jr. Executive Vice President and Director Vice President
Harmon E. Burns Executive Vice President and Director Vice President
Daniel T. O'Lear Executive Vice President None
Peter Jones Executive Vice President None
700 Central Avenue
St. Petersburg, Fl
Edward V. McVey Senior Vice President None
Deborah R. Gatzek Senior Vice President and Assistant Vice President
Secretary
Richard C. Stoker Senior Vice President None
Charles E. Johnson Senior Vice President Vice President
500 E. Broward Blvd.
Ft. Lauderdale, Fl
Richard O. Conboy Senior Vice President None
H. G. Mumford, Jr. Senior Vice President None
Bert W. Feuss Vice President None
Loretta Fry Vice President None
James K. Blinn Vice President None
Robert N. Geppner Vice President None
Jimmy A. Escobedo Vice President None
Mike Hackett Vice President None
Philip J. Kearns Vice President None
Ken Leder Vice President None
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH POSITION WITH
NAME UNDERWRITER THE REGISTRANT
<S> <C> <C>
Jack Lemein Vice President None
John R. McGee Vice President None
Vivian J. Palmieri Vice President None
Kent P. Strazza Vice President None
Sarah Stypa Vice President None
Laura Komar Vice President None
John R. Kay Assistant Vice President Vice President
500 E. Broward Blvd.
Ft. Lauderdale
Francie Arnone Assistant Vice President None
Alison Hawksley Assistant Vice President None
Virginia Marans Assistant Vice President None
Bernadette Marino Howard Assistant Vice President None
Susan Thompson Assistant Vice President None
Kenneth A. Lewis Treasurer None
Karen DeBellis Assistant Treasurer Assistant Treasurer
700 Central Avenue
St. Petersburg, Fl
Philip A. Scatena Assistant Treasurer None
Leslie M. Kratter Secretary None
</TABLE>
(c) Not Applicable (Information on unaffiliated underwriters).
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books, and other documents required to be
maintained by Registrant pursuant to Section 31(a) of the
Investment Company Act of 1940 and rules promulgated
thereunder are in the possession of Franklin Templeton
Services, Inc., 500 East Broward Blvd., Fort Lauderdale,
Florida 33394.
<PAGE>
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS.
(a) Not Applicable.
(b) Not Applicable.
(c) Registrant undertakes to furnish to each person to
whom its Prospectus is provided a copy of its latest
Annual Report, upon request and without charge.
(d) Registrant undertakes to file a post-effective
amendment, within four to six months from the
effective date of this registration statement to
provide financial statements for the Emerging Fixed
Markets Series.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it has met the requirements
for effectiveness of the Registration Statement pursuant to Rule 485(b) under
the Securities Act of 1933 and has duly caused this amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the District of Columbia on the 1st day of May, 1997.
TEMPLETON INSTITUTIONAL FUNDS, INC.
By:
Donald F. Reed, President*
*By:/s/JEFFREY L.STEELE
Jeffrey L. Steele
attorney-in-fact**
Pursuant to the requirements of the Securities Act of 1933, this amendment to
the Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
- -----------------------
Charles B. Johnson* Director May 1, 1997
- -----------------------
Constantine Dean Tseretopoulos* Director May 1, 1997
- -----------------------
Frank J. Crothers* Director May 1, 1997
- -----------------------
Harris J. Ashton* Director May 1, 1997
- -----------------------
S. Joseph Fortunato* Director May 1, 1997
- -----------------------
Fred R. Millsaps* Director May 1, 1997
- -----------------------
Gordon S. Macklin* Director May 1, 1997
- -----------------------
Andrew H. Hines, Jr.* Director May 1, 1997
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
- -----------------------
John Wm. Galbraith* Director May 1, 1997
- -----------------------
Nicholas F. Brady* Director May 1, 1997
- -----------------------
Betty P. Krahmer* Director May 1, 1997
- -----------------------
Edith E. Holiday* Director May 1, 1997
- -----------------------
Donald F. Reed* President (Chief May 1, 1997
Executive Officer)
- -----------------------
James R. Baio* Treasurer (Chief May 1, 1997
Financial and
Accounting Officer)
</TABLE>
*By:/s/JEFFREY L. STEELE
Jeffrey L. Steele
as attorney-in-fact**
** Powers of Attorney are contained in Post-Effective Amendment No. 4 to the
Registration Statement filed on March 25, 1993, Post-Effective Amendment No. 5
to the Registration Statement filed on November 4, 1993, Post-Effective
Amendment No. 7 to the Registration Statement filed on March 2, 1994, and
Post-Effective Amendment No. 10 to the Registration Statement filed on February
14, 1997.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS FILED WITH
POST-EFFECTIVE AMENDMENT NO. 11 TO
REGISTRATION STATEMENT
ON
FORM N-1A
TEMPLETON INSTITUTIONAL FUNDS, INC.
<PAGE>
EXHIBIT LIST
EXHIBIT NUMBER NAME OF EXHIBIT
(1)(k) Articles Supplementary dated December 27, 1996
(l) Articles Supplementary dated April 10, 1997
(2) By-Laws
(11) Consent of Independent Public Accountants
(27) Financial Data Schedules
TEMPLETON INSTITUTIONAL FUNDS, INC.
ARTICLES SUPPLEMENTARY
TEMPLETON INSTITUTIONAL FUNDS, INC., a Maryland corporation
registered under the Investment Company Act of 1940 and having its principal
office in the State of Maryland in Baltimore City, Maryland (hereinafter called
the "Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: The Board of Directors of the Corporation, at a meeting
duly convened and held on December 3, 1996, adopted a resolution to liquidate
and dissolve the Global Fixed Income Series and to reallocate the total number
of shares of Common Stock previously allocated to the Global Fixed Income
Series, to the Emerging Markets Series.
SECOND: Immediately prior to the effectiveness of the Articles
Supplementary of the Corporation as hereinabove set forth, the Corporation had
authority to issue 700,000,000 Common Shares of the par value of $0.01 per Share
and having an aggregate par value of $7,000,000, of which the Board of Directors
has classified (i) 355,000,000 Shares as Foreign Equity Series shares; (ii)
120,000,000 Shares as Growth Series shares, (iii) 215,000,000 Shares as Emerging
Markets Series shares, and (iv) 10,000,000 Shares as Global Fixed Income Series
shares. As amended hereby, the Corporation's Articles of Incorporation authorize
the issuance of 700,000,000 Common Shares of the par value of $0.01 per Share
and having an aggregate par value of $7,000,000, of which the Board of Directors
has classified 355,000,000 Shares as Foreign Equity Series shares, 120,000,000
Shares as Growth Series shares, and 225,000,000 Shares as Emerging Markets
Series shares. The preferences, rights, voting powers, restrictions, limitations
as to dividends, qualifications, and terms and conditions of redemption of the
Series of shares, as set forth in the Articles of Incorporation of the
Corporation as heretofore amended and supplemented, are not changed by these
Articles Supplementary.
THIRD: The Shares of Common Stock of the Corporation
authorized and classified pursuant to Articles First and Second of these
Articles Supplementary have been so authorized and classified by the Board of
Directors under the authority contained in the Charter of the Corporation. The
total number of Shares of Common Stock of the various series that the
Corporation has authority to issue has been established by the Board of
Directors in accordance with Section 2-105(c) of the Maryland General
Corporation Law.
IN WITNESS WHEREOF, Templeton Institutional Funds, Inc. has
caused these Articles Supplementary to be signed in its name on its behalf by
its authorized officers who acknowledge that these Articles Supplementary are
the act of the Corporation, that to the best of their knowledge, information and
belief, all matters and facts set forth herein relating to the authorization and
approval of these Articles Supplementary are true in all material respects and
that this statement is made under the penalties of perjury.
Date: December 27, 1996
TEMPLETON INSTITUTIONAL FUNDS, INC.
[CORPORATE SEAL]
By:/s/HARMON E. BURNS
Harmon E. Burns
Vice President
Attest:
/S/JEFFREY L. STEELE
Jeffrey L. Steele
Assistant Secretary
TEMPLETON INSTITUTIONAL FUNDS, INC.
ARTICLES SUPPLEMENTARY
TEMPLETON INSTITUTIONAL FUNDS, INC., a Maryland corporation
registered as an open-end investment company under the Investment Company Act of
1940 and having its principal office in the State of Maryland in Baltimore City,
Maryland (hereinafter called the "Corporation"), hereby certifies to the State
Department of Assessments and Taxation of Maryland that:
FIRST: The Board of Directors of the Corporation, at a meeting
duly convened and held on February 21, 1997, adopted a resolution classifying
SEVENTY MILLION (70,000,000) Shares of Common Stock previously classified as
shares of the Growth Series as shares of the Emerging Fixed Income Markets
Series.
