Registration No. 33-35779
As filed with the Securities and Exchange Commission on April 30, 1998
===============================================================================
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. 13 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 15
(Check appropriate box or boxes)
TEMPLETON INSTITUTIONAL FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
500 EAST BROWARD BOULEVARD, FORT LAUDERDALE, FLORIDA 33394
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (954) 527-7500
Barbara J. Green
Templeton Worldwide, Inc.
500 East Broward Boulevard
FORT LAUDERDALE, FLORIDA 33394
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b) of Rule 485
X on May 1, 1998 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
If appropriate, check the following box:
this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
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 Risks of Investing in the
Funds?"
5 Management of the Fund "Who Manages the Funds?"
5A Management's Discussion Contained in Registrant's Annual
of Fund Performance Report to Shareholders
6 Capital Stock and Other "How Is the Company Organized?"; "Services
Securities to Help You Manage Your Account"; "What
Distributions Might I Receive From the
Funds?"; "How Taxation Affects the Funds
and Their Shareholders"
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 Proceeding Not Applicable
</TABLE>
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
CROSS-REFERENCE SHEET
FORM N-1A
PART B
<TABLE>
<CAPTION>
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
<S> <C> <C>
10 Cover Page Cover Page
11 Table of Contents Table of Contents
12 General Information and Not Applicable
History
13 Investment Objectives and "How Do the Funds Invest Their Assets?";
Policies "Investment Restrictions"; "What are the
Funds' Potential Risks?"
14 Management of the "Officers and Directors"; "Investment
Registrant Management and Other Services"
15 Control Persons and "Officers and Directors"; "Investment
Principal Holders of Management and Other Services"; "Miscellaneous
Securities Information"
16 Investment Advisory and "Investment Management and Other Services";
Other Services "The Funds' Underwriter"
17 Brokerage Allocation and "How Do the Funds Buy Securities
Other Practices for Their Portfolios?"
18 Capital Stock and Other "Miscellaneous Information"; See Prospectus
Securities "How Is the Company Organized?"
19 Purchase, Redemption and "How Do I Buy, Sell and Exchange Shares?";
Pricing of Securities "How are Fund Shares Valued?";
Being Offered "Financial Statements"
20 Tax Status "Additional Information on Distributions
and Taxes"
21 Underwriters "The Funds' Underwriter"
22 Calculation of Performance "How Do the Funds Measure Performance?"
Data
23 Financial Statements "Financial Statements"
</TABLE>
PAGE
PART A
PROSPECTUS
PAGE
PROSPECTUS
LOGO
TEMPLETON
INSTITUTIONAL FUNDS, INC.
---------------------------------------------
MAY 1, 1998
GROWTH SERIES
FOREIGN EQUITY SERIES
EMERGING MARKETS SERIES
EMERGING FIXED INCOME MARKETS SERIES
LOGO
- --------------------------------------------------------------------------------
Please read this prospectus before investing, and keep it for future reference.
It contains important information, including how the funds invest and the
services available to shareholders.
This prospectus describes the four funds listed above (the "funds") which are
series of Templeton Institutional Funds, Inc. (the "Company").
INVESTMENTS IN EMERGING MARKETS INVOLVE CERTAIN CONSIDERATIONS WHICH ARE NOT
NORMALLY INVOLVED IN INVESTMENT IN SECURITIES OF U.S. COMPANIES, AND AN
INVESTMENT IN THE FUNDS MAY BE CONSIDERED SPECULATIVE. THE FUNDS MAY BORROW
MONEY FOR INVESTMENT PURPOSES, WHICH MAY INVOLVE GREATER RISK AND ADDITIONAL
COSTS TO THE FUNDS. IN ADDITION, THE FUNDS MAY INVEST UP TO 10% OF THEIR ASSETS
IN RESTRICTED SECURITIES, WHICH MAY INVOLVE GREATER RISK AND INCREASED FUND
EXPENSES. THE EMERGING FIXED INCOME MARKETS SERIES MAY INVEST A SUBSTANTIAL
PORTION OF ITS ASSETS IN HIGH-YIELD, HIGH RISK DEBT INSTRUMENTS THAT ARE
PREDOMINANTLY SPECULATIVE. SEE "WHAT ARE THE RISKS OF INVESTING IN THE FUNDS?"
To learn more about the Company and its policies, you may request a copy of the
Company's Statement of Additional Information ("SAI"), dated May 1, 1998, which
we may amend from time to time. We have filed the SAI with the SEC and have
incorporated it by reference into this prospectus.
For a free copy of the SAI or a larger print version of this prospectus, contact
your investment representative or call 1-800/DIAL BEN.
MUTUAL FUND SHARES 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. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
PAGE
TABLE OF CONTENTS
<TABLE>
<S> <C>
ABOUT THE FUNDS
Expense Summary........................................ 1
Financial Highlights................................... 2
How Do the Funds Invest Their Assets?.................. 6
What Are the Risks of Investing in the Funds?.......... 17
Who Manages the Funds?................................. 20
How Do the Funds Measure Performance?.................. 23
How Taxation Affects the Funds and Their 23
Shareholders.........................................
How Is the Company Organized?.......................... 23
ABOUT YOUR ACCOUNT
How Do I Buy Shares?................................... 24
May I Exchange Shares for Shares of Another Fund?...... 26
How Do I Sell Shares?.................................. 27
What Distributions Might I Receive From the Funds?..... 28
Transaction Procedures and Special Requirements........ 28
Services to Help You Manage Your Account............... 31
What If I Have Questions About My Account?............. 32
GLOSSARY
Useful Terms and Definitions........................... 34
APPENDIX
Corporate Bond Ratings................................. 36
</TABLE>
TEMPLETON
INSTITUTIONAL
FUNDS, INC.
- --------------------------------
May 1, 1998
When reading this prospectus,
you will see certain terms
beginning with capital letters.
This means the term is explained
in our glossary section.
100 Fountain Parkway
P.O. Box 33030
St. Petersburg, FL 33733-8030
1-800/DIAL BEN
PAGE
ABOUT THE FUNDS
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 the fund's historical expenses for the fiscal year ended
December 31, 1997. 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% 0.00%
Other Expenses (after fee reduction)*............ 0.16% 0.14% 0.32% 1.25%
Total Fund Operating Expenses (after fee
reduction)*.................................... 0.86% 0.84% 1.57% 1.25%
</TABLE>
EXAMPLE: Assume each fund's annual return is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in a fund.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GROWTH SERIES.......................................... $ 9 $27 $48 $106
FOREIGN EQUITY SERIES.................................. $ 9 $27 $47 $104
EMERGING MARKETS SERIES................................ $16 $50 $86 $187
EMERGING FIXED INCOME MARKETS SERIES................... $13 $40 - -
</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 0.90% of average net assets for Growth Series, 1% of average net assets
for Foreign Equity Series, and 1.6% of average net assets for Emerging Markets
Series through April 30, 1999; and 1.25% of average net assets for Emerging
Fixed Income Markets Series through December 31, 1998. If these fee reductions
are insufficient to so limit the funds' expenses, FT Services has agreed to make
certain payments to reduce the funds' expenses. After April 30, 1999, the
agreements for Growth Series, Foreign Equity Series and Emerging Markets Series
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 or
Emerging Markets Series for the fiscal year ended December 31, 1997. After
December 31, 1998, the agreement for Emerging Fixed Income Markets Series may
end at any time. If this voluntary agreement was not in effect for Emerging
Fixed Income Markets Series, the fund's "Management Fees," "Other Expenses" and
"Total Fund Operating Expenses" would be 0.70%, 5.70% and 6.40%, respectively.
"Other Expenses" for Emerging Fixed Income Markets Series are based on estimated
amounts for the current fiscal year.
Templeton Institutional Funds, Inc. - 1
PAGE
FINANCIAL HIGHLIGHTS
These tables summarize the funds' financial history. The information has been
audited by McGladrey & Pullen, LLP, the funds' independent auditors. Their audit
reports covering the periods shown below appear in the financial statements in
each fund's Annual Report to Shareholders for the fiscal year ended December 31,
1997. 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>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993+
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net Asset Value, beginning of year........................ $13.41 $11.86 $10.94 $11.80 $10.00
----------------------------------------------------------------
Income from investment operations:
Net investment income................................... .73 .30 .27 .20 .06
Net realized and unrealized gain (loss)................. .89 2.32 1.62 (.36) 1.94
----------------------------------------------------------------
Total from investment operations.......................... 1.62 2.62 1.89 (.16) 2.00
----------------------------------------------------------------
Less distributions from:
Net investment income................................... (.87) (.29) (.27) (.20) (.05)
Net realized gains...................................... (.54) (.74) (.70) (.50) (.15)
In excess of net realized gains......................... -- (.04) -- -- --
----------------------------------------------------------------
Total distributions....................................... (1.41) (1.07) (.97) (.70) (.20)
----------------------------------------------------------------
Net Asset Value, end of year.............................. $13.62 $13.41 $11.86 $10.94 $11.80
================================================================
TOTAL RETURN*............................................. 12.27% 22.57% 17.59% (1.32)% 20.04%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)........................... $120,370 $268,158 $226,963 $194,059 $184,013
Ratios to average net assets:
Expenses................................................ .86% .87% .88% .95% 1.00%**
Net investment income................................... 2.15% 2.34% 2.28% 1.69% 1.19%**
Portfolio turnover rate................................... 16.73% 15.61% 30.20% 17.23% 17.32%
Average commission rate paid***........................... $.0105 $.0242 -- -- --
</TABLE>
*Total return is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities. Prior to fiscal year
1996 disclosure of average commission rate was not required.
+For the period May 3, 1993 (commencement of operations) to December 31, 1993.
2 - Templeton Institutional Funds, Inc.
PAGE
FOREIGN EQUITY SERIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993+ 1992+ 1991 1990++
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
(For a share outstanding
throughout the year)
Net Asset Value, beginning
of year................... $16.34 $14.04 $12.86 $13.32 $10.05 $10.63 $10.16 $10.00
-----------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income..... .42 .45 .31 .20 .23 .27 .31 .12
Net realized and
unrealized gain
(loss).................. 1.43 2.54 1.35 (.16) 3.19 (.41) 1.30 .04
-----------------------------------------------------------------------------------------------
Total from investment
operations................ 1.85 2.99 1.66 .04 3.42 (.14) 1.61 .16
-----------------------------------------------------------------------------------------------
Less distributions from:
Net investment income..... (.43) (.45) (.31) (.19) (.09) (.24) (.44) --
In excess of net
investment income....... -- (.02) -- -- -- -- -- --
Net realized gains........ (.40) (.14) (.17) (.31) (.06) (.20) (.70) --
In excess of net realized
gains................... -- (.08) -- -- -- -- -- --
-----------------------------------------------------------------------------------------------
Total distributions......... (.83) (.69) (.48) (.50) (.15) (.44) 1.14 --
-----------------------------------------------------------------------------------------------
Net Asset Value, end of
year...................... $17.36 $16.34 $14.04 $12.86 $13.32 $10.05 $10.63 $10.16
===============================================================================================
TOTAL RETURN*............... 11.43% 21.58% 13.00% 0.24% 34.03% (1.33)% 16.13% 1.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(000's)................... $3,706,006 $2,857,591 $1,817,883 $1,093,227 $407,970 $566 $1,181 $1,015
Ratios to average net
assets:
Expenses.................. .84% .87% .88% .95% 1.00% 8.82% 9.15% 9.24%**
Expenses, excluding waiver
and payments by
affiliate............... .84% .87% .88% .95% 1.03% 1.00% 1.00% 1.00%**
Net investment income..... 2.49% 3.20% 2.70% 2.03% 1.73% 2.38% 2.47% 5.77%**
Portfolio turnover rate..... 15.25% 7.39% 20.87% 7.90% 42.79% 8.45% 76.16% 0.00%
Average commission rate
paid***................... $.0013 $.0021 -- -- -- -- -- --
</TABLE>
*Total return is not annualized.
**Annualized
***Relates to purchases and sales of equity securities. Prior to fiscal year
1996 disclosure of average commission rate was not required.
+Based on average weighted shares outstanding.
++For the period October 18, 1990 (commencement of operations) to December 31,
1990.
Templeton Institutional Funds, Inc. - 3
PAGE
EMERGING MARKETS SERIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1997
---------- 1996 1995 1994 1993+
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net Asset Value, beginning of year..................... $12.45 $10.75 $11.21 $13.22 $10.00
--------------------------------------------------------------------
Income from investment operations:
Net investment income................................ .18 .15 .19 .17 .04
Net realized and unrealized gain (loss).............. (1.60) 1.86 (.34) (1.65) 3.25
--------------------------------------------------------------------
Total from investment operations....................... (1.42) 2.01 (.15) (1.48) 3.29
--------------------------------------------------------------------
Less distributions from:
Net investment income................................ (.18) (.15) (.17) (.17) (.04)
Net realized gains................................... (.48) (.16) (.14) (.36) (.03)
--------------------------------------------------------------------
Total distributions.................................... (.66) (.31) (.31) (.53) (.07)
--------------------------------------------------------------------
Net Asset Value, end of year........................... $10.37 $12.45 $10.75 $11.21 $13.22
====================================================================
TOTAL RETURN*.......................................... (11.32)% 18.86% (1.23)% (11.39)% 32.93%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)........................ $1,923,881 $1,565,537 $798,515 $582,878 $422,433
Ratios to average net assets:
Expenses............................................. 1.57% 1.56% 1.52% 1.60% 1.60%**
Expenses, excluding waiver and payments by
affiliate.......................................... 1.57% 1.56% 1.52% 1.66% 1.60%**
Net investment income................................ 1.42% 1.56% 2.00% 1.59% 0.91%**
Portfolio turnover rate................................ 24.72% 7.92% 13.47% 12.51% 9.42%
Average commission rate paid***........................ $.0019 $.0019 -- -- --
</TABLE>
*Total return is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities. Prior to fiscal year
1996 disclosure of average commission rate was not required.
+For the period May 3, 1993 (commencement of operations) to December 31, 1993.
4 - Templeton Institutional Funds, Inc.
PAGE
EMERGING FIXED INCOME MARKETS SERIES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1997+
------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net Asset Value, beginning of period........................ $10.00
-------
Income from investment operations:
Net investment income..................................... .44
Net realized and unrealized gain.......................... .79
-------
Total from investment operations............................ 1.23
-------
Less distribution from:
Net investment income..................................... (.44)
Net realized gains........................................ (.32)
-------
Total distributions......................................... (.76)
-------
Net Asset Value, end of period.............................. $10.47
=======
TOTAL RETURN*............................................... 12.42%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $2,249
Ratios to average net assets:
Expenses.................................................. 1.25%**
Expenses, excluding waiver and payments by affiliate...... 6.40%**
Net investment income..................................... 7.26%**
Portfolio turnover rate..................................... 172.62%
</TABLE>
*Total return is not annualized.
**Annualized.
+For the period June 4, 1997 (commencement of operations) to December 31, 1997.
Templeton Institutional Funds, Inc. - 5
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.
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 the investment objectives and restrictions specifically identified
as fundamental, all investment policies and practices described in this
prospectus and in the SAI may be changed by the Board without shareholder
approval.
GROWTH SERIES. Growth Series seeks 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. Under normal market conditions at
least 65% of Growth Series' total assets will be invested in such securities.
Although Growth Series generally invests in common stock, it may also invest in
preferred stocks and debt securities that the Investment Manager believes offer
the potential for capital growth. In selecting securities for Growth Series, the
Investment Manager attempts to identify companies that offer above-average
opportunities for capital appreciation in various countries and industries where
economic and political factors, including currency movements, are favorable to
capital growth.
Growth Series may invest up to 5% of its assets in warrants (not counting
warrants acquired in units or attached to other securities), and up to 10% of
its net 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 at the
time of purchase 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 long-term capital growth
through a flexible policy of investing primarily in equity securities and debt
obligations of companies and governments outside the U.S. including emerging
markets securities. Foreign Equity Series normally will invest at least 65% of
its total assets in foreign equity securities. Foreign Equity Series may also
invest up to 35% of its total assets in debt securities when, in the judgment of
the Investment Manager, they offer greater potential for capital appreciation
than is available through investment in stocks. In selecting securities for
Foreign Equity Series, the Investment Manager attempts to identify those
companies that offer above-average opportunities for capital appreciation in
various countries and industries where economic and political factors, including
currency movements, are favorable to capital growth.
6 - Templeton Institutional Funds, Inc.
PAGE
Foreign Equity Series may invest up to 5% of its assets in warrants (not
counting warrants acquired in units or attached to other securities), and up to
10% of its net 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 at the time of purchase 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 long-term capital growth
by investing primarily in equity securities of issuers in countries with
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 with 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 the Investment Manager believes 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 with 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 (not
counting warrants acquired in units or attached to other securities), and up to
15% of its net 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 at the time of purchase 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
Templeton Institutional Funds, Inc. - 7
PAGE
securities on which futures contracts will be written at any one time will not
exceed 25% of the total assets of the fund.