SECOND: Immediately prior to the effectiveness of the Articles
Supplementary of the Corporation as hereinabove set forth, the Corporation had
authority to issue SEVEN HUNDRED MILLION (700,000,000) Shares of Common Stock of
the par value of $0.01 per Share and having an aggregate par value of SEVEN
MILLION ($7,000,000) dollars, of which the Board of Directors had classified (i)
THREE HUNDRED FIFTY FIVE MILLION (355,000,000) Shares as Foreign Equity Series
shares, (ii) ONE HUNDRED TWENTY MILLION (120,000,000) Shares as Growth Series
shares, and (iii) TWO HUNDRED TWENTY FIVE MILLION (225,000,000) Shares as
Emerging Markets Series shares. As amended hereby, the Corporation's Articles of
Incorporation authorize the issuance of SEVEN HUNDRED MILLION (700,000,000)
Shares of Common Stock of the par value of $0.01 per Share and having an
aggregate par value of SEVEN MILLION ($7,000,000) dollars, of which the Board of
Directors has classified (i) THREE HUNDRED FIFTY FIVE MILLION (355,000,000)
Shares as Foreign Equity Series shares, (ii) FIFTY MILLION (50,000,000) Shares
as Growth Series shares, (iii) TWO HUNDRED TWENTY FIVE MILLION (225,000,000)
Shares as Emerging Markets Series shares, and (iv) SEVENTY MILLION (70,000,000)
Shares as Emerging Fixed Income Markets Series shares. The preferences, rights,
voting powers, restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption of the Series of shares, as set forth in the
Articles of Incorporation of the Corporation as heretofore amended and
supplemented, are not changed by these Articles Supplementary.
THIRD: The Shares of Common Stock of the Corporation
authorized and classified pursuant to Articles First and Second of these
Articles Supplementary have been so authorized and classified by the Board of
Directors under the authority contained in the Charter of the Corporation. The
total number of Shares of Common Stock of the various series that the
Corporation has authority to issue has been established by the Board of
Directors in accordance with Section 2-105(c) of the Maryland General
Corporation Law.
<PAGE>
IN WITNESS WHEREOF, Templeton Institutional Funds, Inc. has
caused these Articles Supplementary to be signed in its name on its behalf by
its authorized officers who acknowledge that these Articles Supplementary are
the act of the Corporation, that to the best of their knowledge, information and
belief, all matters and facts set forth herein relating to the authorization and
approval of these Articles Supplementary are true in all material respects and
that this statement is made under the penalties of perjury.
Date: April 10, 1997
TEMPLETON INSTITUTIONAL FUNDS, INC.
[CORPORATE SEAL]
By:/s/JOHN R. KAY
John R. Kay
Vice President
Attest:/s/JEFFREY L. STEELE
Jeffrey L. Steele
Assistant Secretary
BY-LAWS
-of-
TEMPLETON INSTITUTIONAL FUNDS, INC.
(As amended and restated October 19, 1996)
ARTICLE I
NAME OF COMPANY, LOCATION OF OFFICES AND SEAL.
SECTION 1. NAME. The name of the Company is Templeton
Institutional Funds, Inc.
SECTION 2. PRINCIPAL OFFICES. The principal office of the
Company in the State of Maryland shall be located in Baltimore, Maryland. The
Company may, in addition, establish and maintain such other offices and
places of business within or outside the State of Maryland as the Board of
Directors may from time to time determine.
SECTION 3. SEAL. The corporate seal of the Company shall be
circular in form and shall bear the name of the Company, the year of its
incorporation and the words "Corporate Seal, Maryland." The form of the seal
shall be subject to alteration by the Board of Directors and the seal may be
used by causing it or a facsimile to be impressed or affixed or printed or
otherwise reproduced. Any officer or Director of the Company shall have
authority to affix the corporate seal of the Corporation to any document
requiring the same.
<PAGE>
ARTICLE II
STOCKHOLDERS
SECTION 1. PLACE OF MEETINGS. All meetings of the Stockholders
shall be held at such place within the United States, whether within or outside
the State of Maryland as the Board of Directors shall determine, which shall be
stated in the notice of the meeting or in a duly executed waiver of notice
thereof.
SECTION 2. ANNUAL MEETINGS. The Company shall not be required
to hold an annual meeting of Stockholders in any year in which the election of
Directors is not required to be acted upon under the Investment Company Act of
1940. Otherwise, annual meetings of Stockholders for the election of Directors
and the transaction of such other business as may properly come before the
meeting shall be held at such time and place within the United States as the
Board of Directors shall select.
SECTION 3. SPECIAL MEETINGS. Special meetings of the
Stockholders for any purpose or purposes, unless otherwise prescribed by statute
or by the Articles of Incorporation, may be called by resolution of the Board of
Directors or by the President, and shall be called by the President or Secretary
at the request in writing of a majority of the Board of Directors or at the
request in writing by Stockholders owning 10% in amount of the entire capital
stock of the Company issued and outstanding at the time of the call, provided
that (1) such request shall state the purpose of such meeting and the matters
proposed to be acted on, and (2) the Stockholders requesting such meeting shall
<PAGE>
have paid to the Company the reasonably estimated cost of preparing and mailing
the notice thereof, which the Secretary shall determine and specify to such
Stockholders. No special meeting shall be called upon the request of
Stockholders to consider any matter which is substantially the same as a matter
voted upon at any special meeting of the Stockholders held during the preceding
12 months, unless requested by the holders of a majority of all shares entitled
to be voted at such meeting.
SECTION 4. NOTICE. Written notice of every meeting of
Stockholders, stating the purpose or purposes for which the meeting is called,
the time when and the place where it is to be held, shall be served, either
personally or by mail, not less than ten nor more than ninety days before the
meeting, upon each Stockholder as of the record date fixed for the meeting and
who is entitled to vote at such meeting. If mailed (1) such notice shall be
directed to a Stockholder at his address as it shall appear on the books of the
Company (unless he shall have filed with the Transfer Agent of the Company a
written request that notices intended for him be mailed to some other address,
in which case it shall be mailed to the address designated in such request) and
(2) such notice shall be deemed to have been given as of the date when it is
deposited in the United States mail with first class postage thereon prepaid.
Irregularities in the notice or in the giving thereof, as well as the accidental
omission to give notice of any meeting to, or the non-receipt of any such notice
by, any of the Stockholders shall not invalidate any action otherwise properly
taken by or at any such meeting. Notice of any Stockholders' meeting need not be
given to any Stockholder who shall sign a written waiver of such notice either
before or after the time of such meeting, which waiver shall be filed with the
records of such meeting, or to any Stockholder who is present at such meeting in
person or by proxy.
<PAGE>
SECTION 5. QUORUM, ADJOURNMENT OF MEETINGS. The presence at
any Stockholders' meeting, in person or by proxy, of Stockholders entitled to
cast a majority of the votes entitled to be cast shall be necessary and
sufficient to constitute a quorum for the transaction of business. The holders
of a majority of shares entitled to vote at the meeting and present in person or
by proxy, whether or not sufficient to constitute a quorum, or, any officer
present entitled to preside or act as Secretary of such meeting may adjourn the
meeting without determining the date of the new meeting or from time to time
without further notice to a date not more than 120 days after the original
record date. Any business that might have been transacted at the meeting
originally called may be transacted at such adjourned meeting at which a quorum
is present.
SECTION 6. VOTE OF THE MEETING. When a quorum is present or
represented at any meeting, a majority of the votes cast shall decide any
question brought before such meeting, unless the question is one upon which by
express provisions of applicable statutes, of the Articles of Incorporation, or
of these By-Laws, a different vote is required, in which case such express
provisions shall govern and control the decision of such question.
SECTION 7. VOTING RIGHTS OF STOCKHOLDERS. Each Stockholder of
record having the right to vote shall be entitled at every meeting of the
Stockholders of the Company to one vote for each share of stock having voting
power standing in the name of such Stockholder on the books of the Company on
the record date fixed in accordance with Section 5 of Article VII of these
By-Laws, with pro-rata voting rights for any fractional shares, and such votes
may be cast either in person or by written proxy.
<PAGE>
SECTION 8. PROXIES. Every proxy must be executed in writing by
the Stockholder or by his duly authorized attorney-in-fact. No proxy shall be
valid after the expiration of eleven months from the date of its execution
unless it shall have specified therein its duration. Every proxy shall be
revocable at the pleasure of the person executing it or of his personal
representatives or assigns. Proxies shall be delivered prior to the meeting to
the Secretary of the Company or to the person acting as Secretary of the meeting
before being voted. A proxy with respect to stock held in the name of two or
more persons shall be valid if executed by one of them unless at or prior to
exercise of such proxy the Company receives a specific written notice to the
contrary from any one of them. A proxy purporting to be executed by or on behalf
of a Stockholder shall be deemed valid unless challenged at or prior to its
exercise.
SECTION 9. STOCK LEDGER AND LIST OF STOCKHOLDERS. It shall be
the duty of the Secretary or Assistant Secretary of the Company to cause an
original or duplicate stock ledger to be maintained at the office of the
Company's transfer agent.
SECTION 10. ACTION WITHOUT MEETING. Any action to be taken by
Stockholders may be taken without a meeting if (1) all Stockholders entitled to
vote on the matter consent to the action in writing, (2) all Stockholders
entitled to notice of the meeting but not entitled to vote at it sign a written
waiver of any right to dissent and (3) said consents and waivers are filed with
the records of the meetings of Stockholders.
Such consent shall be treated for all purposes as a vote of the meeting.