EMERGING FIXED INCOME MARKETS SERIES. Emerging Fixed Income Markets Series seeks
high total return, consisting of current income and capital appreciation, by
investing at least 65% of its total assets in a portfolio of "fixed income" or
debt obligations of sovereign or sovereign-related entities of emerging market
countries, as well as debt obligations of emerging market companies. For
purposes of this restriction, the fund uses the term "fixed income" generically
to mean debt obligations of all types, including debt obligations which pay a
variable or floating rate of interest as well as a fixed rate of interest. In
selecting investments for Emerging Fixed Income Markets Series, the Investment
Manager will draw on its experience in global investing in seeking to identify
those markets and issuers around the world which are anticipated to provide the
opportunity for high current income and capital appreciation. Debt securities
issued in emerging markets are generally rated below investment grade.
Consequently, the fund anticipates that a substantial percentage of its assets
may be invested in higher risk, lower quality debt securities, commonly known as
"junk bonds." These investments are speculative in nature. See "Debt Securities"
in this section and "What Are the Risks of Investing in the Funds?"
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. 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 may 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 total 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 (not counting warrants acquired in units or attached to other
securities), and up to 15% of its net assets in illiquid securities. Emerging
Fixed Income Markets Series will not invest more than 5% of its total assets in
securities of Russian issuers. Emerging Fixed Income Markets Series may invest
in debt securities rated below BBB by S&P or Baa by Moody's (or unrated debt
securities determined by the fund's Investment Manager to be of comparable
quality). Emerging Fixed Income Markets Series may borrow up to one-third of the
value of its total assets and may lend portfolio securities with an aggregate
market value of up to one-third of its total assets. Emerging Fixed Income
Markets Series may purchase and sell put and call options on securities or
indices, provided that (i) the value of the underlying securities on which
options may be written at any one time will not exceed 25% of the fund's total
assets, and (ii) the fund will not purchase put or call options if the aggregate
premium paid for such options
8 - Templeton Institutional Funds, Inc.
PAGE
would exceed 5% of its total assets. Emerging Fixed Income Markets Series may
enter into forward foreign currency contracts and may purchase and write put and
call options on foreign currencies. For hedging purposes only (including
anticipatory hedges where the Investment Manager seeks to anticipate an intended
shift in maturity, duration or asset allocation), Emerging Fixed Income Markets
Series may buy and sell financial futures contracts, stock index futures
contracts, foreign currency futures contracts and options on any of these
futures contracts, provided that (i) the fund will not commit more than 5% of
its total assets to initial margin deposits on futures contracts and related
options, and (ii) the value of the underlying securities on which futures
contracts will be written at any one time will not exceed 25% of the total
assets of the fund. Emerging Fixed Income Markets Series may enter into swap
agreements as discussed below, provided that the fund will not enter into an
agreement with any single party if the amount owed or to be received under any
existing contracts with that party would exceed 5% of the fund's assets.
Types Of Securities In Which The Funds May Invest
Each fund is authorized to invest in certain of the types of securities
described below.
EQUITY SECURITIES. As used in this prospectus, "equity securities" refers to
common stock, preferred stock, securities convertible into common or preferred
stock, warrants or rights to subscribe to or purchase such securities, and
sponsored or unsponsored Depositary Receipts, including American Depositary
Receipts, European Depositary Receipts, Global Depositary Receipts and similar
instruments (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 (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. A fund's investments in debt securities may include 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 government, its agencies or instrumentalities;
supranational organizations; local governments, their agencies or
instrumentalities; 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 below BBB by S&P or Baa by
Moody's or, if unrated, of comparable quality as determined by each fund's
Investment Manager. Each fund except Emerging Fixed Income Markets Series will
limit its investment in such debt securities to 5% of its total assets. The
Board may consider a change in this operating policy if, in its judgment,
economic conditions change such that a different level of investment in high
risk, lower quality debt securities would be consistent with the interests of
the funds and their shareholders. Debt securities rated C by Moody's are the
lowest rated class of bonds and may be regarded as having extremely poor
prospects of ever attaining any real investment standing. Debt securities rated
C by S&P are
Templeton Institutional Funds, Inc. - 9
PAGE
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. Debt securities rated C are therefore risky and
speculative investments.
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 may 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, Brazil, Bulgaria,
Costa Rica, the Dominican Republic, Ecuador, the Ivory Coast, Jordan, Mexico,
Nigeria, Panama, Peru, the Philippines, Poland, Uruguay, and Venezuela and
Vietnam. In addition, some countries have negotiated and others are expected to
negotiate similar restructurings to the Brady Plan and, in some cases, their
external debts have been restructured into new loans or promissory notes: namely
Bolivia, Russia, Macedonia and Bosnia.
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
10 - Templeton Institutional Funds, Inc.
PAGE
set-off against the borrower, and Emerging Fixed Income Markets Series may not
benefit directly from any collateral supporting the Loan in which it has
purchased the Participation. As a result, Emerging Fixed Income Markets Series
will assume the credit risk of both the borrower and the Lender that is selling
the Participation. In the event of the insolvency of the Lender selling a
Participation, Emerging Fixed Income Markets Series may be treated as a general
creditor of the Lender and may not benefit from any set-off between the Lender
and the borrower. Emerging Fixed Income Markets Series will acquire
Participations only if the Lender interpositioned between Emerging Fixed Income
Markets Series and the borrower is believed by the 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.
Templeton Institutional Funds, Inc. - 11
PAGE
The funds will generally not enter into forward contracts with terms of greater
than one year. A forward contract is an obligation to purchase or sell a
specific currency for an agreed price at a future date which is individually
negotiated and privately traded by currency traders and their customers. The
funds will generally enter into forward contracts under two circumstances.
First, when a fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock" in the U.S. dollar
price of the security in relation to another currency by entering into a forward
contract to buy the amount of foreign currency needed to settle the transaction.
Second, when a fund's Investment Manager believes that the currency of a
particular foreign country may suffer or enjoy a substantial movement against
another currency, it may enter into a forward contract to sell or buy the former
foreign currency (or another currency which acts as a proxy for that currency)
approximating the value of some or all of the fund's portfolio securities
denominated in such foreign currency. This second investment practice is
generally referred to as "cross-hedging." A fund's forward transactions may call
for the delivery of one foreign currency in exchange for another foreign
currency and may at times not involve currencies in which its portfolio
securities are then denominated. The funds have no specific limitation on the
percentage of assets they may commit to forward contracts, subject to their
stated investment objectives and policies, except that a fund will not enter
into a forward contract if the amount of assets set aside to cover the contract
would impede portfolio management or the fund's ability to meet redemption
requests. Although forward contracts will be used primarily to protect the funds
from adverse currency movements, they also involve the risk of loss in the event
that anticipated currency movements are 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.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent an ownership
interest in a pool of residential and commercial mortgage loans. Generally,
these securities are designed to provide monthly payments of interest and
principal to the investor. The mortgagee's monthly payments to his/her lending
institution are passed through to investors such as a fund. Most issuers provide
guarantees of payments, regardless of whether the mortgagor actually makes the
payment. The guarantees made by issuers or poolers are supported by various
forms of credit, collateral, guarantees or insurance, including individual loan,
title, pool and hazard insurance purchased by the issuer. The pools are
assembled by various governmental, government-related and private organizations.
A fund may invest in securities issued or guaranteed by the Government National
Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC),
Fannie Mae, and other government agencies. If there is no guarantee provided by
the issuer, mortgage-backed securities purchased by a fund will be those which
at the time of purchase are rated investment grade by one or more NRSRO, or, if
unrated, are deemed by the Investment Manager to be of investment grade quality.
DEPOSITARY RECEIPTS. The funds may purchase sponsored or unsponsored Depositary
Receipts and other similar instruments, including 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
12 - Templeton Institutional Funds, Inc.
PAGE
corporation. EDRs and GDRs are typically issued by foreign banks or trust
companies, although they also may be issued by U.S. banks or trust companies,
and evidence ownership of underlying securities issued by either a foreign or a
United States corporation. Generally, depositary receipts in registered form are
designed for use in the U.S. securities market and depositary receipts in bearer
form are designed for use in securities markets outside the U.S. Depositary
receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. Depositary receipts may
be issued pursuant to sponsored or unsponsored programs. In sponsored programs,
an issuer has made arrangements to have its securities traded in the form of
depositary receipts. In unsponsored programs, the issuer may not be directly
involved in the creation of the program. Although regulatory requirements with
respect to sponsored and unsponsored programs are generally similar, in some
cases it may be easier to obtain financial information from an issuer that has
participated in the creation of a sponsored program. Accordingly, there may be
less information available regarding issuers of securities underlying
unsponsored depositary receipts 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 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. 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
Templeton Institutional Funds, Inc. - 13
PAGE
fund may experience delay or difficulty in its ability to dispose of the
underlying security and might incur a loss if the value of the security
declines, as well as incur disposition costs in liquidating the security.
BORROWING. Each fund may borrow up to one-third of the value of its total assets
from banks to increase its holdings of portfolio securities, to meet redemption
requests, to pay expenses or for other temporary needs. Under the 1940 Act, a
fund is required to maintain continuous asset coverage of 300% with respect to
such borrowings and to sell (within three days) sufficient portfolio holdings to
restore such coverage if it should decline to less than 300% due to market
fluctuations or otherwise, even if such liquidations of a fund's holdings may be
disadvantageous from an investment standpoint. Leveraging by means of borrowing
may exaggerate the effect of any increase or decrease in the value of portfolio
securities on a fund's Net Asset Value, and money borrowed will be subject to
interest and other costs (which may include commitment fees and/or the cost of
maintaining minimum average balances) which may or may not exceed the income
received or capital appreciation realized from the securities purchased with
borrowed funds.
LOANS OF PORTFOLIO SECURITIES. Each fund may lend to broker-dealers portfolio
securities with an aggregate market value of up to one-third of its total assets
to generate income. Such loans must be secured by collateral (consisting of any
combination of cash, U.S. government securities or irrevocable letters of
credit) in an amount at least equal (on a daily marked-to-market basis) to the
current market value of the securities loaned. A fund may terminate the loans at
any time and obtain the return of the securities loaned within five business
days. A fund will continue to receive any interest or dividends paid on the
loaned securities and will continue to retain any voting rights with respect to
the securities. Loans of portfolio securities involve the risk of default by the
counter-party to the loan transaction, which could involve delay or difficulty
in a fund's exercise of its right to realize upon the collateral for such loans,
as well as transaction costs.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each fund may purchase securities
on a when-issued or delayed delivery basis. Securities purchased on a
when-issued or delayed delivery basis are purchased for delivery beyond the
normal settlement date at a stated price and yield. No income accrues to the
purchaser of a security on a when-issued or delayed delivery basis prior to
delivery. Such securities are recorded as an asset and are subject to changes in
value based upon changes in the general level of interest rates. The funds will
only make commitments to purchase securities on a when-issued or delayed
delivery basis with the intention of actually acquiring the securities, but may
sell them before the settlement date to attempt to "lock" in gains or avoid
losses, or if otherwise deemed advisable by the Investment Manager.
Purchasing a security on a when-issued or delayed delivery basis can involve a
risk that the market price at the time of delivery may be lower than the
agreed-upon purchase price, and therefore there could be an unrealized loss at
the time of delivery. In addition, while an issuer of when-issued securities has
made a commitment to issue the securities as of a specified future date, there
can be no assurance that the securities will be issued and that the trade will
settle. In the event settlement does not occur, any appreciation in the value of
the when-issued security would be lost, including the amount of any appreciation
"locked" in by the sale of an appreciated security prior to settlement. Each
fund will establish a segregated account in which it will maintain liquid assets
in an amount at least equal in value to the fund's net commitments to purchase
securities on a when-issued or delayed delivery basis. If the value of these
assets declines, the fund will place additional liquid assets in the account on
a daily basis so that the value of the assets in the account is equal to the
amount of such commitments.
OPTIONS ON SECURITIES OR INDICES. In order to hedge against market shifts, each
fund may purchase put and call options on securities or securities indices. In
addition, each fund may seek to generate income to offset operating expenses
and/or may hedge a portion of its portfolio investments through writing (i.e.,
selling) covered put and call options. Options purchased or written by the funds
will be traded on United States and foreign exchanges or in the over-the-counter
markets. An option on a security is a contract that permits the purchaser of the
option, in return for the premium paid, the right to buy a specified security
(in the case of a call option) or to sell a
14 - Templeton Institutional Funds, Inc.
PAGE
specified security (in the case of a put option) from or to the writer of the
option at a designated price during the term of the option. An option on a
securities index permits the purchaser of the option, in return for the premium
paid, the right to receive from the seller cash equal to the difference between
the closing price of the index and the exercise price of the option.
A fund may write a call or put option only if the option is "covered." This
means that so long as a fund is obligated as the writer of a call option, it
will own the underlying securities subject to the call, or hold a call at the
same exercise price, for the same exercise period, and on the same securities as
the written call. A put is covered if a fund maintains liquid assets with a
value equal to the exercise price in a segregated account, or holds a put on the
same underlying securities at an equal or greater exercise price. The value of
the underlying securities on which options may be written at any one time will
not exceed 25% of the total assets of a fund. A fund will not purchase put or
call options if the aggregate premium paid for such options would exceed 5% of
its total assets at the time of purchase.
FUTURES CONTRACTS. For hedging purposes only (including anticipatory hedges
where the Investment Manager seeks to anticipate an intended shift in maturity,
duration or asset allocation), the funds may buy and sell covered financial
futures contracts, stock index futures contracts, foreign currency futures
contracts and options on any of the foregoing. A financial futures contract is
an agreement between two parties to buy or sell a specified debt security at a
set price on a future date. An index futures contract is an agreement to take or
make delivery of an amount of cash based on the difference between the value of
the index at the beginning and at the end of the contract period. A futures
contract on a foreign currency is an agreement to buy or sell a specified amount
of a currency for a set price on a future date. When a fund enters into a
futures contract, it must make an initial deposit, known as "initial margin," as
a partial guarantee of its performance under the contract. As the value of the
security, index or currency fluctuates, either party to the contract is required
to make additional margin payments, known as "variation margin," to cover any
additional obligation it may have under the contract. In addition, when a fund
enters into a futures contract, it will segregate assets or "cover" its position
in accordance with the 1940 Act. See "How Do the Funds Invest Their
Assets? - Futures Contracts" in the SAI.
A fund may not commit more than 5% of its total assets to initial margin
deposits on futures contracts and related options. The value of the underlying
securities on which futures contracts will be written at any one time will not
exceed 25% of the total assets of a fund.
SWAP AGREEMENTS. Emerging Fixed Income Markets Series may enter into interest
rate, index and currency exchange rate swap agreements for purposes of
attempting to obtain a particular desired return at a lower cost to the fund
than if the fund had invested directly in an instrument that yielded that
desired return. Swap agreements are two-party contracts entered into primarily
by institutional investors for periods ranging from a few weeks to more than one
year. In a standard "swap" transaction, two parties agree to exchange the
returns (or differentials in rates of return) earned or realized on particular
predetermined investments or instruments. The gross returns to be exchanged or
"swapped" between the parties are calculated with respect to a "notional
amount," i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency, or in
a "basket" of securities representing a particular index. The "notional amount"
of the swap agreement is only a fictive basis on which to calculate the
obligations which the parties to a swap agreement have agreed to exchange.
Emerging Fixed Income Markets Series' obligations (or rights) under a swap
agreement will generally be equal only to the net amount to be paid or received
under the agreement based on the relative values of the positions held by each
party to the agreement (the "net amount"). Emerging Fixed Income Markets Series'
obligations under a swap agreement will be accrued daily (offset against any
amounts owing to the fund) and any accrued but unpaid net amounts owed to a swap
counterparty will be covered by the maintenance of a segregated account
consisting of cash, U.S. Government securities, or high grade debt obligations,
to avoid any potential leveraging of the fund's portfolio. Emerging Fixed Income
Markets Series will not enter into a swap agreement
Templeton Institutional Funds, Inc. - 15
PAGE
with any single party if the net amount that would be owed or received under
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 may have terms of greater than seven days, swap
agreements may be considered to be illiquid. Moreover, Emerging Fixed Income
Markets Series bears the risk of loss of the amount expected to be received
under a swap agreement in the event of the default or bankruptcy of a swap
agreement counterparty. The Investment Manager will cause Emerging Fixed Income
Markets Series to enter into swap agreements only with counterparties that would
be eligible for consideration as repurchase agreement counterparties under the
funds' repurchase agreement guidelines. Certain restrictions imposed on Emerging
Fixed Income Markets Series by the Code may limit its ability to use swap
agreements. The swap market is a relatively new market and is largely
unregulated. It is possible that developments in the swap market and the laws
relating to swaps, including potential government regulation, could adversely
affect Emerging Fixed Income Markets Series' ability to terminate existing swap
agreements, to realize amounts to be received under such agreements, or to enter
into swap agreements, or could have adverse 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. The 1940 Act limits the amount each fund
may invest in securities of closed-end investment companies, including those
that invest principally in securities that a fund may purchase. These
restrictions 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.
16 - Templeton Institutional Funds, Inc.
PAGE
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 be changed without shareholder approval. For a list of these
restrictions and more information about each fund's investment policies, please
see "How Do the Funds Invest Their Assets?" and "Investment Restrictions" in the
SAI.