<PAGE>
ARTICLE III
DIRECTORS
SECTION 1. BOARD OF 3 TO 15 DIRECTORS. The Board of Directors
shall consist of not less than three (3) nor more than fifteen (15) Directors,
all of whom shall be of full age and at least 40% of whom shall be persons who
are not interested persons of the Company as defined in the Investment Company
Act of 1940, provided that prior to the issuance of stock by the Company, the
Board of Directors may consist of less than three (3) Directors, subject to the
provisions of Maryland law. Directors shall be elected at the annual meeting of
the Stockholders, if held, and each Director shall be elected to serve for one
year and until his successor shall be elected and shall qualify or until his
earlier death, resignation or removal. Directors need not be Stockholders. The
Directors shall have power from time to time, and at any time when the
Stockholders as such are not assembled in a meeting, regular or special, to
increase or decrease their own number. If the number of Directors be increased,
the additional Directors may be elected by a majority of the Directors in office
at the time of the increase. The additional Directors shall thereafter be
elected or reelected by the Stockholders at their next annual meeting or at an
earlier special meeting called for that purpose.
The number of Directors may also be increased or decreased by
vote of the Stockholders at any regular or special meeting called for that
purpose. A Director may be removed with or without cause, by a majority vote of
the shares then entitled to vote in an election of Directors. A meeting for the
purpose of considering the removal of a person serving as Director shall be
called by the Directors if requested in writing to do so by the holders of not
<PAGE>
less than 10% of the outstanding shares of the Company. If the Stockholders vote
an increase in the Board they shall by plurality vote elect Directors to the
newly created places as well as fill any then existing vacancies on the Board.
The Board of Directors may elect, but shall not be required to
elect, a Chairman of the Board who must be Director.
SECTION 2. VACANCIES. If the office of any Director or
Directors becomes vacant for any reason (other than an increase in the number of
places on the Board as provided in Section 1 of Article III), the Directors in
office, although less than a quorum, shall continue to act and may, by a
majority vote, choose a successor or successors, who shall hold office until the
next meeting of Stockholders, subject to compliance with applicable provisions
of the 1940 Act. Any vacancy may be filled by the Stockholders at any meeting
thereof
SECTION 3. MAJORITY TO BE ELECTED BY STOCKHOLDERS. If at any
time, less than a majority of the Directors in office shall consist of Directors
elected by Stockholder, a meeting of the Stockholders shall be called within 60
days for the purpose of electing Directors to fill any vacancies in the Board of
Directors (unless the Securities and Exchange Commission or any court of
competent jurisdiction shall by order extend such period).
SECTION 4. REMOVAL. At any meeting of Stockholders duly called
and at which a quorum is present, the Stockholders may, by the affirmative vote
of the holders of a majority of the votes entitled to be cast thereon, remove
any Director or Directors from office, with or without cause, and may elect a
successor or successors to fill any resulting vacancies for the unexpired terms
of the removed Directors.
<PAGE>
SECTION 5. POWERS OF THE BOARD. The business of this Company
shall be managed under the direction of its Board of Directors, which may
exercise or give authority to exercise all powers of the Company and do all such
lawful acts and things as are not by statute, by the Articles of Incorporation
or by these By-Laws required to be exercised or done by the Stockholders.
SECTION 6. PLACE OF MEETINGS. The Directors may hold their
meetings at the principal office of the Company or at such other places, either
within or without the State of Maryland, as they may from time to time
determine.
SECTION 7. REGULAR MEETINGS. Regular meetings of the Board
may be held at such date and time as shall from time to time be determined by
resolution of the Board.
SECTION 8. SPECIAL MEETINGS. Special meetings of the Board may
be called by order of the President on one day's notice given to each Director
either in person or by mail, telephone, telegram, telefax, telex, cable or
wireless to each Director at his residence or regular place of business. Special
meetings will be called by the President or Secretary in a like manner on the
written request of a majority of the Directors.
SECTION 9. WAIVER OF NOTICE. No notice of any meting of the
Board of Directors or a committee of the Board need be given to any Director who
is present at the meeting or who waives notice of such meeting in writing (which
waiver shall be filed with the records of such meeting), either before or after
the time of the meeting.
SECTION 10. QUORUM OF ONE-THIRD. At all meetings of the Board
the presence of one-third of the entire number of Directors then in office (but
<PAGE>
not less than two Directors) shall be necessary to constitute a quorum and
sufficient for the transaction of business, and any act of a majority present at
a meeting at which there is a quorum shall be the act of the Board of Directors,
except as may be otherwise specifically provided by statute, by the Articles of
Incorporation or by these By-Laws. If a quorum shall not be present at any
meeting of Directors, the Directors present thereat may adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present.
SECTION 11. INFORMAL ACTION BY DIRECTORS AND COMMITTEES. Any
action required or permitted to be taken at any meeting of the Board of
Directors or of any committee thereof may, except as otherwise required by
statute, be taken without a meeting if a written consent to such action is
signed by all members of the Board, or of such committee, as the case may be and
filed with the minutes of the proceedings of the Board or committee. Subject to
the Investment Company Act of 1940, members of the Board of Directors or a
committee thereof may participate in a meeting by means of a conference
telephone or similar communications equipment if all persons participating in
the meeting can hear each other at the same time.
SECTION 12. EXECUTIVE COMMITTEE. There may be an Executive
Committee of two or more Directors appointed by the Board who may meet at stated
times or on notice to all by any of their own number. The Executive Committee
shall consult with and advise the Officers of the Company in the management of
its business and exercise such powers of the Board of Directors as may be
lawfully delegated by the Board of the Directors. Vacancies shall be filled by
the Board of Directors at any regular or special meeting. The Executive
Committee shall keep regular minutes of its proceedings and report the same to
the Board when required.
<PAGE>
SECTION 13. OTHER COMMITTEES. The Board of Directors, by the
affirmative vote of a majority of the entire Board, may appoint other committees
which shall in each case consist of such number of members (not less than two)
and shall have and may exercise, to the extent permitted by law, such powers as
the Board may determine in the resolution appointing them. A majority of all
members of any such committee may determine its action, and fix the time and
place of its meetings, unless the Board of Directors shall otherwise provide.
The Board of Directors shall have power at any time to change the members and,
to the extent permitted by law, the powers of any such committee, to fill
vacancies, and to discharge any such committee.
SECTION 14. ADVISORY BOARD. There may be an Advisory Board of
any number of individuals appointed by the Board of Directors who may meet at
stated times or on notice to all by any of their own number or by the President.
The Advisory Board shall be composed of Stockholders or representatives of
Stockholders. The Advisory Board will have no power to require the Company to
take any specific action. Its purpose shall be solely to consider matters of
general policy and to represent the Stockholders in all matters except those
involving the purchase or sale of specific securities. A majority of the
Advisory Board, if appointed, must consist of Stockholders who are not otherwise
affiliated or interested persons of the Company or of any affiliate of the
Company as those terms are defined in the Investment Company Act of 1940
SECTION 15. COMPENSATION OF DIRECTORS. The Board may, by
resolution, determine what compensation and reimbursement of expenses of
attendance at meetings, if any, shall be paid to Directors in connection with
their service on the Board. Nothing herein contained shall be construed to
preclude any Director from serving the Company in any other capacity or from
receiving compensation therefor.
<PAGE>
ARTICLE IV
OFFICERS
SECTION 1. OFFICERS. The Officers of the Company shall be
fixed by the Board of Directors and shall include a President, a Vice-President,
a Secretary and a Treasurer. Any two of the aforesaid offices, except those of
President and Vice President, may be held by the same person.
SECTION 2. APPOINTMENT OF OFFICERS. The Directors, at their
first meeting after each annual meeting of Stockholders, shall appoint a
President and the other Officers who need not be members of the Board.
SECTION 3. ADDITIONAL OFFICERS. The Board, at any regular or
special meeting, may appoint such other Officers and agents as it shall deem
necessary who shall exercise such powers and perform such duties as shall be
determined from time to time by the Board.
SECTION 4. SALARIES OF OFFICERS. The salaries of all
Officers of the Company shall be fixed by the Board of Directors
SECTION 5. TERM, REMOVAL, VACANCIES. The Officers of the
Company shall hold office for one year and until their successors are chosen and
qualify in their stead. Any Officer elected or appointed by the Board of
<PAGE>
Directors may be removed at any time by the affirmative vote of a majority of
the Directors. If the office of any Officer becomes vacant for any reason, the
vacancy shall be filled by the Board of Directors.
SECTION 6. PRESIDENT. The President shall be the chief
executive officer of the Company; he shall, subject to the supervision of the
Board of Directors, have general responsibility for the management of the
business of the Company and shall see that all orders and resolutions of the
Board are carried into effect.
SECTION 7. VICE-PRESIDENT. The Vice-President (senior in
service), at the request or in the absence or disability of the President shall
perform the duties and exercise the powers of the President and shall perform
such other duties as the Board of Directors shall prescribe.
SECTION 8. TREASURER. The Treasurer shall have the custody of
the corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Company and shall deposit
all moneys and other valuable effects in the name and to the credit of the
Company in such depositories as may be designated by the Board of Directors. He
shall disburse the funds of the Company as may be ordered by the Board, taking
proper vouchers for such disbursements, and shall render to the President and
Directors at the regular meetings of the Board, or whenever they may require it,
an account of all his transactions as Treasurer and of the financial condition
of the Company.
Any Assistant Treasurer may perform such duties of the
Treasurer as the Treasurer of the Board of Directors may assign, and, in the
absence of the Treasurer, he may perform all the duties of the Treasurer.
<PAGE>
SECTION 9. SECRETARY. The Secretary shall attend meetings of
the Board and meetings of the Stockholders and record all votes and the minutes
of all proceedings in books to be kept for that purpose. He shall give or cause
to be given notice of all meetings of Stockholders and special meetings of the
Board of Directors and shall perform such other duties as may be prescribed by
the Board of Directors. He shall keep in safe custody the seal of the Company
and affix it to any instrument when authorized by the Board of Directors.
Any Assistant Secretary may perform such duties of the
Secretary as the Secretary or the Board of Directors may assign, and, in the
absence of the Secretary, may perform all the duties of the Secretary.
SECTION 10. SUBORDINATE OFFICERS. The Board of Directors from
time to time may appoint such other officers or agents as it may deem advisable,
each of whom shall have such title, hold office for such period, have such
authority and perform such duties as the Board of Directors may determine. The
Board of Directors from time to time may delegate to one or more officers or
agents the power to appoint any such subordinate officers or agents and to
prescribe their respective rights, terms of office, authorities and duties.
SECTION 11. SURETY BONDS. The Board of Directors may require
any officer or agent of the Company to execute a bond (including, without
limitation, any bond required by the Investment Company Act of 1940, as amended,
and the rules and regulations of the Securities and Exchange Commission) to the
Company in such sum and with such surety or sureties as the Board of Directors
may determine, conditioned upon the faithful performance of his duties to the
<PAGE>
Company, including responsibility for negligence and for the accounting of any
of the Company's property, funds or securities that may come into his hands.
ARTICLE V
INDEMNIFICATION
SECTION 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The
Company shall indemnify its Directors to the fullest extent that indemnification
of directors is permitted by the Maryland General Corporation Law. The Company
shall indemnify its Officers to the same extent as its Directors and to such
further extent as is consistent with law. The Company shall indemnify its
Directors and Officers who while serving as Directors or Officers also serve at
the request of the Company as a director, officer, partner, trustee, employee,
agent or fiduciary of another corporation, partnership, joint venture, trust,
other enterprise or employee benefit plan to the fullest extent consistent with
law. The indemnification and other rights provided by this Article shall
continue as to a person who has ceased to be a director or officer and shall
inure to the benefit of the heirs, executors and administrators of such a
person. This Article shall not protect any such person against any liability to
the Company or any Stockholder thereof to which such person would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office
("disabling conduct").
<PAGE>
SECTION 2. ADVANCES. Any current or former director or officer
of the Company seeking indemnification within the scope of this Article shall be
entitled to advances from the Company for payment of the reasonable expenses
incurred by him in connection with the matter as to which he is seeking
indemnification in the manner and to the fullest extent permissible under the
Maryland General Corporation Law. The person seeking indemnification shall
provide to the Company a written affirmation of his good faith belief that the
standard of conduct necessary for indemnification by the Company has been met
and a written undertaking to repay any such advance if it should ultimately be
determined that the standard of conduct has not been met. The provisions of this
Section are subject to compliance with applicable provisions of the 1940 Act.
SECTION 3. PROCEDURE. Subject to Section 2 of this Article V,
at the request of any person claiming indemnification under this Article, the
Board of Directors shall determine, or cause to be determined, in a manner
consistent with the Maryland General Corporation Law, whether the standards
required by this Article have been met. Indemnification shall be made only
following: (a) a final decision on the merits by a court or other body before
whom the proceeding was brought that the person to be indemnified was not liable
by reason of disabling conduct or (b) in the absence of such a decision, a
reasonable determination, based upon a review of the facts, that the person to
be indemnified was not liable by reason of disabling conduct by (i) the vote of
a majority of a quorum of disinterested non-party Directors or (ii) an
independent legal counsel in a written opinion.
<PAGE>
SECTION 4. INDEMNIFICATION OF EMPLOYEES AND AGENTS. Employees
and agents who are not Officers or Directors of the Company may be indemnified,
and reasonable expenses may be advanced to such employees or agents, as may be
provided by action of the Board of Directors or by contract, subject to any
limitations imposed by the Investment Company Act of 1940.
SECTION 5. OTHER RIGHTS. The Board of Directors may make
further provision consistent with law for indemnification and advance of
expenses to Directors, Officers, employees and agents by resolution, agreement
or otherwise. The indemnification provided by this Article shall not be deemed
exclusive of any other right, with respect to indemnification or otherwise, to
which those seeking indemnification may be entitled under any insurance or other
agreement or resolution of Stockholders or disinterested Directors or otherwise.
The rights provided to any person by this Article shall be enforceable against
the Company by such person who shall be presumed to have relied upon it in
serving or continuing to serve as a director, officer, employee, or agent as
provided above.
SECTION 6. AMENDMENTS. References in this Article are to the
Maryland General Corporation Law and to the Investment Company Act of 1940 as
from time to time amended. No amendment of these By-laws shall effect any right
of any person under this Article based on any event, omission or proceeding
prior to the amendment.
SECTION 7. INSURANCE. The Company may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee,
or agent of the Company or who, while a director, officer, employee, or agent of
the Company, is or was serving at the request of the Company as a director,
<PAGE>
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, other enterprise, or employee
benefit plan against any liability asserted against and incurred by such person
in any such capacity or arising out of such person's position; provided, that no
insurance may be purchased which would indemnify any Director or Officer of the
Company against any liability to the Company or to its security holders to which
he would otherwise be subject by reason of disabling conduct (as defined in
Section 1 of this Article V).
ARTICLE VI
GENERAL PROVISIONS
SECTION 1. WAIVER OF NOTICE. Whenever by statute, the
provisions of the Articles of Incorporation or these ByLaws, the Stockholders or
the Board of Directors are authorized to take any action at any meeting after
notice, such notice may be waived, in writing, before or after the holding of
the meeting, by the person or persons entitled to such notice, or, in the case
of a Stockholder, by his attorney thereunto authorized.
SECTION 2. CHECKS. All checks or demands for money and notes
of the Company shall be signed by such Officer or Officers or such other person
or persons as the Board of Directors may from time to time designate
SECTION 3. FISCAL YEAR. The fiscal year of the Company shall
be determined by resolution of the Board of Directors.
<PAGE>
SECTION 4. ACCOUNTANT. The Company shall employ an independent
public accountant or a firm of independent public accountants as its Accountant
to examine the accounts of the Company and to sign and certify financial
statements filed by the Company. The employment of the Accountant shall be
conditioned upon the right of the Company to terminate the employment forthwith
without any penalty by vote of a majority of the outstanding voting securities
at any Stockholders' meeting called for that purpose.
ARTICLE VII
CAPITAL STOCK
SECTION 1. CERTIFICATE OF STOCK. The interest of each
Stockholder of the Company may be evidenced by certificates for shares of stock
in such form as the Board of Directors may from time to time prescribe. The
certificates shall be numbered and entered in the books of the Company as they
are issued. They shall exhibit the holder's name and the number of shares and no
certificate shall be valid unless it has been signed by the President or a
Vice-President and the Treasurer or an Assistant Treasurer or the Secretary or
an Assistant Secretary and bears the corporate seal. Such seal may be a
facsimile, engraved or printed. Where any such certificate is signed by a
Transfer Agent or by a Registrar, the signatures of any such Officer may be
facsimile, engraved or printed. In case any of the Officers of the Company whose
manual or facsimile signature appears on any stock certificate delivered to a
Transfer Agent of the Company shall cease to be such Officer prior to the
<PAGE>
issuance of such certificate, the Transfer Agent may nevertheless countersign
and deliver such certificate as though the person signing the same or whose
facsimile signature appears thereon had not ceased to be such Officer, unless
written instructions of the Company to the contrary are delivered to the
Transfer Agent.
SECTION 2. LOST, STOLEN OR DESTROYED CERTIFICATES. The Board
of Directors, or the President together with the Treasurer or Secretary, may
direct a new certificate to be issued in place of any certificate theretofore
issued by the Company, alleged to have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate of
stock to be lost, stolen or destroyed, or by his legal representative. When
authorizing such issue of a new certificate, the Board of Directors, or the
President and Treasurer or Secretary, may, in its or their discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate, or his legal representative, to advertise the
same in such manner as it or they shall require and/or give the Company a bond
in such sum and with such surety or sureties as it or they may direct as
indemnity against any claim that may be made against the Company with respect to
the certificate alleged to have been lost, stolen or destroyed or such newly
issued certificate.
SECTION 3. TRANSFER OF STOCK. Shares of the Company shall be
transferable on the books of the Company by the holder thereof in person or by
his duly authorized attorney or legal representative upon surrender and
cancellation of a certificate or certificates for the same number of shares of
the same class, duly endorsed or accompanied by proper evidence of succession,
assignment or authority to transfer, with such proof of the authenticity of the
signature as the Company or its agents may reasonably require. The Board of
<PAGE>
Directors may, from time to time, adopt rules and regulations with reference to
the method of transfer of the shares of stock of the Company.