Each fund's policies and restrictions discussed in this prospectus and in the
SAI are considered at the time the fund makes an investment. The funds are
generally not required to sell a security because of a change in circumstances.
WHAT ARE THE RISKS OF INVESTING IN THE FUNDS?
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 or region 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 or regions in which a fund
is invested in fixed income securities will likely affect the value of such
holdings and thus the value of fund shares. Increased rates of interest which
frequently accompany inflation and/or a growing economy are likely to have a
negative effect on the value of a fund's shares. In addition, changes in
currency valuations will affect the price of the shares of a fund. History
reflects both decreases and increases in stock markets and interest rates in
individual countries and throughout the world and in currency valuations, and
these may occur unpredictably in the future. The funds are not intended as a
complete investment program.
FOREIGN INVESTMENTS. The funds have the right to purchase securities in any
foreign country, developed or underdeveloped. Investors should consider
carefully the risks associated with investing in foreign securities, which are
in addition to the usual risks inherent in domestic investments. These risks are
often heightened for investments in developing markets. See "What Are the Risks
of Investing in the Funds?" 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, economic 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 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.
Templeton Institutional Funds, Inc. - 17
PAGE
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 Risks of Investing in the
Funds?" and investors should read this section in detail.
Brokerage commissions, custodial services, and other costs relating to
investment in foreign countries are generally more expensive than in the U.S.
Foreign securities markets have different clearance and settlement procedures
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Delays in settlement could result in temporary
periods when assets of a fund are uninvested and no return is earned thereon.
The inability of a fund to make intended security purchases due to settlement
problems could cause a fund to miss attractive investment opportunities or risk
loss of its investment. 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 Risks of
Investing in the Funds?" 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.
FOREIGN CURRENCY EXCHANGE. The funds may effect currency exchange transactions
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign exchange
market. However, some price spread on currency exchange (to cover service
charges) will be incurred when a fund converts assets from one currency to
another. Further, the funds may be affected either unfavorably or favorably by
fluctuations in the relative rates of exchange between the currencies of
different nations. Cross-hedging transactions by the funds involve the risk of
imperfect correlation between changes in the values of the currencies to which
such transactions relate and changes in the value of the currency or other asset
or liability that is the subject of the hedge.
MORTGAGE-BACKED SECURITIES. Due to the possibility that prepayments on home
mortgages will alter cash flow on mortgage-backed securities, it is not possible
to determine in advance the actual final maturity date or average life. Like
bonds in general, mortgage-backed securities will generally decline in price
when interest rates rise. Rising interest rates also tend to discourage
refinancing of home mortgages, with the result that the average life of
mortgage-backed securities held by a fund may be lengthened. This extension of
average life causes the market price of the securities to decrease further than
if their average lives were fixed. However, when interest rates fall, mortgages
may not enjoy as large a gain in market value due to prepayment risk because
additional mortgage prepayments must be reinvested at lower interest rates.
Faster prepayment will shorten the average life and slower prepayments will
lengthen it. However, it is possible to determine what the range of that
movement could be and to calculate the effect that it will have on the price of
the security. In selecting these securities, the Investment Managers will look
for those securities that offer a higher yield to compensate for any variation
in average maturity.
SMALL COMPANY STOCKS. The funds may purchase securities issued by companies with
comparatively smaller capitalization although the funds do not emphasize smaller
companies. Securities of smaller capitalization companies involve additional
risks. For example, smaller capitalization issuers include relatively new or
unseasoned companies which are in their early stages of development, or small
companies positioned in new and emerging
18 - Templeton Institutional Funds, Inc.
PAGE
industries where the opportunity for rapid growth is expected to be above
average. Historically, smaller capitalization stocks have been more volatile in
price than larger capitalization stocks. Among the reasons for the greater price
volatility of these securities are the less certain growth prospects of smaller
firms, the lower degree of liquidity in the markets for these stocks, and the
greater sensitivity of small companies to changing economic conditions. Besides
exhibiting greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks. Small company stocks may decline in
price as large company stocks rise, or rise in price as large company stocks
decline. You should therefore expect the shares of a fund that invests a
substantial portion of its assets in small company stocks to be more volatile
than the shares of a fund that invests solely in larger capitalization stocks.
EMERGING FIXED INCOME MARKETS SERIES - A NON-DIVERSIFIED FUND. Emerging Fixed
Income Markets Series is a "non-diversified" fund, which means the fund is not
limited in the proportion of its assets that may be invested in the securities
of a single issuer. However, Emerging Fixed Income Markets Series intends to
conduct its operations so as to qualify as a "regulated investment company" for
purposes of the Code, which generally will relieve the fund of any liability for
Federal income tax to the extent its earnings are distributed to shareholders.
See "How Taxation Affects You and the Funds." To so qualify, among other
requirements, Emerging Fixed Income Markets Series will limit its investments so
that, at the close of each quarter of the taxable year, (i) not more than 25% of
the market value of the fund's total assets will be invested in the securities
of a single issuer, and (ii) with respect to 50% of the market value of its
total assets, not more than 5% of the market value of its total assets will be
invested in the securities of a single issuer and the fund will not own more
than 10% of the outstanding voting securities of a single issuer. Emerging Fixed
Income Markets Series' investments in U.S. government securities are not subject
to these limitations. Because Emerging Fixed Income Markets Series, as a
non-diversified fund, may invest in a smaller number of individual issuers than
a diversified investment company, and may be more susceptible to any single
economic, political or regulatory occurrence, an investment in the fund may
present greater risk to an investor than an investment in a diversified fund.
HIGH-RISK DEBT SECURITIES. The funds are authorized to invest in medium quality
or high-risk, lower quality debt securities (see "Types of Securities In Which
the Funds May Invest - Debt Securities"). High-risk, lower quality debt
securities, commonly known as junk bonds, are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation and may be in
default. Unrated debt securities are not necessarily of lower quality than rated
securities but they may not be attractive to as many buyers. Regardless of
rating levels, all debt securities considered for purchase (whether rated or
unrated) will be carefully analyzed by a fund's Investment Manager to insure, to
the extent possible, that the planned investment is sound. The funds may, from
time to time, purchase defaulted debt securities if, in the opinion of a fund's
Investment Manager, the issuer may resume interest payments in the near future.
A fund will not invest more than 5% 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
Templeton Institutional Funds, Inc. - 19
PAGE
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 may be less sensitive to interest rate
changes than higher rated investments, but more sensitive to adverse economic
downturns or individual corporate developments. A projection of an economic
downturn or of a period of rising interest rates, for example, could cause a
decline in low rated debt securities prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities. If the issuer of low rated debt
securities defaults, a fund may incur additional expenses to seek recovery.
Based upon the monthly weighted average ratings of debt securities held by
Emerging Fixed Income Markets Series during the period from commencement of
operations (June 4, 1997) to December 31, 1997, the Series had 100% of its total
assets invested in debt securities that received a rating from Moody's and/or
S & P, and 0% of its total assets invested in debt securities that were not so
rated. Emerging Fixed Income Markets Series had the following weighted average
percentages of its total assets invested in rated securities: AAA and/or Aaa:
14.6%, BBB and/or Baa: 4.0%, BB and/or Ba: 49.0%, and B: 32.4%.
LEVERAGE. Leveraging by means of borrowing may exaggerate the effect of any
increase or decrease in the value of portfolio securities on a fund's Net Asset
Value and money borrowed will be subject to interest and other costs (which may
include commitment fees and/or the cost of maintaining minimum average balances)
which may or may not exceed the income received from the securities purchased
with borrowed funds.
FUTURES CONTRACTS AND RELATED OPTIONS. 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. Use of options on securities or stock
indices is subject to similar risk considerations. In addition, by writing
covered call options, a fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price.
There are further risk factors, including possible losses through the holding of
securities in domestic and foreign custodian banks and depositories, described
elsewhere in this prospectus and in the SAI.
WHO MANAGES THE FUNDS?
THE BOARD. The Company's 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. ("Investment Counsel"). The
Investment Manager of Emerging Markets Series is Templeton Asset Management
Ltd. - Hong Kong Branch ("Asset Management Hong Kong"). The Investment Manager
of Emerging Fixed Income Markets Series is Investment Counsel through its
Templeton Global Bond Managers division. The Investment Managers manage the
funds' assets and make their investment decisions. The Investment Managers also
perform similar services for other funds. Investment Counsel and Asset
Management Hong Kong are wholly owned by Resources, a publicly owned company
engaged in the financial services industry
20 - Templeton Institutional Funds, Inc.
PAGE
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 $232 billion in assets. The Templeton organization has
been investing globally since 1940. The Investment Managers and their affiliates
have offices in Argentina, Australia, Bahamas, Brazil, Canada, China, France,
Germany, Hong Kong, India, Italy, Japan, Korea, Luxembourg, the Netherlands,
Poland, Russia, Singapore, South Africa, Switzerland, Taiwan, United Kingdom,
U.S., and Vietnam. Please see "Investment Management and Other Services" and
"Miscellaneous Information" in the SAI for information on securities
transactions and a summary of the funds' Code of Ethics.
PORTFOLIO MANAGEMENT. The lead portfolio manager for Growth Series and Foreign
Equity Series since 1996 is Gary P. Motyl, an executive vice president of
Investment Counsel. 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 S&P and as a research
analyst and portfolio manager from 1979 to 1981 with Landmark First National
Bank. While at Landmark, Mr. Motyl had responsibility for equity research and
managed several pension and profit-sharing plans. His research responsibilities
with Templeton include the global automobile industry, U.S. utilities and
country coverage of Germany. Mark Beveridge, Gary R. Clemons and Edward Ramos
exercise secondary portfolio management responsibilities with respect to Growth
Series and Foreign Equity Series. Mr. Beveridge is a senior vice president of
Investment Counsel. 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 and
research analyst with responsibility for non-life insurance and industrial
components industries. He also has country coverage of Argentina. Mr. Clemons is
a senior vice president of Investment Counsel. He holds a BS degree from the
University of Nevada-Reno and an MBA from the University of Wisconsin-Madison.
He joined Investment Counsel 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 portfolio
manager and research analyst with Templeton, Mr. Clemons has responsibility for
the telecommunications industry and country coverage of Columbia and Peru. Mr.
Ramos is vice president of Investment Counsel. 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 and financial service industries as well as country coverage of
Egypt, Israel and Taiwan.
The lead portfolio manager for Emerging Markets Series since its inception is
Dr. J. Mark Mobius. Dr. Mobius, a German citizen, is managing director of
Templeton Asset Management Ltd., of which Asset Management Hong Kong is a
representative office. In addition, Dr. Mobius serves as a director and/or
officer of many other funds within 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. Before joining Vickers da Costa, Dr. Mobius operated his
own consulting firm in Hong Kong from 1970 until 1980. 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 Asset Management
Hong
Templeton Institutional Funds, Inc. - 21
PAGE
Kong. 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 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 Templeton Global
Bond Managers, a division of Investment Counsel. 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 and corporate pension accounts. Dr. Johnson is vice president of
Templeton Global Bond Managers. He holds a Ph.D. and an MA in economics from
Stanford University, and an MBA in finance and a BA in economics from Adelphi
University. Prior to joining the Templeton organization in 1995, Dr. Johnson was
chief strategist and head of research for JPBT Advisers, Inc. in Miami. Before
joining JPBT Advisers Inc., he was chief economist and head of research at
Vestrust Asset Management Corporation in Miami. In addition, Dr. Johnson has
held several positions at the Federal Reserve Bank of New York, including chief
of the Domestic Financial Markets Division. Currently, Dr. Johnson co-directs
the fixed income research process and manages several emerging markets fixed
income portfolios. Dr. Demirors is vice president of Templeton Global Bond
Managers. He holds a Ph.D. 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 VestcorPartners Group in Miami from 1992 through 1994. 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, 1997, management fees
as a percentage of each fund's average daily net assets were as follows: Growth
Series, 0.70%; Foreign Equity Series, 0.70%; and Emerging Markets Series, 1.25%.
The Investment Managers voluntarily agreed to reduce their fees in order to
limit total expenses of the funds. These voluntary agreements did not result in
any management fee reductions for Growth Series, Foreign Equity Series or
Emerging Markets Series. After April 30, 1999, these agreements may end at any
time upon notice to the Board. Total operating expenses of the funds during the
fiscal year ended December 31, 1997, including fees paid to the Investment
Managers, were as follows: Growth Series, 0.86%; Foreign Equity Series, 0.84%;
and Emerging Markets Series, 1.57%.
During the fiscal period ended December 31, 1997, Emerging Fixed Income Markets
Series' management fees, before any advance waiver, totaled 0.70% and total
operating expenses, before any advance waiver, were 6.40% of the average daily
net assets of the fund. Under an agreement by Investment Counsel to waive its
fees, the fund paid no management fees and total operating expenses were 1.25%
of its average daily net assets. After December 31, 1998, this agreement may end
at any time upon notice to the Board.
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 fund shares, 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 provides certain administrative services
and facilities for the funds. During the fiscal year ended December 31, 1997,
administration fees totaling 0.09% of the average daily net assets of Growth
22 - Templeton Institutional Funds, Inc.
PAGE
Series, Foreign Equity Series and Emerging Markets Series were paid to FT
Services. These fees are included in the amount of total operating expenses
shown above.
During the fiscal period ended December 31, 1997, Emerging Fixed Income Markets
Series' administration fees, before any advance waiver, totaled 0.08% of the
average daily net assets of the fund. Under an agreement by FT Services to waive
its fees, the fund paid no administration fees. Administration fees are included
in the amount of total operating expenses shown above. 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 commonly used
measure of performance is total return.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested.
The funds' investment results will vary. Performance figures are always based on
past performance and do not guarantee future results. For a more detailed
description of how each fund calculates its performance figures, please see "How
Do the Funds Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUNDS AND THEIR SHAREHOLDERS
On August 5, 1997, President Clinton signed into law the Taxpayer Relief Act of
1997 (the "1997 Act"). This new law makes sweeping changes in the Code. Because
many of these changes are complex they are discussed in the SAI.
HOW DOES A FUND EARN INCOME
AND GAINS?
A FUND EARNS DIVIDENDS AND INTEREST (THE FUND'S "INCOME") ON ITS INVESTMENTS.
WHEN THE FUND SELLS A SECURITY FOR A PRICE THAT IS HIGHER THAN IT PAID, IT HAS A
GAIN. WHEN THE FUND SELLS A SECURITY FOR A PRICE THAT IS LOWER THAN IT PAID, IT
HAS A LOSS. IF THE FUND HAS HELD THE SECURITY FOR MORE THAN ONE YEAR, THE GAIN
OR LOSS WILL BE A LONG-TERM CAPITAL GAIN OR LOSS. IF THE FUND HAS HELD THE
SECURITY FOR ONE YEAR OR LESS, THE GAIN OR LOSS WILL BE A SHORT-TERM CAPITAL
GAIN OR LOSS. THE FUND'S GAINS AND LOSSES ARE NETTED TOGETHER, AND, IF THE FUND
HAS A NET GAIN (THE FUND'S "GAINS"), THAT GAIN WILL GENERALLY BE DISTRIBUTED TO
YOU.
TAXATION OF THE FUND'S INVESTMENTS. The funds invest your money in the stocks,
bonds and other securities that are described in the section "How Do the Funds
Invest Their Assets?" Special tax rules may apply in determining the income and
gains that a fund earns on its investments. These rules may, in turn, affect the
amount of distributions that the funds pay to you. These special tax rules are
discussed in the SAI.
TAXATION OF THE FUNDS. As series of a regulated investment company, the funds
generally pay no federal income tax on the income and gains that they distribute
to you.
FOREIGN TAXES. Foreign governments may impose taxes on the income and gains from
the funds investments in foreign stocks and bonds. These taxes will reduce the
amount of a fund's distributions to you, but, depending upon the amount of the
fund's assets that are invested in foreign securities and foreign taxes paid,
may be passed through to you as a foreign tax credit on your income tax return.
The funds may also invest in the securities of foreign companies that are
"passive foreign investment companies" ("PFICs"). These investments in PFICs may
cause the funds to pay income taxes and interest charges. If possible, the funds
will adopt strategies to avoid PFIC taxes and interest charges.
Templeton Institutional Funds, Inc. - 23
PAGE
TAXATION OF SHAREHOLDERS.
WHAT IS A DISTRIBUTION?
AS A SHAREHOLDER, YOU WILL RECEIVE YOUR SHARE OF A FUND'S INCOME AND GAINS ON
ITS INVESTMENTS IN STOCKS, BONDS AND OTHER SECURITIES. THE FUND'S INCOME AND
SHORT TERM CAPITAL GAINS ARE PAID TO YOU AS ORDINARY DIVIDENDS. THE FUND'S
LONG-TERM CAPITAL GAINS ARE PAID TO YOU AS CAPITAL GAIN DISTRIBUTIONS. IF THE
FUND PAYS YOU AN AMOUNT IN EXCESS OF ITS INCOME AND GAINS, THIS EXCESS WILL
GENERALLY BE TREATED AS A NON-TAXABLE DISTRIBUTION. THESE AMOUNTS, TAKEN
TOGETHER, ARE WHAT WE CALL THE FUND'S DISTRIBUTIONS TO YOU.
DISTRIBUTIONS. Distributions from the funds, whether you receive them in cash or
in additional shares, are generally subject to income tax. The fund will send
you a statement in January that reflects the amount of ordinary dividends,
capital gain distributions and non-taxable distributions you received from the
fund in the prior year. This statement will include distributions declared in
December and paid to you in January of the current year, but which are taxable
as if paid on December 31 of the prior year. The IRS requires you to report
these amounts on your income tax return for the prior year. The fund's statement
for the prior year will tell you how much of your capital gain distribution
represents 28% rate gain. The remainder of the capital gain distribution
represents 20% rate gain.
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your qualified
retirement plan such as a Section 401(k) plan or IRA, are generally
tax-deferred; this means that you are not required to report fund
distributions on your income tax return when paid to your plan, but, rather,
when your plan makes payments to you. Be aware, however, that special rules
apply to payouts from Roth and Education IRAs.
DIVIDENDS-RECEIVED DEDUCTION. Corporate investors may be entitled to a
dividends-received deduction on a portion of the ordinary dividends they receive
from a Fund.
WHAT IS A REDEMPTION?
A REDEMPTION IS A SALE BY YOU TO A FUND OF SOME OR ALL OF YOUR SHARES IN THE
FUND. THE PRICE PER SHARE YOU RECEIVE WHEN YOU REDEEM FUND SHARES MAY BE MORE OR
LESS THAN THE PRICE AT WHICH YOU PURCHASED THOSE SHARES. AN EXCHANGE OF FUND
SHARES FOR SHARES OF ANOTHER FRANKLIN TEMPLETON FUND IS TREATED AS A REDEMPTION
OF FUND SHARES AND THEN A PURCHASE OF SHARES OF THE OTHER FUND. WHEN YOU REDEEM
OR EXCHANGE YOUR SHARES, YOU WILL GENERALLY HAVE A GAIN OR LOSS, DEPENDING UPON
WHETHER THE BASIS IN YOUR SHARES IS MORE OR LESS THAN YOUR COST OR OTHER BASIS
IN THE SHARES. CALL FUND INFORMATION FOR A FREE SHAREHOLDER TAX INFORMATION
HANDBOOK IF YOU NEED MORE INFORMATION IN CALCULATING THE GAIN OR LOSS ON THE
REDEMPTION OR EXCHANGE OF YOUR SHARES.
REDEMPTIONS AND EXCHANGES. If you redeem your shares or if you exchange your
fund shares for shares in another Franklin Templeton Fund, you will generally
have a gain or loss that the IRS requires you to report on your income tax
return. If you hold your shares for six months or less, any loss you have will
be treated as a long-term capital loss to the extent of any capital gain
distributions received by you from the fund. All or a portion of any loss on the
redemption or exchange or your shares will be disallowed by the IRS if you
purchase other shares in the fund within 30 days before or after your redemption
or exchange.
24 - Templeton Institutional Funds, Inc.
PAGE
WHAT IS A FOREIGN TAX CREDIT?
A FOREIGN TAX CREDIT IS A TAX CREDIT FOR THE AMOUNT OF TAXES IMPOSED BY A
FOREIGN COUNTRY ON EARNINGS OF A FUND. WHEN A FOREIGN COMPANY IN WHICH THE FUND
INVESTS PAYS A DIVIDEND TO THE FUND, THE DIVIDEND WILL GENERALLY BE SUBJECT TO A
WITHHOLDING TAX. THE TAXES WITHHELD IN FOREIGN COUNTRIES CREATE CREDITS THAT YOU
MAY USE TO OFFSET YOUR U.S. FEDERAL INCOME TAX.
FOREIGN TAXES. If more than 50% of the value of a fund's assets consist of
foreign securities, the fund may elect to pass-through to you the amount of
foreign taxes it paid. If the fund makes this election, your year-end statement
will show more taxable income than was actually distributed to you. However, you
will be entitled to either deduct your share of such taxes in computing your
taxable income or claim a foreign tax credit for such taxes against your U.S.
federal income tax. Your year-end statement, showing the amount of deduction or
credit available to you, will be distributed to you in January along with other
shareholder information records including your fund's Form 1099-DIV.
The 1997 Act includes a provision that allows you to claim these credits
directly on your income tax return (Form 1040) and eliminates the previous
requirement that you complete a detailed supporting form. To qualify, you must
have $600 or less in joint return foreign taxes ($300 or less on a single
return), all of which are reported to you on IRS Form 1099-DIV. THIS SIMPLIFIED
PROCEDURE APPLIES ONLY FOR CALENDAR YEARS 1998 AND BEYOND, AND IS NOT AVAILABLE
IN 1997.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income
tax withholding. Your home country may also tax ordinary dividends, capital gain
distributions and gains arising from redemptions or exchanges of your fund
shares. Fund shares held by the estate of a non-U.S. investor may be subject to
U.S. estate tax. You may wish to contact your tax advisor to determine the U.S.
and non-U.S. tax consequences of your investments in the fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you receive
from a fund, and gains arising from redemptions or exchanges of your fund shares
will generally be subject to state and local income tax. The holding of fund
shares may also be subject to state and local intangibles taxes. You may wish to
contact your tax advisor to determine the state and local tax consequences of
your investment in the fund.
WHAT IS A BACKUP WITHHOLDING?
BACKUP WITHHOLDING OCCURS WHEN A FUND IS REQUIRED TO WITHHOLD AND PAY OVER TO
THE IRS 31% OF YOUR DISTRIBUTIONS AND REDEMPTION PROCEEDS. YOU CAN AVOID BACKUP
WITHHOLDING BY PROVIDING THE FUND WITH YOUR TIN, AND BY COMPLETING THE TAX
CERTIFICATIONS ON YOUR SHAREHOLDER APPLICATION THAT YOU WERE ASKED TO SIGN WHEN
YOU OPENED YOUR ACCOUNT. HOWEVER, IF THE IRS INSTRUCTS THE FUND TO BEGIN BACKUP
WITHHOLDING, IT IS REQUIRED TO DO SO EVEN IF YOU PROVIDED THE FUND WITH YOUR TIN
AND THESE TAX CERTIFICATIONS, AND BACKUP WITHHOLDING WILL MAIN IN PLACE UNTIL
THE FUND IS INSTRUCTED BY THE IRS THAT IT IS NO LONGER REQUIRED.
BACKUP WITHHOLDING. When you open an account, IRS regulations require that you
provide your taxpayer identification number ("TIN"), certify that it is correct,
and certify that you are not subject to backup withholding under IRS rules. If
you fail to provide a correct TIN or the proper tax certifications, a fund is
required to withhold 31% of all the distributions (including ordinary dividends
and capital gain distributions), and redemption proceeds paid to you. A fund is
also required to begin backup withholding on your account if the IRS instructs
the fund to do so. A fund reserves the right not to open your account, or,
alternatively, to redeem your shares at the current net asset value, less any
taxes withheld, if you fail to provide a correct TIN, fail to provide the proper
tax certifications, or the IRS instructs the fund to begin backup withholding on
your account.
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUNDS. A MORE
Templeton Institutional Funds, Inc. - 25
PAGE
COMPLETE DISCUSSION OF THESE RULES AND RELATED MATTERS IS CONTAINED IN THE
SECTION ENTITLED "ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES" IN THE SAI.
THE TAX TREATMENT TO YOU OF DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS, FOREIGN TAXES
PAID AND INCOME TAXES WITHHELD IS ALSO DISCUSSED IN A FREE FRANKLIN TEMPLETON
TAX INFORMATION HANDBOOK, WHICH YOU MAY REQUEST BY CONTACTING FUND INFORMATION.
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. Shares of each series of the Company have equal and exclusive rights to
dividends and distributions declared by that series and the net assets of the
series in the event of liquidation or dissolution. Shares of the funds are
considered Class I shares for redemption, exchange and other purposes.
Additional series and classes of shares may be offered in the future.
Shares of each class of a series have the same voting and other rights and
preferences as the other classes and series of the Company for matters that
affect the Company as a whole.
The Company has 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 Company does not intend to hold annual shareholder meetings. The Company or
a fund may hold special meetings, however, for matters requiring shareholder
approval. A meeting may also be called by the Board in its discretion or 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.
As of April 17, 1998, T. Rowe Price, for the benefit of Honeywell, and the
Norton Family Trust each owned of record and beneficially more than 25% of the
outstanding shares of Growth Series. As of the same date, Templeton Global
Investors, Inc. owned substantially all of the outstanding shares of Emerging
Fixed Income Markets Series as a result of providing its initial capitalization.
26 - Templeton Institutional Funds, Inc.
PAGE
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
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.
Please note that as of January 1, 1998, shares of the funds are not available to
retirement plans through Franklin Templeton's ValuSelect(R) program. Retirement
plans in Franklin Templeton's ValuSelect program before January 1, 1998,
however, may continue to invest in the funds.
MINIMUM INVESTMENT
There is a minimum initial investment of $5 million ($25 for subsequent
investments) for all investors except the following:
(a) Defined contribution plans such as employer stock, bonus, pension or profit
sharing plans that meet the requirements for qualification under Section 401
of the Code, including salary reduction plans qualified 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 1,000 or the amount of plan assets is
$10 million or more. Plans with less than 1,000 employees or $10 million in
plan assets 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 investing assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which
the trust companies and 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;
(c) Defined benefit plans or governments, municipalities, and tax-exempt
entities that meet the requirements for qualification under Section 501 of
the Code are subject to an initial investment in the funds of $1 million;
(d) Service agents and broker-dealers who have entered into an agreement with
Distributors may purchase shares of the funds for clients of associated
registered investment advisors participating in fee-based programs until May
31, 1997. After this date, additional purchases of a fund may be made only
for clients who already own or hold shares of that fund.
LETTER OF INTENT
An initial investment of less than $5 million may be made if the investor
executes a Letter of Intent ("Letter") which expresses the investor's intention
to invest at least $5 million within a 13-month period in the Franklin Templeton
Group of Funds, including at least $1 million in the funds. See the
Institutional Account Application Form. The minimum initial investment under a
Letter is $1 million. If the investor does not invest at least $5 million in
shares of the funds or other funds in the Franklin Templeton Group of Funds
within the 13-month period, the shares actually purchased will be involuntarily
redeemed and the proceeds sent the investor at the
Templeton Institutional Funds, Inc. - 27
PAGE
address of record. Any redemptions made by the shareholder during the 13-month
period will be subtracted from the amount of the purchases for purposes of
determining whether the terms of the Letter have been completed.
GROUP PURCHASES
Any other investor, including a private investment vehicle such as a family
trust or foundation, who is a member of a qualified group may also purchase
shares of the funds if the group as a whole meets the minimum initial investment
of $5 million, at least $1 million of which is invested or to be invested in the
funds. The minimum initial investment is based upon the aggregate dollar value
of shares previously purchased and still owned by the group, plus the amount of
the current purchase. A "qualified group" is one which (i) has formalized
operations which have been in existence for more than six months, (ii) has a
purpose other than acquiring fund shares, and (iii) satisfies uniform criteria,
such as centralized accounting and communications, which enable Distributors to
realize economies of scale in its costs of distributing shares.
PURCHASES BY TELEPHONE. Shares of the funds may be purchased for existing
accounts by telephone, and paid for by wire, in the following manner:
1. Call Institutional Services at 1-800/321-8563 or 1-415/312-3600 to advise of
the intention to wire funds for investment. The call must be received prior
to 4:00 p.m. Eastern time to receive that day's price. Each fund will supply
a wire control number for the investment. It is necessary to obtain a new
wire control number every time money is wired into an account in a fund. Wire
control numbers are effective for one transaction only and cannot be used
more than once. Wired money which is not properly identified with a currently
effective wire control number will be returned to the bank from which it was
wired and will not be credited to the shareholder's account.
2. On the next business day, wire funds to Bank of America, ABA Routing No.
121000358, for credit to account no. 1493304779. Be sure to include the wire
control number, the investor's Franklin or Templeton account number and
account registration. Wired funds received by the bank and reported by the
bank to the funds by the close of the Federal Reserve Wire System are
available for credit on that day. Later wires are credited the following
business day. In order to maximize efficient fund management, investors are
urged to place and wire their investments as early in the day as possible.
If the purchase is not for an existing account, identify the fund in which the
investment is being made and send a completed Institutional Account Application
Form to Institutional Services.
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.
28 - Templeton Institutional Funds, Inc.
PAGE
Shares of the funds may be purchased with "in-kind" securities, if approved in
advance by the Company. Securities used to purchase fund shares must be
appropriate investments for that fund, consistent with its investment objective,
policies and limitations, as determined by the Company, and must have readily
available market quotations. The securities will be valued in accordance with
the Company's policy for calculating Net Asset Value (as set forth above),
determined as of the close of the day on which the securities are received by
the Company in salable form. A prospective shareholder will receive shares of
the applicable fund next computed after such receipt. To obtain the approval of
the Company, call Institutional Services. Investors who are affiliated persons
of the Company (as defined in the 1940 Act) may not purchase shares in this
manner in the absence of SEC approval.
If an investment in the funds is made through a broker that has executed a
dealer agreement with respect to the Templeton Funds, Distributors or one of its
affiliates may make a payment out of its own resources to such dealer in an
amount not to exceed 0.25% of the amount invested. Dealers may contact
Institutional Services for additional information.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment goal and
policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums.
<TABLE>
<CAPTION>
METHOD STEPS TO FOLLOW
- ---------------------------------------------------------------------------------------
<S> <C>
BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates for the shares
you want to exchange
- ---------------------------------------------------------------------------------------
BY PHONE Call Institutional Services or TeleFACTS(R)
[ARROW] IF YOU DO NOT WANT THE ABILITY TO EXCHANGE BY PHONE
TO APPLY TO YOUR ACCOUNT, PLEASE LET US KNOW.
- ---------------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ---------------------------------------------------------------------------------------
</TABLE>
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
- - You may only exchange shares within the same class, except as noted below.
- - The accounts must be identically registered. You may, however, 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. 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 Retirement Plan Services for information on exchanges within
these plans.
- - The fund you are exchanging into must be eligible for sale in your state.
Templeton Institutional Funds, Inc. - 29
PAGE
- - 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 have: (i) requested an
exchange out of a fund within two weeks of an earlier exchange request, (ii)
exchanged shares out of a fund more than twice in a calendar quarter, or (iii)
exchanged 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 have exchanged 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.
Because excessive trading can hurt fund performance, operations 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.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
<TABLE>
<CAPTION>
METHOD STEPS TO FOLLOW
- ---------------------------------------------------------------------------------------------------
<S> <C>
BY MAIL 1. Send us signed written instructions. If you would like
your redemption proceeds wired to a bank account, your
instructions should include:
- The name, address and telephone number of the bank where
you want the proceeds sent
- Your bank account number
- The Federal Reserve ABA routing 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 if required
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 you would
like your redemption proceeds wired to a bank account, other
(Only available if you have than an escrow account, you must complete the Institutional
completed and sent the Telephone Privileges Agreement.
Institutional 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 instructions.
- ---------------------------------------------------------------------------------------------------
</TABLE>
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the
30 - Templeton Institutional Funds, Inc.
PAGE
registered owners on the account, send us written instructions signed by all
account owners, with a signature guarantee. We are not able to receive or pay
out cash in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 4:00 p.m. Eastern time, your wire payment will be
sent the next business day. For requests received in proper form after 4:00 p.m.
Eastern time, the payment will be sent the second business day. By offering this
service to you, the funds are not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the funds nor their agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently 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 sell 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 Retirement Plan Services.
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, if any, and any net realized capital
gains.
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 THEIR 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
SHARE PRICE
When you buy shares, you pay the Net Asset Value per share. When you sell
shares, you receive the Net Asset Value per share.
The Net Asset Value we use when you buy or sell shares is the one 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. - 31
PAGE
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 close of the NYSE, normally 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 outstanding. Each fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.
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,
- - A description of the request,
- - For exchanges, the name of the fund you are exchanging into,
- - Your account number,
- - The dollar amount or number of shares, and
- - A telephone number where we may reach you during the day, or in the evening if
preferred.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of transactions
or account changes. These include transactions or account changes that you could
also make by phone, such as certain redemptions of $50,000 or less, exchanges
between identically registered accounts, and changes to the address of record.
For most other types of transactions or changes, written instructions must be
signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed by
all registered owners on the account.
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. The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4. We receive instructions from an agent, not the registered owners,
5. 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.
32 - Templeton Institutional Funds, Inc.
PAGE
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 or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account by phone. Please
refer to the sections of this prospectus that discuss the transaction you would
like to make or call Institutional Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. 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 us written instructions,
as described elsewhere in this prospectus.
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. We also will not be liable for any loss if we
follow instructions by phone that we reasonably believe are genuine or if you
are unable to execute a transaction by phone.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to 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 forms or more information about distribution or transfer
procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you 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, we cannot accept instructions to change owners on the account unless ALL
owners agree in writing, even if the law in your state says otherwise. 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.
Templeton Institutional Funds, Inc. - 33
PAGE
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
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.
<TABLE>
<CAPTION>
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- ---------------------------------------------------------------------------------
<S> <C>
CORPORATION Corporate 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 cannot 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.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the fund. Telephone instructions
directly from your representative will be accepted unless you have told us that
you do not want telephone privileges to apply to your account.