SECTION 4. REGISTERED HOLDER. The Company shall be entitled to
treat the holder of record of any share or shares of stock as the holder in fact
thereof and, accordingly, shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person
whether or not it shall have express or other notice thereof, except as
expressly provided by statute.
SECTION 5. RECORD DATE. The Board of Directors may fix a time
not less than 10 nor more than 90 days prior to the date of any meeting of
Stockholders or prior to the last day on which the consent or dissent of
Stockholders may be effectively expressed for any purpose without a meeting, as
the time as of which Stockholders entitled to notice of and to vote at such a
meeting or whose consent or dissent is required or may be expressed for any
purpose, as the case may be, shall be determined; and all persons who were
holders of record of voting stock at such time and no other shall be entitled to
notice of and to vote at such meeting or to express their consent or dissent, as
the case may be. If no record date has been fixed, the record date for the
determination of Stockholders entitled to notice of or to vote at a meeting of
Stockholders shall be the later of the close of business on the day on which
notice of the meeting is mailed or the thirtieth day before the meeting, or, if
notice is waived by all Stockholders, at the close of business on the tenth day
next preceding the day on which the meeting is held. The Board of Directors may
also fix a time not exceeding 90 days preceding the date fixed for the payment
of any dividend or the making of any distribution, or for the delivery of
<PAGE>
evidences of rights, or evidences of interests arising out of any change,
conversion or exchange of capital stock, as a record time for the determination
of the Stockholder entitled to receive any such dividend, distribution, rights
or interests.
SECTION 6. STOCK LEDGERS. The stock ledgers of the Company,
containing the names and addresses of the Stockholders and the number of shares
held by them respectively, shall be kept at the principal offices of the Company
or at the offices of the transfer agent of the Company or at such other location
as may be authorized by the Board of Directors from time to time.
SECTION 7. TRANSFER AGENTS AND REGISTRARS. The Board of
Directors may from time to time appoint or remove transfer agents and/or
registrars of transfers (if any) of shares of stock of the Company, and it may
appoint the same person as both transfer agent and registrar. Upon any such
appointment being made, all certificates representing shares of capital stock
thereafter issued shall be countersigned by one of such transfer agents or by
one of such registrars of transfers (if any) or by both and shall not be valid
unless so countersigned. If the same person shall be both transfer agent and
registrar, only one countersignature by such person shall be required
SECTION 8. DIVIDENDS. Dividends upon the capital stock of the
Company, subject to any provisions of the Articles of Incorporation relating
thereto, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law.
SECTION 9. RESERVE BEFORE DIVIDENDS. Before payment of any
dividend, there may be set aside out of the net profits of the Company available
<PAGE>
for dividends such sum or sums as the Directors from time to time in their
absolute discretion think proper as a reserve fund to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
Company, or for such other purpose as the Directors shall think conducive to the
interests of the Company, and the Directors may modify or abolish any such
reserve in the manner in which it was created.
SECTION 10. NO PRE-EMPTIVE RIGHTS. Shares of stock shall
not possess pre-emptive rights to purchase additional shares of stock when
offered.
SECTION 11. FRACTIONAL SHARES. Fractional shares entitle
the holder to the same voting and other rights and privileges as whole shares
on a pro-rata basis.
ARTICLE VIII
AMENDMENTS
SECTION 1. BY STOCKHOLDERS. By-Laws may be adopted, amended or
repealed, by vote of the holders of a majority of the Company's stock, as
defined by the Investment Company Act of 1940, at any annual or special meeting
of the Stockholders at which a quorum is present or represented, provided notice
of the proposed amendment shall have been contained in the notice of the
meeting.
SECTION 2. BY DIRECTORS. The Directors may adopt, amend or
repeal any By-Law (which is not inconsistent with any By-Law adopted, amended or
<PAGE>
repealed by the Company's Stockholders in accordance with Section 1 of this
Article VIII) by majority vote of all of the Directors in office at any regular
meeting, or at any special meeting, in accordance with the requirements of
applicable law.
ARTICLE IX
CUSTODY OF SECURITIES
SECTION 1. EMPLOYMENT OF A CUSTODIAN. The Company shall place
and at all times maintain in the custody of a Custodian (including any
sub-custodian for the Custodian, which may be a foreign bank which meets
applicable requirements of law) all funds, securities and similar investments
owned by the Company. The Custodian (and any sub-custodian) shall be a bank
having not less than $2,000,000 aggregate capital, surplus and undivided profits
or such other financial institution as shall be permitted by rule or order of
the United States Securities and Exchange Commission. The Custodian shall be
appointed from time to time by the Directors, who shall fix its remuneration.
SECTION 2. ACTION UPON TERMINATION OF CUSTODIAN AGREEMENT.
Upon termination of a Custodian Agreement or inability of the Custodian to
continue to serve, the Directors shall promptly appoint a successor custodian,
but in the event that no successor custodian can be found who has the required
qualifications and is willing to serve, the Directors shall call as promptly as
possible a special meeting of the Shareholders to determine whether the Company
<PAGE>
shall function without a custodian or shall be liquidated. If so directed by
vote of the holders of a majority of the outstanding voting securities, the
Custodian shall deliver and pay over all funds, securities and similar
investments held by it as specified in such vote.
SECTION 3. PROVISIONS OF CUSTODIAN AGREEMENT. The following
provisions shall apply to the employment of a Custodian and to any contract
entered into with the Custodian so employed:
The Directors shall cause to be delivered to the Custodian all
securities owned by the Company or to which it may become
entitled, and shall order the same to be delivered by the
Custodian only in completion of a sale, exchange, transfer,
pledge, loan of portfolio securities to another person, or other
disposition thereof, all as the Directors may generally or from
time to time require or approve or to a successor Custodian; and
the Directors shall cause all funds owned by the Company or to
which it may become entitled to be paid to the Custodian, and
shall order the same disbursed only for investment against
delivery of the securities acquired, or the return of cash held
as collateral for loans of portfolio securities, or in payment of
expenses, including management compensation, and liabilities of
the Company, including distributions to shareholders, or to a
successor Custodian. In connection with the Company's purchase or
sale of futures contracts, the Custodian shall transmit, prior to
receipt on behalf of the Company of any securities or other
property, funds from the Company's custodian account in order to
furnish to and maintain funds with brokers as margin to guarantee
the
<PAGE>
performance of the Company's futures obligations in accordance with
the applicable requirements of commodities exchanges and brokers.
ARTICLE X
MISCELLANEOUS
SECTION 1. MISCELLANEOUS.
(a) Except as hereinafter provided, no Officer or Director of
the Company and no partner, officer, director or shareholder of the Investment
Adviser of the Company or of the Distributor of the Company, and no Investment
Adviser or Distributor of the Company, shall take long or short positions in the
securities issued by the Company.
(1) The foregoing provisions shall not prevent the Distributor
from purchasing Shares from the Company if such purchases are limited
(except for reasonable allowances for clerical errors, delays and errors of
transmission and cancellation of orders) to purchases for the purpose of
filling orders for such Shares received by the Distributor, and provided
that orders to purchase from the Company are entered with the Company or the
Custodian promptly upon receipt by the Distributor of purchase orders for
such Shares, unless the Distributor is otherwise instructed by its customer.
(2) The foregoing provision shall not prevent
the Distributor from purchasing Shares of the Company as agent for the account
of the Company.
<PAGE>
(3) The foregoing provision shall not prevent the
purchase from the Company or from the Distributor of Shares issued by the
Company, by any officer, or Director of the Company or by any partner,
officer, director or shareholder of the Investment Adviser of the Company
or of the Distributor of the Company at the price available to the public
generally at the moment of such purchase, or as described in the then
currently effective Prospectus of the Company.
(4) The foregoing shall not prevent the
Distributor, or any affiliate thereof, of the Company from purchasing Shares
prior to the effectiveness of the first registration statement relating to
the Shares under the Securities Act of 1933.
(b) The Company shall not lend assets of the Company to any
officer or Director of the Company, or to any partner, officer, director or
shareholder of, or person financially interested in, the Investment Adviser of
the Company, or the Distributor of the Company, or to the Investment Adviser of
the Company or to the Distributor of the Company.
(c) The Company shall not impose any restrictions upon the
transfer of the Shares of the Company except as provided in the Articles of
Incorporation, but this requirement shall not prevent the charging of customary
transfer agent fees.