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. We will only do
this if the value of your account fell below this amount because you voluntarily
sold your shares and your account has been inactive (except for the reinvestment
of distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $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. - 8:00p.m. Easter 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.
34 - Templeton Institutional Funds, Inc.
PAGE
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. Once your plan is established, any
distributions paid by a fund will be automatically reinvested in your account.
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.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) 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;
- - exchange shares (within the same class) between identically registered
Franklin Templeton Class I and Class II accounts; and
- - request duplicate statements and deposit slips for Franklin Templeton
accounts.
You will need the funds' code number to use TeleFACTS(R). 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 additional purchases 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 the fund's financial reports.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, a fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 100 Fountain Parkway, P.O. Box 33030, St. Petersburg, Florida 33733-8030. The
funds and Distributors are also located at this address. Investment Counsel is
located at 500 East Broward Boulevard, Fort Lauderdale, FL 33394-3091. Asset
Management
Templeton Institutional Funds, Inc. - 35
PAGE
Hong Kong is located at Two Exchange Square, Hong Kong. You may also contact us
by phone at one of the numbers listed below.
<TABLE>
<CAPTION>
HOURS OF OPERATION (EASTERN TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Institutional Services 1-800/321-8563 9:00 a.m. to 8:00 p.m.
Shareholder Services 1-800/632-2301 8:30 a.m. to 8:00 p.m.
Dealer Services 1-800/524-4040 8:30 a.m. to 8:00 p.m.
Fund Information 1-800/DIAL BEN 8:30 a.m. to 11:00 p.m.
(1-800/342-5236) 9:30 a.m. to 5:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 8:30 a.m. to 8:00 p.m.
Institutional Services 1-800/321-8563 9:00 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.
36 - Templeton Institutional Funds, Inc.
PAGE
GLOSSARY
USEFUL TERMS AND DEFINITIONS
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
multiple classes of shares. The different 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"
Eligible Governmental Authority - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
funds are a legally permissible investment and that can only buy shares of the
funds without paying sales charges
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, Templeton Capital Accumulator Fund, Inc., and Templeton Variable Products
Series Fund
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Franklin Templeton Group of Funds - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT Services - Franklin Templeton Services, Inc., the funds' administrator
Investment Manager - A fund's investment manager: Templeton Investment Counsel,
Inc. ("Investment Counsel") for Growth Series and Foreign Equity Series;
Templeton Asset Management Ltd. - Hong Kong Branch ("Asset Management Hong
Kong") for Emerging Markets Series; and Investment Counsel through its Templeton
Global Bond Managers division 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 Timers - Market Timers generally include market timing or asset
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 or whose transactions include
frequent or large exchanges.
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
Templeton Institutional Funds, Inc. - 37
PAGE
NYSE - New York Stock Exchange
Offering Price - The public offering price is the Net Asset Value per share.
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
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(R) - Franklin Templeton's automated customer servicing system
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.
38 - Templeton Institutional Funds, Inc.
PAGE
APPENDIX
DESCRIPTION OF RATINGS
Corporate Bond Ratings
Moody's
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of 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.
Templeton Institutional Funds, Inc. - 39
PAGE
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 C1 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.
40 - 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 is not authorized. No sales
representative, dealer or other person is authorized to give any information or
make any representations other than those contained in this prospectus. Further
information may be obtained from Distributors.
Principal Underwriter:
FRANKLIN TEMPLETON DISTRIBUTORS, INC.
100 Fountain Parkway
P.O. Box 33030
St. Petersburg, Florida 33733-8030
TIFI
- ------------------------------------------------
TEMPLETON
INSTITUTIONAL
FUNDS, INC.
MAY 1, 1998
PROSPECTUS
Institutional Services and Fund Information: 800-321-8563
ZTIFI P 5/98
PAGE
PAGE
PART B
STATEMENT OF ADDITIONAL INFORMATION
PAGE
TEMPLETON INSTITUTIONAL
FUNDS, INC.
STATEMENT OF
ADDITIONAL INFORMATION [FRANKLIN TEMPLETON LOGO]
100 FOUNTAIN PARKWAY, P.O. BOX 33030
MAY 1, 1998 ST. PETERSBURG, FL 33733-8030 1-800/DIAL BEN
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
How Do the Funds Invest Their Assets?... 2
What Are the Risks of Investing in the
Funds?................................ 6
Investment Restrictions................. 9
Officers and Directors.................. 10
Investment Management and Other
Services.............................. 16
How Do the Funds Buy Securities for
Their Portfolios?..................... 18
How Do I Buy, Sell and Exchange
Shares?............................... 19
How Are Fund Shares Valued?............. 21
Additional Information on Distributions
and Taxes............................. 22
The Funds' Underwriter.................. 27
How Do the Funds Measure Performance?... 27
Miscellaneous Information............... 30
Financial Statements.................... 32
Useful Terms and Definitions............ 32
</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 Growth Series, Foreign Equity Series,
Emerging Markets Series and Emerging Fixed Income Markets Series. All of the
funds, with the exception of Emerging Fixed Income Markets Series, are
diversified series of the Company. Emerging Fixed Income Markets Series is a
non-diversified series of the Company.
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.
Foreign Equity Series' investment objective is to achieve long-term capital
growth. The fund seeks to achieve its objective by investing primarily in stocks
and debt obligations of companies and governments outside the U.S. including
emerging markets securities.
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.
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, 1998, which we may amend 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.
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.
ZTIFI SAI 5/98
1
PAGE
HOW DO THE FUNDS INVEST THEIR ASSETS?
- ---------------------------------------------------------
The following gives more detailed information about the funds' investment
policies and the types of securities that each may buy. Please read this
information together with the section "How Do the Funds Invest Their Assets?" in
the Prospectus.
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 Prime-1 by Moody's or A-1 by S&P 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 Moody's or AAA or AA by S&P.
REPURCHASE AGREEMENTS. The funds may enter into repurchase agreements.
Repurchase agreements are contracts under which the buyer of a security
simultaneously commits to resell the security to the seller at an agreed-upon
price and date. Under a repurchase agreement, the seller is required to maintain
the value of the securities subject to the repurchase agreement at not less than
their repurchase price. Each fund's Investment Manager will monitor the value of
such securities daily to determine that the value equals or exceeds the
repurchase price. Repurchase agreements may involve risks in the event of
default or insolvency of the seller, including possible delays or restrictions
upon a fund's ability to dispose of the underlying securities. A fund will enter
into repurchase agreements only with parties who meet creditworthiness standards
approved by the Company's Board, 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 Moody's or S&P 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 Baa by Moody's or BBB by S&P to 5% of its
total assets. The Board may consider a change in this operating policy if, in
its judgment, economic conditions change such that a different level of
investment in high risk, lower quality debt securities would be consistent with
the interests of the funds and their shareholders. Commercial paper purchased by
the funds will meet the credit quality criteria set forth above.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in each fund's Net Asset Value.
The funds investing in debt securities may accrue and report interest on high
yield bonds structured as zero coupon bonds or pay-in-kind securities as income
even though they receive no corresponding cash payment until a later time,
generally the security's maturity date. In order to qualify for beneficial tax
treatment, a fund must distribute substantially all of its net investment income
to shareholders on an annual basis (see "Additional Information on Distributions
and Taxes"). Thus, a fund may have to dispose of its portfolio securities under
disadvantageous circumstances to generate cash, or leverage itself by borrowing
cash, so that it may satisfy the distribution requirement.
FUTURES CONTRACTS. The funds may purchase and sell financial futures contracts.
Although some financial futures contracts call for making or taking delivery of
the underlying securities, in most cases these obligations are closed out before
the settlement date. The closing of a contractual obligation is accomplished by
purchasing or selling an identical offsetting futures contract. Other financial
futures contracts by their terms call for cash settlements.
The funds may also buy and sell index futures contracts with respect to any
stock index traded on a recognized stock exchange or board of trade. An index
futures contract is a contract to buy or sell units of an index at a specified
future date at a price agreed upon when the contract is made. The stock index
futures contract specifies that no delivery of the actual stocks making up the
index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration of
the contract.
At the time a fund purchases a futures contract, an amount of cash, U.S.
government securities, or other highly liquid debt securities equal to the
market value of the futures contract will be deposited in a segregated account
with the fund's custodian. When writing a futures contract, a fund will maintain
with its custodian liquid assets that, when added to the amounts deposited with
a futures commission
2
PAGE
merchant or broker as margin, are equal to the market value of the instruments
underlying the contract. Alternatively, a fund may "cover" its position by
owning the instruments underlying the contract (or, in the case of an index
futures contract, a portfolio with a volatility substantially similar to that of
the index on which the futures contract is based), or holding a call option
permitting the fund to purchase the same futures contract at a price no higher
than the price of the contract written by the fund (or at a higher price if the
difference is maintained in liquid assets with the fund's custodian).
OPTIONS ON SECURITIES OR INDICES. The funds may write (i.e., sell) covered put
and call options and purchase put and call options on securities or securities
indices that are traded on U.S. and foreign exchanges or in the over-the-counter
markets.
An option on a security is a contract that gives the purchaser of the option, in
return for the premium paid, the right to buy a specified security (in the case
of a call option) or to sell a specified security (in the case of a put option)
from or to the writer of the option at a designated price during the term of the
option. An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.
A fund may write a call or put option only if the option is "covered." A call
option on a security written by a fund is "covered" if the fund owns the
underlying security covered by the call or has an absolute and immediate right
to acquire that security without additional cash consideration (or for
additional 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 liquid assets with a value equal
to the exercise price in a segregated account with its custodian, or else holds
a put on the same security and in the same principal amount as the put written
where the exercise price of the put held is equal to or greater than the
exercise price of the put written.
A fund will cover call options on stock indices that it writes by owning
securities whose price changes, in the opinion of the fund's Investment Manager,
are expected to be similar to those of the index, or in such other manner as may
be in accordance with the rules of the exchange on which the option is traded
and applicable laws and regulations. Nevertheless, where a fund covers a call
option on a stock index through ownership of securities, such securities may not
match the composition of the index. In that event, a fund will not be fully
covered and could be subject to risk of loss in the event of adverse changes in
the value of the index. A fund will cover put options on stock indices that it
writes by segregating assets equal to the option's exercise price, or in such
other manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations.
A fund will receive a premium from writing a put or call option, which increases
the fund's gross income in the event the option expires unexercised or is closed
out at a profit. If the value of a security or an index on which a fund has
written a call option falls or remains the same, the fund will realize a profit
in the form of the premium received (less transaction costs) that could offset
all or a portion of any decline in the value of the portfolio securities being
hedged. If the value of the underlying security or index rises, however, a fund
will realize a loss in its call option position, which will reduce the benefit
of any unrealized appreciation in the fund's investments. By writing a put
option, a fund assumes the risk of a decline in the underlying security or
index. To the extent that the price changes of the portfolio securities being
hedged correlate with changes in the value of the underlying security or index,
writing covered put options on indices or securities will increase a fund's
losses in the event of a market decline, although such losses will be offset in
part by the premium received for writing the option.
A fund may also purchase put options to hedge its investments against a decline
in value. By purchasing a put option, a fund will seek to offset a decline in
the value of the portfolio securities being hedged through appreciation of the
put option. If the value of a fund's investments does not decline as
anticipated, or if the value of the option does not increase, the fund's loss
will be limited to the premium paid for the option plus related transaction
costs. The success of this strategy will depend, in part, on the accuracy of the
correlation between the changes in value of the underlying security or index and
the changes in value of a fund's security holdings being hedged.
3
PAGE
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 or 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, it may in the future assert authority to regulate
forward contracts. In such event, a fund's ability to utilize forward contracts
in the manner set forth above may be restricted. Forward contracts may limit
potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance for a fund than if it had not engaged in
such contracts.
The funds may purchase and write put and call options on foreign currencies for
the purpose of protecting against declines in the dollar value of foreign
portfolio securities and against increases in the dollar cost of foreign
securities to be acquired. As is the case with other kinds of options, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received, and a fund could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may constitute
an effective hedge against fluctuation in exchange rates, although, in the event
of rate movements adverse to a fund's position, the fund may forfeit the entire
amount of the premium plus related transaction costs. Options on foreign
currencies written or purchased by a fund will be traded on U.S. and foreign
exchanges or over-the-counter.
The funds may enter into exchange-traded contracts for the purchase or sale for
future delivery of foreign currencies ("foreign currency futures"). This
investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of a
fund's portfolio securities or adversely affect the prices of securities that a
fund intends to purchase at a later date. The successful use of foreign currency
futures will usually depend on the ability of a fund's Investment Manager to
forecast currency exchange rate movements correctly.
4
PAGE
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.
A fund uses 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 fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
The funds may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stock ("PERCS"), which
provide an investor with the opportunity to earn higher dividend income than is
available on a company's common stock. A PERCS is a preferred stock which
generally features a mandatory conversion date, as well as a capital
appreciation limit which is usually expressed in terms of a stated price. Most
PERCS expire three years from the date of issue, at which time they are
convertible into common stock of the issuer (PERCS are generally not convertible
into cash at maturity). Under a typical arrangement, if after three years the
issuer's common stock is trading at a price below that set by the capital
appreciation limit, each PERCS would convert to one share of common stock. If,
however, the issuer's common stock is trading at a price above that set by the
capital appreciation limit, the holder of the PERCS would receive less than one
full share of common stock. The amount of that fractional share of common stock
received by the PERCS holder is determined by dividing the price set by the
capital appreciation limit of the PERCS by the market price of the issuer's
common stock. PERCS can be called at any time prior to maturity, and hence do
not provide call protection. However if called early the issuer must pay a call
premium over the market price to the investor. This call premium declines at a
preset rate daily, up to the maturity date of the PERCS.
The funds may also invest in other classes of enhanced convertible securities.
These include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities), and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all have the
following features: they are issued by the company, the common stock of which
will be received in the event the convertible preferred stock is converted;
unlike PERCS they do not have a capital appreciation limit; they seek to provide
the investor with high current income with some prospect of future capital
appreciation; they are typically issued with three or four-year maturities; they
typically have some built-in call protection for the first two to three years;
investors have the right to convert them into shares of common stock at a preset
conversion ratio or hold them until maturity; and, upon maturity, they will
necessarily convert into either cash or a specified number of shares of common
stock.
5
PAGE
Similarly, there may be enhanced convertible debt obligations issued by the
operating company whose common stock is to be acquired in the event the security
is converted or by a different issuer, such as an investment bank. These
securities may be identified by names such as ELKS (Equity Linked Securities) or
similar names. Typically they share most of the salient characteristics of an
enhanced convertible preferred stock but will be ranked as senior or
subordinated debt in the issuer's corporate structure according to the terms of
the debt indenture. There may be additional types of convertible securities not
specifically referred to herein which may be similar to those described above in
which a fund may invest, consistent with its objectives and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to a fund. The funds may have difficulty disposing of
such securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and a fund's ability to dispose of particular securities, when
necessary, to meet a fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the creditworthiness of an issuer.
Reduced liquidity in the secondary market for certain securities may also make
it more difficult for a fund to obtain market quotations based on actual trades
for purposes of valuing the fund's portfolio. Each fund, however, intends to
acquire liquid securities, though there can be no assurances that this will be
achieved.
WHAT ARE THE RISKS OF
INVESTING IN THE FUNDS?
- ---------------------------------------------------------
Each fund has the right to purchase securities in any foreign country, developed
or developing. Investors should consider carefully the substantial risks
involved in securities of companies and governments of foreign nations, which
are in addition to the usual risks inherent in domestic investments.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or financial
reporting standards, and auditing practices and requirements may not be
comparable to those applicable to U.S. companies. A fund, therefore, may
encounter difficulty in obtaining market quotations for purposes of valuing its
portfolio and calculating its net asset value. Foreign markets have
substantially less volume than the NYSE, and securities of some foreign
companies are less liquid and more volatile than securities of comparable U.S.
companies. Commission rates in foreign countries, which are generally fixed
rather than subject to negotiation as in the U.S., are likely to be higher. In
many foreign countries there is less government supervision and regulation of
stock exchanges, brokers and listed companies than in the U.S.
The economies of individual emerging market countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, the
economies of developing countries generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be adversely
affected by trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been and may continue
to be adversely affected by economic conditions in the countries with which they
trade.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict a
fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) the absence of
developed legal structures governing private or foreign investment or allowing
for judicial redress for injury to private property; (v) the absence, until
recently in certain Eastern European countries, of a capital market structure or
market-oriented economy; and (vi) the possibility that recent favorable economic
developments in Eastern Europe may be slowed or reversed by unanticipated
political, economic or social events in such countries.
In addition, many countries in which the funds may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such
6
PAGE
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.
Certain Eastern European countries, which do not have market economies, are
characterized by an absence of developed legal structures governing private and
foreign investments and private property. Certain countries require governmental
approval prior to investments by foreign persons, or limit the amount of
investment by foreign persons in a particular company, or limit the investment
of foreign persons to only a specific class of securities of a company that may
have less advantageous terms than securities of the company available for
purchase by nationals. Although in most Eastern European countries the local
currencies have been allowed to fluctuate according to their market value,
various foreign exchange restrictions remain in effect, limiting the ability of
foreign investors to repatriate their profits. The conversion rates for certain
Eastern European currencies may be artificial to the actual market values of the
currencies and may be adverse to fund shareholders. Further, accounting
standards which exist in Eastern European countries may differ from U.S.
standards.