(d) The Company shall not permit any officer or Director of
the Company, or any partner, officer or director of the Investment Adviser or
Distributor of the Company, to deal for or on behalf of the Company with himself
as principal or agent, or with any partnership, association or corporation in
which he has a financial interest; provided that the foregoing provisions shall
not prevent (a) Officers and Directors of the Company or partners, officers or
<PAGE>
directors of the Investment Adviser or Distributor of the Company from buying,
holding or selling Shares in the Company, or from being partners, officers or
directors or otherwise financially interested in the Investment Adviser or
Distributor of the Company; (b) purchases or sales of securities or other
property by the Company from or to an affiliated person or to the Investment
Adviser or Distributor of the Company if such transaction is exempt from the
applicable provisions of the 1940 Act; (c) purchases of investments for the
portfolio of the Company or sales of investments owned by the Company through a
security dealer who is, or one or more of whose partners, shareholders, officers
or directors is, an Officer or Director of the Company, or a partner, officer or
director of the Investment Adviser or Distributor of the Company, if such
transactions are handled in the capacity of broker only and commissions charged
do not exceed customary brokerage charges for such services; (d) employment of
legal counsel, registrar, Transfer Agent, dividend disbursing agent or Custodian
who is, or has a partner, shareholder, officer, or director who is, an officer
or Director of the Company, or a partner, officer or director of the Investment
Adviser or Distributor of the Company, if only customary fees are charged for
services to the Company; (e) sharing statistical research, legal and management
expenses and office hire and expenses with any other investment company in which
an officer or Director of the Company, or a partner, officer or director of the
Investment Adviser or Distributor of the Company, is an officer or director or
otherwise financially interested.
TRANSFER AGENT AGREEMENT BETWEEN
TEMPLETON INSTITUTIONAL FUNDS, INC. AND
FRANKLIN TEMPLETON INVESTOR SERVICES, INC.
AGREEMENT dated as of September 1, 1993, and amended and restated as of
February 21, 1997 between TEMPLETON INSTITUTIONAL FUNDS, INC., a registered
open-end investment company with offices at 700 Central Avenue, St. Petersburg,
Florida 33701 (the "Company"), comprising Growth Series, Foreign Equity Series,
Emerging Markets Series and Emerging Fixed Income Markets Series, and any
additional series that may be established in the future (the "Funds") and
FRANKLIN TEMPLETON INVESTOR SERVICES, INC., a registered transfer agent with
offices at 700 Central Avenue, St.
Petersburg, Florida 33701 ("FTIS").
W I T N E S S E T H:
That for and in consideration of the mutual promises hereinafter set
forth, the Company and FTIS agree as follows:
1. DEFINITIONS. Whenever used in this Agreement, the following words and
phrases, unless the context otherwise requires, shall have the following
meanings:
(a) "Articles of Incorporation" shall mean the Articles of Incorporation of the
Company as the same may be amended from time to time;
(b) "Authorized Person" shall be deemed to include any person, whether or not
such person is an officer or employee of the Company, duly authorized to give
Oral Instructions or Written Instructions on behalf of the Company as indicated
in a certificate furnished to FTIS pursuant to Section 4(c) hereof as may be
received by FTIS from time to time;
(c) "Custodian" refers to the custodian and any sub-custodian
of all securities and other property which the Funds may from time to time
deposit, or cause to be deposited or held under the name or account of such
custodian pursuant to the Custody Agreement;
(d) "Oral Instructions" shall mean instructions, other than written
instructions, actually received by FTIS from a person reasonably believed by
FTIS to be an Authorized Person;
(e) "Shares" refers to shares of common stock, par value $.01 per share, of the
Funds; and
<PAGE>
(f) "Written Instructions" shall mean a written communication signed by a person
reasonably believed by FTIS to be an Authorized Person and actually received by
FTIS.
2. APPOINTMENT OF FTIS. The Company hereby appoints and constitutes FTIS as
transfer agent for Shares of the Company and as shareholder servicing agent for
the Company, and FTIS accepts such appointment and agrees to perform the duties
hereinafter set forth.
3. COMPENSATION.
(a) The Company will compensate or cause FTIS to be
compensated for the performance of its obligations hereunder in accordance with
the fees set forth in the written schedule of fees annexed hereto as Schedule A
and incorporated herein. Schedule A does not include out-of-pocket disbursements
of FTIS for which FTIS shall be entitled to bill the Company separately. FTIS
will bill the Company as soon as practicable after the end of each calendar
month, and said billings will be detailed in accordance with Schedule A. The
Company will promptly pay to FTIS the amount of such billing.
Out-of-pocket disbursements shall include, but shall not be
limited to, the items specified in the written schedule of out-of-pocket
expenses annexed hereto as Schedule B and incorporated herein. Schedule B may be
modified by FTIS upon not less than 30 days' prior written notice to the
Company. Unspecified out-of-pocket expenses shall be limited to those
out-of-pocket expenses reasonably incurred by FTIS in the performance of its
obligations hereunder. Reimbursement by the Company for expenses incurred by
FTIS in any month shall be made as soon as practicable after the receipt of an
itemized bill from FTIS.
Out-of-pocket disbursements may also include payments made by
FTIS to entities including affiliated entities which provide sub-shareholder
services, recordkeeping and/or transfer agency services to beneficial owners of
the Company, where such services are substantially similar to the services
provided by FTIS to account holders of record. The amount of these disbursements
per benefit plan participant fund account per year shall not exceed the per
account transfer agency fees payable by the Company to FTIS in connection with
maintaining actual shareholder accounts. On an annual basis, FTIS shall provide
a report to the Board showing, with respect to each entity receiving such fees,
the number of beneficial owners serviced by such entity and the value of the
assets in the Company represented by such accounts.
(b) Any compensation agreed to hereunder may be adjusted from
time to time by attaching to Schedule A of this Agreement a revised Fee
Schedule.
4. DOCUMENTS. In connection with the appointment of FTIS, the Company
shall, on or before the date this Agreement goes into effect, but in any case,
<PAGE>
within a reasonable period of time for FTIS to prepare to perform its duties
hereunder, deliver or cause to be delivered to FTIS the following documents:
(a) If applicable, specimens of the certificates for Shares of the Funds;
(b) All account application forms and other documents relating to Shareholder
accounts or to any plan, program or service offered by the Funds;
(c) A certificate identifying the Authorized Persons and specimen signatures of
Authorized Persons who will sign Written Instructions; and
(d) All documents and papers necessary under the laws of
Florida, under the Company's Articles of Incorporation, and as may be required
for the due performance of FTIS's duties under this Agreement or for the due
performance of additional duties as may from time to time be agreed upon between
the Company and FTIS.
5. DISTRIBUTIONS PAYABLE IN SHARES. In the event that the Board of
Trustees of the Trust shall declare a distribution payable in Shares, the Trust
shall deliver or cause to be delivered to FTIS written notice of such
declaration signed on behalf of the Trust by an officer thereof, upon which FTIS
shall be entitled to rely for all purposes, certifying (i) the number of Shares
involved, and (ii) that all appropriate action has been taken.
6. DUTIES OF THE TRANSFER AGENT. FTIS shall be responsible for
administering and/or performing transfer agent functions; for acting as service
agent in connection with dividend and distribution functions; and for performing
shareholder account and administrative agent functions in connection with the
issuance, transfer and redemption or repurchase (including coordination with the
Custodian) of Shares. The operating standards and procedures to be followed
shall be determined from time to time by agreement between the Company and FTIS.
Without limiting the generality of the foregoing, FTIS agrees to perform the
specific duties listed on Schedule C.
7. RECORDKEEPING AND OTHER INFORMATION. FTIS shall create and
maintain all necessary records in accordance with all applicable laws, rules
and regulations.
8. OTHER DUTIES. In addition, FTIS shall perform such other duties and
functions, and shall be paid such amounts therefor, as may from time to time be
agreed upon in writing between the Company and FTIS. Such other duties and
functions shall be reflected in a written amendment to Schedule C, and the
compensation for such other duties and functions shall be reflected in a written
amendment to Schedule A.
<PAGE>
9. RELIANCE BY TRANSFER AGENT; INSTRUCTIONS.
(a) FTIS will be protected in acting upon Written or Oral
Instructions reasonably believed to have been executed or orally communicated by
an Authorized Person and will not be held to have any notice of any change of
authority of any person until receipt of a Written Instruction thereof from an
officer of the Company. FTIS will also be protected in processing Share
certificates which it reasonably believes to bear the proper manual or facsimile
signatures of the officers of the Company and the proper countersignature of
FTIS.
(b) At any time FTIS may apply to any Authorized Person of the
Company for Written Instructions and may seek advice at the Company's expense
from legal counsel for the Company or from its own legal counsel, with respect
to any matter arising in connection with this Agreement, and it shall not be
liable for any action taken or not taken or suffered by it in good faith in
accordance with such Written Instructions or in accordance with the opinion of
counsel for the Company or for FTIS. Written Instructions requested by FTIS will
be provided by the Company within a reasonable period of time. In addition,
FTIS, or its officers, agents or employees, shall accept Oral Instructions or
Written Instructions given to them by any person representing or acting on
behalf of the Company only if said representative is known by FTIS, or its
officers, agents or employees, to be an Authorized Person.
10. ACTS OF GOD, ETC. FTIS will not be liable or responsible for delays
or errors by reason of circumstances beyond its control, including acts of civil
or military authority, national emergencies, labor difficulties, fire,
mechanical breakdown beyond its control, flood or catastrophe, acts of God,
insurrection, war, riots or failure beyond its control of transportation,
communication or power supply.
11. DUTY OF CARE AND INDEMNIFICATION. The Company will indemnify FTIS
against and hold it harmless from any and all losses, claims, damages,
liabilities or expenses (including reasonable counsel fees and expenses)
resulting from any claim, demand, action or suit not resulting from willful
misfeasance, bad faith or gross negligence on the part of FTIS, and arising out
of, or in connection with, its duties hereunder. In addition, the Company will
indemnify FTIS against and hold it harmless from any and all losses, claims,
damages, liabilities or expenses (including reasonable counsel fees and
expenses) resulting from any claim, demand, action or suit as a result of: (i)
any action taken in accordance with Written or Oral Instructions, or any other
instructions or Share certificates reasonably believed by FTIS to be genuine and
to be signed, countersigned or executed, or orally communicated by an Authorized
Person; (ii) any action taken in accordance with written or oral advice
reasonably believed by FTIS to have been given by counsel for the Company or by
its own counsel; (iii) any action taken as a result of any error or omission in
any record (including but not limited to magnetic tapes, computer printouts,
hard copies and microfilm copies) delivered, or caused to be delivered by the
Company to FTIS in connection with this Agreement; or (iv) any action taken in
<PAGE>
accordance with Oral Instructions given under the Telephone Exchange and
Redemption Privileges, as described in the applicable Fund's current prospectus,
when believed by FTIS to be genuine.
In any case in which the Company may be asked to indemnify or hold FTIS
harmless, the Company shall be advised of all pertinent facts concerning the
situation in question and FTIS will use reasonable care to identify and notify
the Company promptly concerning any situation which presents or appears likely
to present a claim for indemnification against the Company. The Company shall
have the option to defend FTIS against any claim which may be the subject of
this indemnification, and, in the event that the Company so elects, such defense
shall be conducted by counsel chosen by the Company and satisfactory to FTIS,
and thereupon, the Company shall take over complete defense of the claim and
FTIS shall sustain no further legal or other expenses in such situation for
which it seeks indemnification under this Section 11. FTIS will not confess any
claim or make any compromise in any case in which the Company will be asked to
provide indemnification, except with the Company's prior written consent. The
obligations of the parties hereto under this Section shall survive the
termination of this Agreement.
12. TERM AND TERMINATION.
(a) This Agreement shall be effective as of the date first
written above and shall continue through April 30, 1998 and thereafter shall
continue automatically for successive annual periods ending on April 30 of each
year, provided such continuance is specifically approved at least annually by
(i) the Company's Board of Directors or (ii) a vote of a "majority" (as defined
in the Investment Company Act of 1940 (the "1940 Act")) of the Company's
outstanding voting securities, provided that in either event the continuance is
also approved by a majority of the Board of Directors who are not "interested
persons" (as defined in the 1940 Act) of any party to this Agreement, by vote
cast in person at a meeting called for the purpose of voting such approval.
(b) Either party hereto may terminate this Agreement by giving
to the other party a notice in writing specifying the date of such termination,
which shall be not less than 60 days after the date of receipt of such notice.
In the event such notice is given by the Company, it shall be accompanied by a
resolution of the Board of Directors of the Company, certified by the Secretary
of the Company, designating a successor transfer agent or transfer agents. Upon
such termination and at the expense of the Company, FTIS will deliver to such
successor a certified list of Shareholders of the Company (with names and
addresses), an historical record of the account of each Shareholder and the
status thereof, and all other relevant books, records, correspondence, and other
data established or maintained by FTIS under this Agreement in a form reasonably
acceptable to the Company, and will cooperate in the transfer of such duties and
responsibilities, including provisions for assistance from FTIS's personnel in
the establishment of books, records and other data by such successor or
successors.
<PAGE>
13. AMENDMENT. This Agreement may not be amended or modified in any
manner except by a written agreement executed by both parties.
14. SUBCONTRACTING. The Company agrees that FTIS may, in its
discretion, subcontract for certain of the services described under this
Agreement or the Schedules hereto; provided that the appointment of any
such agent shall not relieve FTIS of its responsibilities hereunder.
15. MISCELLANEOUS.
(a) Any notice or other instrument authorized or required by
this Agreement to be given in writing to the Company or FTIS shall be
sufficiently given if addressed to that party and received by it at its office
set forth below or at such other place as it may from time to time designate in
writing.
To the Company:
Templeton Institutional Funds, Inc.
700 Central Avenue
St. Petersburg, Florida 33701
To FTIS:
Franklin Templeton Investor Services, Inc.
700 Central Avenue
St. Petersburg, Florida 33701
(b) This Agreement shall extend to and shall be binding upon
the parties hereto, and their respective successors and assigns; provided,
however, that this Agreement shall not be assignable without the written consent
of the other party.
(c) This Agreement shall be construed in accordance with the
laws of the State of California.
(d) This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original; but such
counterparts shall, together, constitute only one instrument.
<PAGE>
(e) The captions of this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective corporate officers thereunder duly
authorized as of the day and year first above written.
TEMPLETON INSTITUTIONAL FUNDS, INC.
BY:/s/JOHN R. KAY
John R. Kay
Vice President
FRANKLIN TEMPLETON INVESTOR SERVICES, INC.
BY:/s/ROBERT W. SMITH
Robert W. Smith
Senior Vice President
<PAGE>
A-1
Schedule A
FEES
Shareholder account maintenance $14.54 for Foreign Equity Series,
(per annum, prorated payable Growth Series, Emerging Markets
monthly) Series, and Emerging Fixed Income
Markets Series, adjusted as of
February 1 of each year to
reflect changes in the Department
of Labor Consumer Price Index.
February 1, 1997
<PAGE>
B-1
Schedule B
OUT-OF-POCKET EXPENSES
The Company shall reimburse FTIS monthly for the following
out-of-pocket expenses:
o postage and mailing
o forms
o outgoing wire charges
o telephone
o Federal Reserve charges for check clearance
o if applicable, magnetic tape and freight
o retention of records
o microfilm/microfiche
o stationary
o insurance
o if applicable, terminals, transmitting lines and any expenses
incurred in connection with such terminals and lines
o all other miscellaneous expenses reasonably incurred by FTIS
The Company agrees that postage and mailing expenses will be paid on
the day of or prior to mailing as agreed with FTIS. In addition, the Company
will promptly reimburse FTIS for any other expenses incurred by FTIS as to which
the Company and FTIS mutually agree that such expenses are not otherwise
properly borne by FTIS as part of its duties and obligations under the
Agreement.
<PAGE>
C-4
C-1
Schedule C
DUTIES
AS TRANSFER AGENT FOR INVESTORS IN THE COMPANY, FTIS WILL:
o Record in its transfer record, countersign as transfer agent,
and deliver certificates signed manually or by facsimile, by
the President or a Vice-President and by the Secretary or the
Assistant Secretary of the Company, in such names and for such
number of authorized but hitherto unissued Shares of the Funds
as to which FTIS shall receive instructions; and
o Transfer on its records from time to time, when presented to
it for that purpose, certificates of said Shares, whether now
outstanding or hereafter issued, when countersigned by a duly
authorized transfer agent, and upon the cancellation of the
old certificates, record and countersign new certificates for
a corresponding aggregate number of Shares and deliver said
new certificates.
AS SHAREHOLDER SERVICE AGENT FOR INVESTORS IN THE COMPANY, FTIS WILL:
o Receive from the Company, from the Company's Principal
Underwriter or from a Shareholder, on a form acceptable to
FTIS, information necessary to record sales and redemptions
and to generate sale and/or redemption confirmations;
o Mail sale and/or redemption confirmations using standard
forms;
o Accept and process cash payments from investors, and clear
checks which represent payments for the purchase of Shares;
o Requisition Shares in accordance with instructions of the
Principal Underwriter of the Shares of the Company;
o Produce periodic reports reflecting the accounts receivable
and the paid pending (free stock) items;
o Open, maintain and close Shareholder accounts;
o Establish registration of ownership of Shares in accordance
with generally accepted form;
o Maintain monthly records of (i) issued Shares and (ii) number
of Shareholders and their aggregate Shareholdings classified
according to their residence in each State of the United
States or foreign country;
o Accept and process telephone exchanges and redemptions for
Shares in accordance with a Company's Telephone Exchange and
Redemption Privileges as described in the Funds' current
prospectus;
o Maintain and safeguard records for each Shareholder showing
name(s), address, number of any certificates issued, and
number of Shares registered in such name(s), together with
continuous proof of the outstanding Shares, and dealer
identification, and reflecting all current changes; on
request, provide information as to an investor's qualification
for Cumulative Quantity Discount; and provide all accounts
with confirmation statements reflecting the most recent
transactions, and also provide year-end historical
confirmation statements;
o Provide on request a duplicate set of records for file
maintenance in the Company's office in St. Petersburg,
Florida;
o Pay to the Company's Custodian Account with the Custodian, the
net asset value per Share and pay to the Principal Underwriter
its commission out of money received in payment for Shares
sales;
o Redeem Shares and prepare and mail (or wire) liquidation
proceeds;
o Pass upon the adequacy of documents submitted by a Shareholder
or his legal representative to substantiate the transfer of
ownership of Shares from the registered owner to transferees;
o From time to time, make transfers upon the books of the
Company in accordance with properly executed transfer
instructions furnished to FTIS and make transfers of
certificates for such Shares as may be surrendered for
transfer properly endorsed, and countersign new certificates
issued in lieu thereof;
o Upon receipt of proper documentation, place stop transfers,
obtain necessary insurance forms, and reissue replacement
certificates against lost, stolen or destroyed Share
certificates;
o Check surrendered certificates for stop transfer restrictions.