Governments in certain Eastern European countries may require that a
governmental or quasi-governmental authority act as custodian of a fund's assets
invested in such country. To the extent such governmental or quasi-governmental
authorities do not satisfy the requirements of the 1940 Act to act as foreign
custodians of the fund's cash and securities, the fund's investment in such
countries may be limited or may be required to be effected through
intermediaries. The risk of loss through governmental confiscation may be
increased in such countries.
Investing in Russian companies involves a high degree of risk and special
considerations not typically associated with investing in the U.S. securities
markets, and should be considered highly speculative. Such risks include,
together with Russia's continuing political and economic instability and the
slow-paced development of its market economy, the following: (a) delays in
settling portfolio transactions and risk of loss arising out of Russia's system
of share registration and custody; (b) the risk that it may be impossible or
more difficult than in other countries to obtain and/or enforce a judgment; (c)
pervasiveness of corruption, insider trading, and crime in the Russian economic
system; (d) currency exchange rate volatility and the lack of available currency
hedging instruments; (e) higher rates of inflation (including the risk of social
unrest associated with periods of hyper-inflation); (f) 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; (g) 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, a return to the centrally planned economy that existed prior to the
dissolution of the Soviet Union, or the nationalization of privatized
enterprises; (h) the risks of investing in securities with substantially less
liquidity and in issuers having significantly smaller market capitalizations,
when compared to securities and issuers in more developed markets; (i) the
difficulties associated in obtaining accurate market valuations of many Russian
securities, based partly on the limited amount of publicly available
information; (j) the financial condition of Russian companies, including large
amounts of inter-company debt which may create a payments crisis on a national
scale; (k) dependency on exports and the corresponding importance of
international trade; (l) the risk that the Russian tax system will not be
reformed to prevent inconsistent, retroactive and/or exorbitant taxation or, in
the alternative, the risk that a reformed tax system may result in the
inconsistent and unpredictable enforcement of the new tax laws; (m) possible
difficulty in identifying a purchaser of securities held by a fund due to the
underdeveloped nature of the securities markets; (n) the possibility that
pending legislation could restrict the levels of foreign investment in certain
industries, thereby limiting the number of investment opportunities in Russia;
(o) the risk that pending legislation would confer to Russian courts the
exclusive jurisdiction to resolve disputes between foreign investors and the
Russian government, instead of
7
PAGE
bringing such disputes before an internationally-accepted third-country
arbitrator; and (p) the difficulty in obtaining information about the financial
condition of Russian issuers, in light of the different disclosure and
accounting standards applicable to Russian companies.
There is little long-term 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 nor are they licensed with any
governmental entity and it is possible for a fund to lose its registration
through fraud, negligence or even mere oversight. While each fund will endeavor
to ensure that its interest continues to be appropriately recorded either itself
or through a custodian or other agent inspecting the share register and by
obtaining extracts of share registers through regular confirmations, these
extracts have no legal enforceability and it is possible that subsequent illegal
amendment or other fraudulent act may deprive the fund of its ownership rights
or improperly dilute its interests. In addition, while applicable Russian
regulations impose liability on registrars for losses resulting from their
errors, it may be difficult for a fund to enforce any rights it may have against
the registrar or issuer of the securities in the event of loss of share
registration. Furthermore, although a Russian public enterprise with more than
500 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. In addition, so-called "financial-industrial groups" have emerged in
recent years that seek to deter outside investors from interfering in the
management of companies they control. These practices may prevent a fund from
investing in the securities of certain Russian companies deemed suitable by its
Investment Manager. Further, this also could cause a delay in the sale of
Russian company securities by a fund if a potential purchaser is deemed
unsuitable, which may expose the fund to potential loss on the investment.
Each fund's management 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, economic
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 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.
8
PAGE
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 Board considers 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 Board also considers 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 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 Board's 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.
INVESTMENT RESTRICTIONS
- ---------------------------------------------------------
Each fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the fund or (ii) 67%
or more of the shares of the fund present at a shareholder meeting if more than
50% of the outstanding shares of the fund are represented at the meeting in
person or by proxy, whichever is less.
Each fund MAY NOT:
1. Invest in real estate or mortgages on real estate (although a fund may
invest in marketable securities secured by real estate or interests therein
or issued by companies or investment trusts which invest in real estate or
interests therein); invest in other open-end investment companies except as
permitted by the 1940 Act; invest in interests (other than debentures or
equity stock interests) in oil, gas or other mineral exploration or
development programs; or purchase or sell commodity contracts (except
futures contracts as described in the Prospectus).
2. Purchase or retain securities of any company in which directors or officers
of the Company or a fund's Investment Manager, individually owning more than
1/2 of 1% of the securities of such company, in the aggregate own more than
5% of the securities of such company.
3. Purchase any security (other than obligations of the U.S. government, its
agencies or instrumentalities) if, as a result, as to 75% of the fund's
total assets (i) more than 5% of the fund's total assets would then be
invested in securities of any single issuer, or (ii) the fund would then own
more than 10% of the voting securities of any single issuer; provided,
however, that this restriction does not apply to the Emerging Fixed Income
Markets Series.
4. Act as an underwriter; issue senior securities except as set forth in
investment restriction 6 below; or purchase on margin or sell short (but a
fund may make margin payments in connection with options on securities or
securities indices and foreign currencies; futures contracts and related
options; and forward contracts and related options).
5. Loan money apart from the purchase of a portion of an issue of publicly
distributed bonds, debentures, notes and other evidences of indebtedness,
although a fund may buy from a bank or broker-dealer U.S. government
obligations with a simultaneous agreement by the seller to repurchase them
within no more than seven days at the original purchase price plus accrued
interest and loan its portfolio securities. Emerging Fixed Income Markets
Series may invest in debt instruments of all types consistent with its
investment objectives and policies.
6. Borrow money, except that a fund may borrow money from banks in an amount
not exceeding
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 NYSE or the 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; provided that this restriction does not apply to Emerging Fixed
Income Markets Series. Warrants acquired by a fund in units or attached to
securities are not included in this restriction.
9. Invest more than 25% of its total assets in a single industry.(1)
10. Participate on a joint or a joint and several basis in any trading account
in securities; (See "What Are the Risks of Investing in the Funds?" and "How
Do the Funds Buy Securities for Their Portfolios?" above as to transactions
in the same securities for a fund and/or other mutual funds with the same or
affiliated advisers.)
(1) The SEC considers each foreign government to be a separate industry.
A fund may also be subject to investment limitations imposed by foreign
jurisdictions in which the fund sells its shares.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by a fund, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. In this case, the fund
intends to dispose of the investment as soon as practicable while maximizing the
return to shareholders.
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 or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
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.
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
Company under the 1940 Act are indicated by an asterisk (*).
<TABLE>
<CAPTION>
Positions and Offices
Name, Address and Age with the Company Principal Occupation During the Past Five Years
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HARRIS J. ASHTON Director Director, RBC Holdings, Inc. (a bank holding company)
191 Clapboard Ridge and Bar-S Foods (a meat packing company); director or
Greenwich, Connecticut trustee, as the case may be, of 50 of the investment
06830 companies in the Franklin Templeton Group of Funds; and
Age 65 formerly, President, Chief Executive Officer and
Chairman of the Board, General Host Corporation (nursery
and craft centers).
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
10
PAGE
<TABLE>
<CAPTION>
Positions and Offices
Name, Address and Age with the Company Principal Occupation During the Past Five Years
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
* NICHOLAS F. BRADY Director Chairman, Templeton Emerging Markets Investment Trust
The Bullitt House PLC, Templeton Latin America Investment Trust PLC, Darby
102 East Dover Street Overseas Investments, Ltd. and Darby Emerging Markets
Easton, Maryland 21601 Investments LDC (investment firms) (1994-present);
Age 68 Chairman and Director, Templeton Central and Eastern
European Investment Company; Director, Templeton Global
Strategy Funds, Amerada Hess Corporation, Christiana
Companies, and the H.J. Heinz Company; director or
trustee, as the case may be, of 21 of the investment
companies in the Franklin Templeton Group of Funds; and
formerly, Secretary of the United States Department of
the Treasury (1988-1993) and Chairman of the Board,
Dillon, Read & Co., Inc. (investment banking) prior to
1988.
- ------------------------------------------------------------------------------------------------------------------
FRANK J. CROTHERS Director Chairman, Atlantic Equipment & Power Ltd.; Vice
P.O. Box N-3238 Chairman, Caribbean Utilities Co., Ltd.; President,
Nassau, Bahamas Provo Power Corporation; Director of various other
Age 53 business and non-profit organizations; and director or
trustee, as the case may be, of 5 of the investment
companies in the Franklin Templeton Group of Funds.
- ------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO Director Member of the law firm of Pitney, Hardin, Kipp & Szuch;
Park Avenue at director or trustee, as the case may be, of 52 of the
Morris County investment companies in the Franklin Templeton Group of
P.O. Box 1945 Funds; and formerly, Director, General Host Corporation
Morristown, New Jersey (nursery and craft centers).
07962-1945
Age 65
- ------------------------------------------------------------------------------------------------------------------
JOHN Wm. GALBRAITH Director President, Galbraith Properties, Inc. (personal
360 Central Avenue investment company); Director, Gulf West Banks, Inc.
Suite 1300 (bank holding company) (1995-present); director or
St. Petersburg, Florida trustee, as the case may be, of 20 of the investment
33701 companies in the Franklin Templeton Group of Funds; and
Age 76 formerly, Director, Mercantile Bank (1991-1995), Vice
Chairman, Templeton, Galbraith & Hansberger Ltd.
(1986-1992) and Chairman, Templeton Funds Management,
Inc. (1974-1991).
- ------------------------------------------------------------------------------------------------------------------
ANDREW H. HINES, JR. Director Consultant for the Triangle Consulting Group; Exec-
150 Second Avenue N. utive-in-Residence of Eckerd College (1991-present);
St. Petersburg, Florida director or trustee, as the case may be, of 22 of the
33701 investment companies in the Franklin Templeton Group of
Age 75 Funds; and formerly, Director, Checkers Drive-In
Restaurant, Inc.; Chairman of the Board and Chief
Executive Officer, Florida Progress Corporation
(1982-1990) and Director of various of its subsidiaries.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
11
PAGE
<TABLE>
<CAPTION>
Positions and Offices
Name, Address and Age with the Company Principal Occupation During the Past Five Years
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
EDITH E. HOLIDAY Director Director (1993-present), Amerada Hess Corporation and
3239 38th Street, N.W. Hercules Incorporated; Director, Beverly Enterprises,
Washington, DC 20016 Inc. (1995-present) and H.J. Heinz Company
Age 46 (1994-present); director or trustee, as the case may be,
of 25 of the investment companies in the Franklin
Templeton Group of Funds; and formerly, Chairman
(1995-1997) and Trustee (1993-1997) of National Child
Research Center; 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).
- ------------------------------------------------------------------------------------------------------------------
* CHARLES B. JOHNSON Director, President, Chief Executive Officer and Director,
777 Mariners Island Blvd. Chairman and Vice Franklin Resources, Inc.; Chairman of the Board and
San Mateo, California 94404 President Director, Franklin Advisers, Inc., Franklin Advisory
Age 65 Services, Inc., Franklin Investment Advisory Services,
Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and
Franklin Templeton Services, Inc.; officer and/or
director or trustee, as the case may be, of most of the
other subsidiaries of Franklin Resources, Inc. and of 51
of the investment companies in the Franklin Templeton
Group of Funds; and, Director, General Host Corporation
(nursery and craft centers).
- ------------------------------------------------------------------------------------------------------------------
BETTY P. KRAHMER Director Director or Trustee of various civic associations;
2201 Kentmere Parkway director or trustee, as the case may be, of 21 of the
Wilmington, Delaware 19806 investment companies in the Franklin Templeton Group of
Age 68 Funds; and formerly, Economic Analyst, U.S. government.
- ------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN Director Chairman, White River Corporation (financial ser-
8212 Burning Tree Road vices); Director, Fund American Enterprises Holdings,
Bethesda, Maryland 20817 Inc., MCI Communications Corporation, CCC Information
Age 69 Services Group, Inc. (information services), MedImmune,
Inc. (biotechnology), Spacehab, Inc. (aerospace
services) and Real 3D (software); director or trustee,
as the case may be, of 50 of the investment companies in
the Franklin Templeton Group of Funds; and formerly,
Chairman, Hambrecht and Quist Group, Director, H & Q
Healthcare Investors, and Lockheed Martin Corporation
and President, National Association of Securities
Dealers, Inc.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
12
PAGE
<TABLE>
<CAPTION>
Positions and Offices
Name, Address and Age with the Company Principal Occupation During the Past Five Years
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FRED R. MILLSAPS Director Manager of personal investments (1978-present); Director
2665 N.E. 37th Drive of various business and nonprofit organizations;
Fort Lauderdale, Florida director or trustee, as the case may be, of 22 of the
33308 investment companies in the Franklin Templeton Group of
Age 69 Funds; and formerly, Chairman and Chief Executive
Officer of Landmark Banking Corporation (1969-1978),
Financial Vice President of Florida Power and Light
(1965-1969) and Vice President of the Federal Reserve
Bank of Atlanta (1958-1965).
- ------------------------------------------------------------------------------------------------------------------
CONSTANTINE DEAN Director Physician, Lyford Cay Hospital (1987-present); Director
TSERETOPOULOS of various nonprofit organizations; director or trustee,
Lyford Cay Hospital as the case may be, of 5 of the investment companies in
P.O. Box N-7776 the Franklin Templeton Group of Funds; and formerly,
Nassau, Bahamas Cardiology Fellow, University of Maryland (1985-1987)
Age 44 and Internal Medicine Intern, Greater Baltimore Medical
Center (1982-1985).
- ------------------------------------------------------------------------------------------------------------------
DONALD F. REED President Executive Vice President, Templeton Worldwide, Inc.;
1 Adelaide Street East, President, Templeton Investment Counsel, Inc.; President
Suite 2101 and Chief Executive Officer, Templeton Management
Toronto, Ontario Limited; Co-founder and Director of International
Canada M5C 3B8 Society of Financial Analysts; Chairman of the Canadian
Age 53 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 and Director, Franklin
777 Mariners Island Blvd. Resources, Inc.; Executive Vice President and Director,
San Mateo, California 94404 Franklin Templeton Distributors, Inc. and Franklin
Age 53 Templeton Services, Inc.; Executive Vice President,
Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or
trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 54 of
the investment companies in the Franklin Templeton Group
of Funds.
- ------------------------------------------------------------------------------------------------------------------
RUPERT H. JOHNSON, JR. Vice President Executive Vice President and Director, Franklin
777 Mariners Island Blvd. Resources, Inc. and Franklin Templeton Distributors,
San Mateo, California 94404 Inc.; President and Director, Franklin Advisers, Inc.;
Age 57 Senior Vice President and Director, Franklin Advisory
Services, Inc. and Franklin Investment Advisory
Services, Inc.; Director, Franklin/Templeton Investor
Services, Inc.; and officer and/or director or trustee,
as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 54 of the investment
companies in the Franklin Templeton Group of Funds.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
13
PAGE
<TABLE>
<CAPTION>
Positions and Offices
Name, Address and Age with the Company Principal Occupation During the Past Five Years
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DEBORAH R. GATZEK Vice President Senior Vice President and General Counsel, Franklin
777 Mariners Island Blvd. Resources, Inc.; Senior Vice President, Franklin
San Mateo, California 94404 Templeton Services, Inc. and Franklin Templeton
Age 49 Distributors, Inc.; Vice President, Franklin Advisers,
Inc. and Franklin Advisory Services, Inc.; Vice Pres-
ident, Chief Legal Officer and Chief Operating Officer,
Franklin Investment Advisory Services, Inc.; and officer
of 54 of the investment companies in the Franklin
Templeton Group of Funds.
- ------------------------------------------------------------------------------------------------------------------
CHARLES E. JOHNSON Vice President Senior Vice President and Director, Franklin Resources,
500 East Broward Blvd. Inc.; Senior Vice President, Franklin Templeton
Fort Lauderdale, Florida Distributors, Inc.; President and Director, Templeton
33394-3091 Worldwide, Inc.; President, Chief Executive Officer,
Age 41 Chief Investment Officer and Director, Franklin
Institutional Services Corporation; Chairman and
Director, Templeton Investment Counsel, Inc.; Vice
President, Franklin Advisers, Inc.; officer and/or
director of some of the subsidiaries of Franklin
Resources, Inc.; and officer and/or director or trustee,
as the case may be, of 35 of the investment companies in
the Franklin Templeton Group of Funds.
- ------------------------------------------------------------------------------------------------------------------
MARK G. HOLOWESKO Vice President President and Chief Investment Officer, Templeton Global
Lyford Cay Advisors Limited; Executive Vice President and Director,
Nassau, Bahamas Templeton Worldwide, Inc.; officer of 21 of the
Age 38 investment companies in the Franklin Templeton Group of
Funds; and formerly, Investment Administrator with
RoyWest Trust Corporation (Bahamas) Limited (1984-1985).
- ------------------------------------------------------------------------------------------------------------------
MARTIN L. FLANAGAN Vice President Senior Vice President and Chief Financial Officer,
777 Mariners Island Blvd. Franklin Resources, Inc.; Executive Vice President and
San Mateo, California 94404 Director, Templeton Worldwide, Inc.; Executive Vice
Age 37 President, Chief Operating Officer and Director,
Templeton Investment Counsel, Inc.; Senior Vice
President and Treasurer, Franklin Advisers, Inc.;
Treasurer, Franklin Advisory Services, Inc.; Treasurer
and Chief Financial Officer, Franklin Investment
Advisory Services, Inc.; President, Franklin Templeton
Services, Inc.; Senior Vice President,
Franklin/Templeton Investor Services, Inc.; and officer
and/or director or trustee, as the case may be, of 54 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 Asset
Suite 908 Management Ltd.; officer of 8 of the investment
Hong Kong companies in the Franklin Templeton Group of Funds; and
Age 61 formerly, President of International Investment Trust
Company Limited (investment manager of Taiwan R.O.C.
Fund) (1986-1987) and Director, Vickers da Costa, Hong
Kong (1983-1986).
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
14
PAGE
<TABLE>
<CAPTION>
Positions and Offices
Name, Address and Age with the Company Principal Occupation During the Past Five Years
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
JOHN R. KAY Vice President Vice President and Treasurer, Templeton Worldwide, Inc.;
500 East Broward Blvd. Assistant Vice President, Franklin Templeton
Fort Lauderdale, Florida Distributors, Inc.; officer of 25 of the investment
33394-3091 companies in the Franklin Templeton Group of Funds; and
Age 57 formerly, Vice President and Controller, Keystone Group,
Inc.
- ------------------------------------------------------------------------------------------------------------------
THOMAS LATTA Vice President Vice President, Templeton Global Bond Managers, a
500 East Broward Blvd. division of Templeton Investment Counsel, Inc.; and
Fort Lauderdale, Florida formerly, Portfolio Manager at Forester & Hairston
33394-3091 (1988-1990) and Investment advisor at Merrill Lynch
Age 37 Capital Markets (1981-1988).
- ------------------------------------------------------------------------------------------------------------------
ELIZABETH M. KNOBLOCK Vice President- General Counsel, Secretary and a Senior Vice President,
500 East Broward Blvd. Compliance Templeton Investment Counsel, Inc.; Senior Vice
Fort Lauderdale, Florida President, Templeton Global Investors, Inc.; officer of
33394-3091 21 of the investment companies in the Franklin Templeton
Age 43 Group of Funds; and formerly, Vice President and
Associate General Counsel, Kidder Peabody & Co. Inc.
(1989-1990), Assistant General Counsel, Gruntal & Co.,
Inc. (1988), Vice President and Associate General
Counsel, Shearson Lehman Hutton Inc. (1988), Vice
President and Assistant General Counsel, E.F. Hutton &
Co. Inc. (1986-1988), and Special Counsel of the
Division of Investment Management of the U.S. Securities
and Exchange Commission (1984-1986).
- ------------------------------------------------------------------------------------------------------------------
JAMES R. BAIO Treasurer Certified Public Accountant; Treasurer, Franklin Mutual
500 East Broward Blvd. Advisers, Inc.; Senior Vice President, Templeton
Fort Lauderdale, Florida Worldwide, Inc., Templeton Global Investors, Inc. and
33394-3091 Templeton Funds Trust Company; officer of 22 of the
Age 44 investment companies in the Franklin Templeton Group of
Funds; and formerly, Senior Tax Manager for Ernst &
Young (certified public accountants) (1977-1989).
- ------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN Secretary Senior Vice President, Templeton Worldwide, Inc.; Senior
500 East Broward Blvd. Vice President, Templeton Global Investors, Inc.;
Fort Lauderdale, Florida officer of 21 of the investment companies in the
33394-3091 Franklin Templeton Group of Funds; and formerly, Deputy
Age 50 Director of the Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman,
Counselor 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).
</TABLE>
- --------------------------------------------------------------------------------
* Nicholas F. Brady and Charles B. Johnson are "interested persons" as defined
by the Investment Company under the 1940 Act. The 1940 Act limits the percentage
of interested persons that can comprise a fund's board of directors. 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 is Chairman and shareholder of Darby Emerging Markets Investments LDC,
which is 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 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
15
PAGE
and committee meetings. Currently, the Company pays the nonaffiliated Board
members and Mr. Brady an annual retainer of $10,000, a fee of $800 per Board
meeting, and its portion of a flat fee of $2,000 for each audit committee
meeting and/or nominating and compensation committee meeting attended. As shown
above, the nonaffiliated Board members also serve as directors or trustees 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.
<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...................... $13,200 $344,642 50
Nicholas F. Brady..................... 13,200 119,675 21
Frank J. Crothers..................... 15,280 35,300 5
S. Joseph Fortunato................... 13,200 361,562 52
John Wm. Galbraith.................... 13,200 117,675 20
Andrew H. Hines, Jr. ................. 13,200 144,175 22
Edith E. Holiday...................... 13,200 72,875 25
Betty P. Krahmer...................... 13,200 119,675 21
Gordon S. Macklin..................... 13,200 337,292 50
Fred R. Millsaps...................... 14,056 144,175 22
Constantine D. Tseretopoulos.......... 14,240 33,775 5
</TABLE>
* For the fiscal year ended December 31, 1997.
** For the calendar year ended December 31, 1997.
*** 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 57 registered investment companies, with approximately 170 U.S. based
funds or series.
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 or
trustee. 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 17, 1998, the officers and Board members did not own of record or
beneficially any shares of the funds. Many of the Board members own shares in
other funds in the Franklin Templeton Group of Funds. Charles B. Johnson and
Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively, of
Charles E. Johnson.
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.,
("Investment Counsel"). The Investment Manager of Emerging Markets Series is
Templeton Asset Management Ltd. -- Hong Kong branch ("Asset Management Hong
Kong"). Asset Management Hong Kong renders its services to Emerging Markets
Series from outside the U.S. The Investment Manager of Emerging Fixed Income
Markets Series is Investment Counsel, through its Global Bond Managers division
(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
16
PAGE
its own account, that may differ from action taken by the Investment Manager on
behalf of a fund. Similarly, with respect to the funds, the Investment Managers
are not obligated to recommend, buy or sell, or to refrain from recommending,
buying or selling any security that an Investment Manager and access persons, as
defined by the 1940 Act, may buy or sell for its or their own account or for the
accounts of any other funds. The Investment Managers are not obligated to
refrain from investing in securities held by the funds or other funds they
manage. Of course, any transactions for the accounts of the Investment Managers
and other access persons will be made in compliance with the funds' Code of
Ethics. Please see "Miscellaneous Information -- Summary of Code of Ethics."
MANAGEMENT FEES. Under its management agreement, each fund pays its Investment
Manager a management fee at the end of each calendar month. Growth Series and
Foreign Equity Series each pay Investment Counsel a monthly fee equal on an
annual basis to 0.70% of its average daily net assets during the year. For the
fiscal years ended December 31, 1997, 1996 and 1995, Investment Counsel received
from Growth Series fees of $1,946,728, $1,656,913, and $1,469,015, respectively.
For the fiscal years ended December 31, 1997, 1996 and 1995, Investment Counsel
received from Foreign Equity Series fees of $23,912,568, $16,525,094 and
$9,916,869, respectively. Emerging Markets Series pays Asset Management Hong
Kong a monthly fee equal on an annual basis to 1.25% of its average daily net
assets during the year. For the fiscal years ended December 31, 1997, 1996 and
1995, Asset Management Hong Kong received from Emerging Markets Series fees of
$25,766,850, $15,676,692, and $8,488,442, respectively.
Emerging Fixed Income Markets Series pays Investment Counsel a monthly fee equal
on an annual basis to 0.70% of its average daily net assets during the year. For
the fiscal period ended December 31, 1997, Emerging Fixed Income Markets Series'
management fees, before any advance waiver, totaled $8,484. Under an agreement
by Investment Counsel to waive its fees, Emerging Fixed Income Markets Series
paid no management fees.
MANAGEMENT AGREEMENTS. The management agreements between the Company, on behalf
of each fund, and the Investment Managers are in effect until April 30, 1999.
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 respective fund's outstanding voting securities on 60 days'
written notice to Investment Manager, or by the Investment Manager on 60 days'
written notice to the fund, and will automatically terminate in the event of its
assignment, as defined in the 1940 Act.
ADMINISTRATIVE SERVICES. Since October 1, 1996, FT Services has provided certain
administrative services and facilities for the funds. Prior to that date,
Templeton Global Investors, Inc. provided the same services to 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 over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
The fee is allocated between the funds according to their respective average
daily net assets. For the fiscal years ended December 31, 1997, 1996 and 1995,
Growth Series paid administration fees totaling $236,356, $211,998 and $208,881,
respectively. For the fiscal years ended December 31, 1997, 1996 and 1995,
Foreign Equity Series paid administration fees totaling $2,903,341, $2,117,449
and $1,412,755, respectively. For the fiscal years ended December 31, 1997, 1996
and 1995, Emerging Markets Series paid administration fees totaling $1,751,904,
$1,127,833 and $681,225, respectively.
For the fiscal period ended December 31, 1997, Emerging Fixed Income Markets
Series' administration fees, before any advance waiver, totaled $1,030. Under an
agreement by FT Services to waive its fees, Emerging Fixed Income Markets Series
paid no administration fees.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the funds' shareholder servicing agent and acts as the funds'
17
PAGE
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. The funds may also reimburse Investor
Services for certain out-of-pocket expenses.
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 each fund's 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,
1997, their auditing services consisted of rendering an opinion on the financial
statements of each fund which are included in the respective fund's Annual
Report to Shareholders for the fiscal year ended December 31, 1997, and review
of the funds' filings with the SEC.
HOW DO THE FUNDS BUY SECURITIES
FOR THEIR PORTFOLIOS?
- ---------------------------------------------------------
The Investment Managers selects brokers and dealers to execute the funds'
portfolio transactions 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 seeks to obtain
prompt execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid by a fund
is negotiated between the Investment Manager and the broker executing the
transaction. The determination and evaluation of the reasonableness of the
brokerage commissions paid are based to a large degree on the professional
opinions of the persons responsible for 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.
An Investment Manager may pay certain brokers commissions that are higher than
those another broker may charge, if the Investment Manager determines in good
faith that the amount paid is reasonable in relation to the value of the
brokerage and research services it receives. This may be viewed in terms of
either the particular transaction or the Investment Manager's overall
responsibilities to client accounts over which it exercises investment
discretion. The services that brokers may provide to an Investment Manager
include, among others, supplying information about particular companies,
markets, countries, or local, regional, national or transnational economies,
statistical data, quotations and other securities pricing information, and other
information that provides lawful and appropriate assistance to the Investment
Manager in carrying out its investment advisory responsibilities. These services
may not always directly benefit the fund. They must, however, be of value to an
Investment Manager in carrying out its 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 an Investment Manager from broker-dealers
effecting transactions in portfolio securities. The allocation of transactions
in order to obtain additional research services permits an Investment Manager to
supplement its 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, each Investment Managers and its
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 a fund's 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.
18
PAGE
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 a fund is concerned. In other cases it is possible that the ability to
participate in volume transactions may improve execution and reduce transaction
costs to the fund.
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.
During the fiscal years ended December 31, 1997, 1996 and 1995, Growth Series
paid brokerage commissions totaling $391,067, $173,658 and $302,096,
respectively. During the fiscal years ended December 31, 1997, 1996 and 1995,
Foreign Equity Series paid brokerage commissions totaling $2,666,430, $2,138,850
and $2,779,325, respectively. During the fiscal years ended December 31, 1997,
1996 and 1995, Emerging Markets Series paid brokerage commissions totaling
$6,813,142, $3,832,003 and $1,949,885, respectively. During the fiscal period
ended December 31, 1997, Emerging Fixed Income Markets Series paid no brokerage
commissions.
As of December 31, 1997, no fund owned securities of its 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.
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 a fund's particular investment
objective exist immediately. This money will then be withdrawn from the
short-term, money
19
PAGE
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. Payments under the plan will be made
from the redemption of an equivalent amount of shares in your account, generally
on the 25th day of the month in which a payment is scheduled. If the 25th falls
on a weekend or holiday, we will process the redemption on the next business
day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from a fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
A fund may discontinue a systematic withdrawal plan by notifying you in writing
and will automatically discontinue a systematic withdrawal plan if all shares in
your account are withdrawn or if the fund receives notification of the
shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the funds in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The funds have committed themselves to pay in cash (by
check) all requests for redemption by any shareholder of record, limited in
amount, however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the funds' net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the SEC. In the case of
redemption requests in excess of these amounts, the Board reserves the right to
make payments in whole or in part in securities or other assets of the funds, in
case of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the funds. In these circumstances,
the securities distributed would be valued at the price used to compute the
pertinent fund's net assets and you may incur brokerage fees in converting the
securities to cash. The funds do not intend to redeem illiquid securities in
kind. If this happens, however, you may not be able to recover your investment
in a timely manner.
SUBSTANTIAL REDEMPTIONS. A number of fund shareholders are institutions with
significant shareholdings that may be redeemed at any time. If a substantial
number or amount of redemptions should occur within a relatively short period of
time, a fund may have to sell portfolio securities it would otherwise hold and
incur the additional transactions costs. The sale of portfolio securities may
result in the recognition of capital gains, which will be distributed annually
and generally will be taxable to shareholders as ordinary income or capital
gains. Shareholders are notified annually regarding the federal tax status of
distributions they receive (see "Taxes").
GENERAL INFORMATION
If dividend checks are returned to a fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither a fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. A fund is not responsible for tracking down uncashed checks, unless a
check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional 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
20
PAGE
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 close of the NYSE, normally
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, Martin Luther King Jr. 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 a fund's Investment
Manager.
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 close of trading on the
NYSE, if that is earlier. The value is then coverted into its U.S. dollar
equivalent at the foreign exchange rate in effect at noon, New York time, on the
day the value of the foreign security is determined. If no sale is reported at
that time, the foreign security is valued within the range of the most recent
quoted bid and ask prices. 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 U.S. corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the Net
Asset Value of the funds' 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 close of the NYSE that will not be reflected
in the computation of the funds' 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.
21
PAGE
ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES
- ---------------------------------------------------------
DISTRIBUTIONS
DISTRIBUTIONS OF NET INVESTMENT INCOME. A fund receives income generally in the
form of dividends, interest, original issue, market and acquisition discount,
and other income derived from its investments. This income, less expenses
incurred in the operation of the fund, constitutes its net investment income
from which dividends may be paid to you. Any distributions by the fund from such
income will be taxable to you as ordinary income, whether you take them in cash
or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS. A fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income. Distributions
paid from long-term capital gains realized by a fund will be taxable to you as
long-term capital gain, regardless of how long you have held your shares in the
fund. Any net short-term or long-term capital gains realized by the fund (net of
any capital loss carryovers) generally will be distributed once each year, and
may be distributed more frequently, if necessary, in order to reduce or
eliminate federal excise or income taxes on the fund.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), a fund is required to
report the capital gain distributions paid to you from gains realized on the
sale of portfolio securities using the following categories:
"28% RATE GAINS": gains resulting from securities sold by a fund after July 28,
1997 that were held for more than one year but not more than 18 months, and
securities sold by a fund before May 7, 1997 that were held for more than one
year. These gains will be taxable to individual investors at a maximum rate of
28%.
"20% RATE GAINS": gains resulting from securities sold by a fund after July 28,
1997 that were held for more than 18 months, and under a transitional rule,
securities sold by a fund between May 7 and July 28, 1997 (inclusive) that were
held for more than one year. These gains will be taxable to individual investors
at a maximum rate of 20% for individual investors in the 28% or higher federal
income tax brackets, and at a maximum rate of 10% for investors in the 15%
federal income tax bracket.
The 1997 Act also provides for a new maximum rate of tax on capital gains of 18%
for individuals in the 28% or higher federal income tax brackets and 8% for
individuals in the 15% federal income tax bracket for "qualified 5-year gains."
For individuals in the 15% bracket, qualified 5-year gains are net gains on
securities held for more than 5 years which are sold after December 31, 2000.
For individuals who are subject to tax at higher rates, qualified 5-year gains
are net gains on securities which are purchased after December 31, 2000 and are
held for more than 5 years. Taxpayers subject to tax at the higher rates may
also make an election for shares held on January 1, 2001 to recognize gain on
their shares in order to qualify such shares as qualified 5-year property.