Although FTIS cannot insure the genuineness of certificates
surrendered for cancellation, it will employ all due
reasonable care in deciding the genuineness of such
certificates and the guarantor of the signature(s) thereon;
o Cancel surrendered certificates and record and countersign
new certificates;
o Certify outstanding Shares to auditors;
o In connection with any meeting of Shareholders, upon receiving
appropriate detailed instructions and written materials
prepared by the Company and proxy proofs checked by the
Company, print proxy cards; deliver to Shareholders all
reports, prospectuses, proxy cards and related proxy materials
of suitable design for enclosing; receive and tabulate
executed proxies; and furnish a list of Shareholders for the
meeting;
o Answer routine correspondence and telephone inquiries about
individual accounts; prepare monthly reports for
correspondence volume and correspondence data necessary for
the Company's Semi-Annual Report on Form N-SAR;
o Prepare and mail dealer commission statements and checks;
o Maintain and furnish the Company and its Shareholders with
such information as the Company may reasonably request for the
purpose of compliance by the Company with the applicable tax
and securities laws of applicable jurisdictions;
o Mail confirmations of transactions to investors and dealers
in a timely fashion;
o Pay or reinvest income dividends and/or capital gains
distributions to Shareholders of record, in accordance with
the Company's and/or Shareholder's instructions, provided
that:
(a) The Company shall notify FTIS in writing
promptly upon declaration of any such
dividend and/or distribution, and in any
event at least forty-eight (48) hours before
the record date;
(b) Such notification shall include the
declaration date, the record date, the
payable date, the rate, and, if applicable,
the reinvestment date and the reinvestment
price to be used; and
(c) Prior to the payable date, the Company shall
furnish FTIS with sufficient fully and
finally collected funds to make such
distribution.
o Prepare and file annual United States information returns of
dividends and capital gains distributions (Form 1099) and mail
payee copies to Shareholders; report and pay United States
income taxes withheld from distributions made to nonresidents
of the United States; and prepare and mail to Shareholders the
notice required by the U.S. Internal Revenue Code as to
realized capital gains distributed and/or retained, and their
proportionate share of any foreign taxes paid by the Company;
o Prepare transfer journals;
o Set up wire order trades on file;
o Receive payment for trades and update the trade file;
o Produce delinquency and other trade file reports;
o Provide dealer commission statements and payments thereof
for the Principal Underwriter;
o Sort and print Shareholder information by state, social
code, price break, etc.; and
o Mail promptly the Statement of Additional Information of
the Funds to each Shareholder who requests it, at no cost
to the Shareholder.
MCGLADREY & PULLEN, LLP
Certified Public Accountants and Consultants
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our report dated January 31, 1997
on the financial statements of the Growth Series, the Foreign Equity Series, and
the Emerging Markets Series of Templeton Institutional Funds, Inc. referred to
therein, which appears in the 1996 Annual Report to Shareholders, and which are
incorporated herein by reference, in Post-Effective Amendment No. 11 to the
Registration Statement on Form N1-A, File No. 33-35779, as filed with the
Securities and Exchange Commission.
We also consent to the reference to our firm in the Prospectus
under the caption "Financial Highlights" and in the Statement of Additional
Information under the caption "Independent Accountants".
/s/McGladrey & Pullen, LLP
New York, New York
April 21, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
TIFI FOREIGN EQUITY SERIES DECEMBER 31, 1996 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 001
<NAME> TIFI FOREIGN EQUITY SERIES
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 2321806193
<INVESTMENTS-AT-VALUE> 2807616599
<RECEIVABLES> 60448307
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 40465
<TOTAL-ASSETS> 2868105371
<PAYABLE-FOR-SECURITIES> 7453164
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3061474
<TOTAL-LIABILITIES> 10514638
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2387961682
<SHARES-COMMON-STOCK> 174840843
<SHARES-COMMON-PRIOR> 129496379
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (2669031)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (13512324)
<ACCUM-APPREC-OR-DEPREC> 485810406
<NET-ASSETS> 2857590733
<DIVIDEND-INCOME> 79994062
<INTEREST-INCOME> 16174482
<OTHER-INCOME> 0
<EXPENSES-NET> 20549169
<NET-INVESTMENT-INCOME> 75619375
<REALIZED-GAINS-CURRENT> 19801000
<APPREC-INCREASE-CURRENT> 367862740
<NET-CHANGE-FROM-OPS> 463283115
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (79293403)
<DISTRIBUTIONS-OF-GAINS> (35435012)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 57725609
<NUMBER-OF-SHARES-REDEEMED> (19936059)
<SHARES-REINVESTED> 7554914
<NET-CHANGE-IN-ASSETS> 1039707426
<ACCUMULATED-NII-PRIOR> 756912
<ACCUMULATED-GAINS-PRIOR> 2369773
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 16525094
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 20549169
<AVERAGE-NET-ASSETS> 2360727655
<PER-SHARE-NAV-BEGIN> 14.04
<PER-SHARE-NII> 0.450
<PER-SHARE-GAIN-APPREC> 2.540
<PER-SHARE-DIVIDEND> (0.470)
<PER-SHARE-DISTRIBUTIONS> (0.220)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.34
<EXPENSE-RATIO> 0.87
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
TIFI GROWTH SERIES DECEMBER 31, 1996 ANNUAL REPORT AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER>002
<NAME> TIFI GROWTH SERIES
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 211609861
<INVESTMENTS-AT-VALUE> 267505328
<RECEIVABLES> 893216
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 2031
<TOTAL-ASSETS> 268400575
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 242784
<TOTAL-LIABILITIES> 242784
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 212846140
<SHARES-COMMON-STOCK> 19993055
<SHARES-COMMON-PRIOR> 19141240
<ACCUMULATED-NII-CURRENT> 134012
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (717828)
<ACCUM-APPREC-OR-DEPREC> 55895467
<NET-ASSETS> 268157791
<DIVIDEND-INCOME> 6813640
<INTEREST-INCOME> 784361
<OTHER-INCOME> 0
<EXPENSES-NET> 2067792
<NET-INVESTMENT-INCOME> 5530209
<REALIZED-GAINS-CURRENT> 13242428
<APPREC-INCREASE-CURRENT> 30278191
<NET-CHANGE-FROM-OPS> 49050828
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5396197)
<DISTRIBUTIONS-OF-GAINS> (14385189)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2056255
<NUMBER-OF-SHARES-REDEEMED> (2735648)
<SHARES-REINVESTED> 1531208
<NET-CHANGE-IN-ASSETS> 41194782
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 424933
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1656913
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2067792
<AVERAGE-NET-ASSETS> 236701853
<PER-SHARE-NAV-BEGIN> 11.86
<PER-SHARE-NII> 0.300
<PER-SHARE-GAIN-APPREC> 2.320
<PER-SHARE-DIVIDEND> (0.290)
<PER-SHARE-DISTRIBUTIONS> (0.780)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.41
<EXPENSE-RATIO> 0.87
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
TIFI EMERGING MARKETS SERIES DECEMBER 31, 1996 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER>003
<NAME> TIFI EMERGING MARKETS SERIES
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 1457933747
<INVESTMENTS-AT-VALUE> 1563765071
<RECEIVABLES> 5507140
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 1466365
<TOTAL-ASSETS> 1570738576
<PAYABLE-FOR-SECURITIES> 2770835
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2431122
<TOTAL-LIABILITIES> 5201957
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1456499744
<SHARES-COMMON-STOCK> 125711773
<SHARES-COMMON-PRIOR> 74261758
<ACCUMULATED-NII-CURRENT> 865476
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2340075
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 105831324
<NET-ASSETS> 1565536619
<DIVIDEND-INCOME> 29822203
<INTEREST-INCOME> 9361025
<OTHER-INCOME> 0
<EXPENSES-NET> 19566078
<NET-INVESTMENT-INCOME> 19617150
<REALIZED-GAINS-CURRENT> 19339283
<APPREC-INCREASE-CURRENT> 154324968
<NET-CHANGE-FROM-OPS> 193281401
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (18840261)
<DISTRIBUTIONS-OF-GAINS> (18732279)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 53130712
<NUMBER-OF-SHARES-REDEEMED> (4431413)
<SHARES-REINVESTED> 2750716
<NET-CHANGE-IN-ASSETS> 767021555
<ACCUMULATED-NII-PRIOR> 1138292
<ACCUMULATED-GAINS-PRIOR> 683366
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 15676692
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 19566078
<AVERAGE-NET-ASSETS> 1254135375
<PER-SHARE-NAV-BEGIN> 10.75
<PER-SHARE-NII> 0.150
<PER-SHARE-GAIN-APPREC> 1.860
<PER-SHARE-DIVIDEND> (0.15)
<PER-SHARE-DISTRIBUTIONS> (0.160)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.45
<EXPENSE-RATIO> 1.56
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