A fund will advise you at the end of each calendar year of the amount of its
capital gain distributions paid during the calendar year that qualify for these
maximum federal tax rates. Additional information on reporting these
distributions on your personal income tax returns is available in Franklin
Templeton's Tax Information Handbook. This handbook has been revised to include
1997 Act tax law changes. Please call Fund Information to request a copy.
Questions concerning each investor's personal tax reporting should be addressed
to the investor's personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions which are declared in
October, November or December and paid to you in January of the following year,
will be treated for tax purposes as if they had been received by you on December
31 of the year in which they were declared. A fund will report this income to
you on your Form 1099-DIV for the year in which these distributions were
declared.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS. Most foreign exchange gains
realized on the sale of debt instruments are treated as ordinary income by a
fund. Similarly, foreign exchange losses realized by a fund on the sale of debt
instruments are generally treated as ordinary losses by the fund. These gains
when distributed will be taxable to you as ordinary dividends, and any losses
will reduce the fund's ordinary income otherwise available for distribution to
you. This treatment could increase or reduce the fund's ordinary income
distributions to you, and may cause some or all of the fund's previously
distributed income to be classified as a return of capital.
FOREIGN TAX CREDITS INCLUDED IN DISTRIBUTIONS. A fund may be subject to foreign
withholding taxes on income from certain of its foreign securities. If more than
50% of the total assets of the fund at the end of its fiscal year are invested
in securities of foreign corporations, the fund may elect to pass-through to you
your pro rata share of foreign taxes paid by the
22
PAGE
fund. If this election is made, you will be (i) required to include in your
gross income your pro rata share of foreign source income (including any foreign
taxes paid by the fund), and (ii) entitled to either deduct your share of such
foreign taxes in computing your taxable income or to claim a credit for such
taxes against your U.S. income tax, subject to certain limitations under the
Code. If the fund elects to pass through to you the foreign income taxes that it
has paid, you will be informed at the end of the calendar year of the amount of
foreign taxes paid and foreign source income that must be included on your
federal income tax return. If the fund invests 50% or less of its total assets
in securities of foreign corporations, it will not be entitled to pass-through
to you your pro-rata share of the foreign taxes paid by the fund. In this case,
these taxes will be taken as a deduction by the fund, and the income reported to
you will be the net amount after these deductions.
The 1997 Act also simplifies the procedures by which investors in funds that
invest in foreign securities can claim tax credits on their individual income
tax returns for the foreign taxes paid by a fund. These provisions will allow
investors who claim a credit for foreign taxes paid of $300 or less on a single
return or $600 or less on a joint return during any year (all of which must be
reported on IRS Form 1099-DIV from the fund to the investor) to bypass the
burdensome and detailed reporting requirements on the supporting foreign tax
credit schedule (Form 1116) and report foreign taxes paid directly on page 2 of
Form 1040. You should note that this simplified procedure will not be available
until calendar year 1998.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. A fund will inform you of the
amount and character of your distributions at the time they are paid, and will
advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held fund shares for a full year, you may have designated and distributed to you
as ordinary income or capital gain a percentage of income that is not equal to
the actual amount of such income earned during the period of your investment in
the fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. The funds have elected
to be treated as regulated investment companies under Subchapter M of the Code,
have qualified as such for their most recent fiscal year, and intend to so
qualify during the current fiscal year. The Board reserves the right not to
maintain the qualification of a fund as a regulated investment company if it
determines such course of action to be beneficial to you. In such case, a fund
will be subject to federal, and possibly state, corporate taxes on its taxable
income and gains, and distributions to you will be taxed as ordinary dividend
income to the extent of the fund's available earnings and profits.
In order to qualify as a regulated investment company for tax purposes, a fund
must meet certain specific requirements, including:
- - The fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. government securities and securities of other
regulated investment companies) can exceed 25% of the fund's total assets,
and, with respect to 50% of the fund's total assets, no investment (other than
cash and cash items, U.S. government securities and securities of other
regulated investment companies) can exceed 5% of the fund's total assets;
- - The fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the sale
or disposition of stock, securities or foreign currencies, or other income
derived with respect to its business of investing in such stock, securities,
or currencies; and
- - The fund must distribute to its shareholders at least 90% of its net
investment company taxable income and net tax-exempt income for each of its
fiscal years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires a fund to distribute at
least 98% of its taxable ordinary income earned during the calendar year and 98%
of its capital gain net income earned during the twelve month period ending
October 31 (in addition to undistributed amounts from the prior year) to you by
December 31 of each year in order to avoid federal excise taxes. The funds
intend to declare and pay sufficient dividends in December (or in January that
are treated by you as received in December) but do not guarantee and can give no
assurances that their distributions will be sufficient to eliminate all such
taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. The tax law requires
that you recognize a gain or loss in an amount equal to the difference between
your tax basis and the amount you received in exchange for your shares, subject
to the rules described below. If you hold your shares as a capital asset, the
gain or loss that you realize will be a capital gain or loss,
23
PAGE
and will be long-term for federal income tax purposes if you have held your
shares for more than one year at the time of redemption or exchange. Any loss
incurred on the redemption or exchange of shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by a fund on those shares. The holding periods
and categories of capital gain that apply under the 1997 Act are described above
in the "Distributions" section.
All or a portion of any loss that you realize upon the redemption of your fund
shares will be disallowed to the extent that you purchase other shares in the
fund (through reinvestment of dividends or otherwise) within 30 days before or
after your share redemption. Any loss disallowed under these rules will be added
to your tax basis in the new shares you purchase.
U.S. GOVERNMENT OBLIGATIONS. Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment requirements that must be met by a
fund. Investments in GNMA/FNMA securities, bankers' acceptances, commercial
paper and repurchase agreements collateralized by U.S. government securities do
not generally qualify for tax-free treatment. At the end of each calendar year,
a fund will provide you with the percentage of any dividends paid that may
qualify for tax-free treatment on your personal income tax return. You should
consult with your own tax advisor to determine the application of your state and
local laws to these distributions. Because the rules on exclusion of this income
are different for corporations, corporate shareholders should consult with their
corporate tax advisors about whether any of their distributions may be exempt
from corporate income or franchise taxes.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. As a corporate shareholder, you
should note that only a small percentage of the dividends paid by Growth Series
for the most recent calendar year qualified for the dividends-received
deduction. You will be permitted in some circumstances to deduct these qualified
dividends, thereby reducing the tax that you would otherwise be required to pay
on these dividends. The dividends-received deduction will be available only with
respect to dividends designated by a fund as eligible for such treatment.
Dividends so designated by a fund must be attributable to dividends earned by
the fund from U.S. corporations that were not debt financed.
Under the 1997 Act, the amount that a fund may designate as eligible for the
dividends-received deduction will be reduced or eliminated if the shares on
which the dividends were earned by the fund were debt financed or held by the
fund for less than a 46 day period during a 90 day period beginning 45 days
before the ex-dividend date of the corporate stock. Similarly, if your fund
shares are debt financed or held by you for less than this same 46 day period,
then the dividends-received deduction may also be reduced or eliminated. Even if
designated as dividends eligible for the dividends-received deduction, all
dividends (including the deducted portion) must be included in your alternative
minimum taxable income calculation.
INVESTMENT IN COMPLEX SECURITIES. A fund's investment in options, futures
contracts and forward contracts, including transactions involving actual or
deemed short sales or foreign exchange gains or losses are subject to many
complex and special tax rules. Over-the-counter options on debt securities and
equity options, including options on stock and on narrow-based stock indexes,
will be subject to tax under Section 1234 of the Code, generally producing a
long-term or short-term capital gain or loss upon exercise, lapse, or closing
out of the option or sale of the underlying stock or security. Certain other
options, futures and forward contracts entered into by a fund are generally
governed by Section 1256 of the Code. These "Section 1256" positions generally
include listed options on debt securities, options on broad-based stock indexes,
options on securities indexes, options on futures contracts, regulated futures
contracts and certain foreign currency contracts and options thereon.
Absent a tax election to the contrary, each such Section 1256 position held by a
fund will be marked-to-market (i.e., treated as if it were sold for fair market
value) on the last business day of the fund's fiscal year (and on other dates as
prescribed by the Code), and all gain or loss associated with fiscal year
transactions and mark-to-market positions at fiscal year end (except certain
currency gain or loss covered by Section 988 of the Code) will generally be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. Under legislation pending in technical corrections to the 1997 Act, the
60% long-term capital gain portion will qualify as 20% rate gain and will be
subject to tax to individual investors at a maximum rate of 20% for investors in
the 28% or higher federal income tax brackets, or at a maximum rate of 10% for
investors in the 15% federal income tax bracket. Even though marked-to-market,
gains and losses realized on foreign currency and foreign security investments
will generally be treated as ordinary income. The effect of Section 1256 mark-
24
PAGE
to-market rules may be to accelerate income or to convert what otherwise would
have been long-term capital gains into short-term capital gains or short-term
capital losses into long-term capital losses within a fund. The acceleration of
income on Section 1256 positions may require a fund to accrue taxable income
without the corresponding receipt of cash. In order to generate cash to satisfy
the distribution requirements of the Code, a fund may be required to dispose of
portfolio securities that it otherwise would have continued to hold or to use
cash flows from other sources such as the sale of fund shares. In these ways,
any or all of these rules may affect the amount, character and timing of income
distributed to you by a fund.
When a fund holds an option or contract which substantially diminishes the
fund's risk of loss with respect to another position of the fund (as might occur
in some hedging transactions), this combination of positions could be treated as
a "straddle" for tax purposes, possibly resulting in deferral of losses,
adjustments in the holding periods and conversion of short-term capital losses
into long-term capital losses. A fund may make certain tax elections for mixed
straddles (i.e., straddles comprised of at least one Section 1256 position and
at least one non-Section 1256 position) which may reduce or eliminate the
operation of these straddle rules.
The 1997 Act has also added new provisions for dealing with transactions that
are generally called "Constructive Sale Transactions." Under these rules, a fund
must recognize gain (but not loss) on any constructive sale of an appreciated
financial position in stock, a partnership interest or certain debt instruments.
A fund will generally be treated as making a constructive sale when it: 1)
enters into a short sale on the same property, 2) enters into an offsetting
notional principal contract, or 3) enters into a futures or forward contract to
deliver the same or substantially similar property. Other transactions
(including certain financial instruments called collars) will be treated as
constructive sales as provided in Treasury regulations to be published. There
are also certain exceptions that apply for transactions that are closed before
the end of the 30th day after the close of the taxable year.
Distributions paid to you by a fund of ordinary income and short-term capital
gains arising from the fund's investments, including investments in options,
forwards, and futures contracts, will be taxable to you as ordinary income. A
fund will monitor its transactions in such options and contracts and may make
certain other tax elections in order to mitigate the effect of the above rules.
INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES. The funds are
authorized to invest in foreign currency denominated securities. Such
investments, if made, will have the following additional tax consequences:
Under the Code, gains or losses attributable to fluctuations in foreign currency
exchange rates which occur between the time a fund accrues income (including
dividends), or accrues expenses which are denominated in a foreign currency, and
the time the fund actually collects such income or pays such expenses generally
are treated as ordinary income or loss. Similarly, on the disposition of debt
securities denominated in a foreign currency and on the disposition of certain
options, futures, and forward contracts, gain or loss attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of its disposition are also treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of a fund's
net investment company taxable income, which, in turn, will affect the amount of
income to be distributed to you by the fund.
If a fund's Section 988 losses exceed the fund's other net investment company
taxable income during a taxable year, the fund generally will not be able to
make ordinary dividend distributions to you for that year, or distributions made
before the losses were realized will be recharacterized as return of capital
distributions for federal income tax purposes, rather than as an ordinary
dividend or capital gain distribution. 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 to you.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANY SECURITIES. A fund 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 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 an "excess distribution" with respect to PFIC stock, the fund
itself may be subject to U.S. federal income tax on a portion of the
distribution, whether or not the corresponding income is distributed by the fund
to you. In general, under the PFIC rules, an excess distribution is treated as
having been realized ratably over the period during
25
PAGE
which the fund held the PFIC shares. The 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. In this case, you would not be
permitted to claim a credit on your own tax return for the tax paid by the fund.
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. This may have
the effect of increasing fund distributions to you that are treated as ordinary
dividends rather than long-term capital gain dividends.
A fund 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 PFIC during such period. If this election were made, the special
rules, discussed above, relating to the taxation of excess distributions, would
not apply. In addition, the 1997 Act provides for another election that would
involve marking-to-market a fund's PFIC shares at the end of each taxable year
(and on certain other dates as prescribed in the Code), with the result that
unrealized gains would be treated as though they were realized. The fund would
also be allowed an ordinary deduction for the excess, if any, of the adjusted
basis of its investment in the PFIC stock over its fair market value at the end
of the taxable year. This deduction would be limited to the amount of any net
mark-to-market gains previously included with respect to that particular PFIC
security. If a fund were to make this second PFIC election, tax at the fund
level under the PFIC rules would generally be eliminated.
The application of the PFIC rules may affect, among other things, the amount of
tax payable by a fund (if any), the amounts distributable to you by a fund, the
time at which these distributions must be made, and whether these distributions
will be classified as ordinary income or capital gain distributions to you.
You should be aware that it is not always possible at the time shares of a
foreign corporation are acquired to ascertain that the foreign corporation is a
PFIC, and that there is always a possibility that a foreign corporation will
become a PFIC after a fund acquires shares in that corporation. While a fund
will generally seek to avoid investing in PFIC shares to avoid the tax
consequences detailed above, there are no guarantees that it will do so and it
reserves the right to make such investments as a matter of its fundamental
investment policy.
CONVERSION TRANSACTIONS. Gains realized by a fund from transactions that are
deemed to be "conversion transactions" under the Code, and that would otherwise
produce capital gain may be recharacterized as ordinary income to the extent
that such gain does not exceed an amount defined as the "applicable imputed
income amount". A conversion transaction is any transaction in which
substantially all of a fund's expected return is attributable to the time value
of the fund's net investment in such transaction, and any one of the following
criteria are met:
1. there is an acquisition of property with a substantially contemporaneous
agreement to sell the same or substantially identical property in the
future;
2. the transaction is an applicable straddle;
3. the transaction was marketed or sold to the fund on the basis that it would
have the economic characteristics of a loan but would be taxed as capital
gain; or
4. the transaction is specified in Treasury regulations to be promulgated in
the future.
The applicable imputed income amount, which represents the deemed return on the
conversion transaction based upon the time value of money, is computed using a
yield equal to 120 percent of the applicable federal rate, reduced by any prior
recharacterizations under this provision or the provisions of Section 263(g) of
the Code dealing with capitalized carrying costs.
STRIPPED PREFERRED STOCK. Occasionally, a fund may purchase "stripped preferred
stock" that is subject to special tax treatment. Stripped preferred stock is
defined as certain preferred stock issues where ownership of the stock has been
separated from the right to receive dividends that have not yet become payable.
The stock must have a fixed redemption price, must not participate substantially
in the growth of the issuer, and must be limited and preferred as to dividends.
The difference between the redemption price and purchase price is taken into
fund income over the term of the instrument as if it were original issue
discount. The amount that must be included in each period generally depends on
the original yield to maturity, adjusted for any prepayments of principal.
26
PAGE
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT (MD) BONDS. A
fund's investments in zero coupon bonds, bonds issued or acquired at a discount,
delayed interest bonds, or bonds that provide for payment of interest-in-kind
(PIK) may cause the fund to recognize income and make distributions to you prior
to its receipt of cash payments. Zero coupon and delayed interest bonds are
normally issued at a discount and are therefore generally subject to tax
reporting as OID obligations. A fund is required to accrue as income a portion
of the discount at which these securities were issued, and to distribute such
income each year (as ordinary dividends) in order to maintain its qualification
as a regulated investment company and to avoid income reporting and excise taxes
at the fund level. PIK bonds are subject to similar tax rules concerning the
amount, character and timing of income required to be accrued by a fund. Bonds
acquired in the secondary market for a price less than their stated redemption
price, or revised issue price in the case of a bond having OID, are said to have
been acquired with market discount. For these bonds, a fund may elect to accrue
market discount on a current basis, in which case the fund will be required to
distribute any such accrued discount. If a fund does not elect to accrue market
discount into income currently, gain recognized on sale will be recharacterized
as ordinary income instead of capital gain to the extent of any accumulated
market discount on the obligation.
DEFAULTED OBLIGATIONS. A fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy these distribution requirements, a fund may be required
to dispose of portfolio securities that it otherwise would have continued to
hold or to use cash flows from other sources such as the sale of fund shares.
THE FUNDS' UNDERWRITER
- ---------------------------------------------------------
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of each fund's shares. The
underwriting agreement with respect to a fund will continue in effect for
successive annual periods if its continuance is specifically approved at least
annually by a vote of the Board or by a vote of the holders of a majority of
that fund's outstanding voting securities, and in either event by a majority
vote of the Board members who are not parties to the underwriting agreement or
interested persons of any such party (other than as members of the Board), cast
in person at a meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may be terminated by
either party on 60 days' written notice.
Distributors pays the expenses of the distribution of each fund's shares,
including advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The Company pays the expenses
of preparing and printing amendments to its registration statement and
prospectuses (other than those necessitated by the activities of Distributors)
and of sending prospectuses to existing shareholders.
HOW DO THE FUNDS MEASURE PERFORMANCE?
- ---------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the funds be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return quotations used by the funds are based on the
standardized methods of computing performance mandated by the SEC. If a Rule
12b-1 plan is adopted, performance figures reflect fees from the date of the
plan's implementation. An explanation of these and other methods used by the
funds to compute or express performance follows. Regardless of the method used,
past performance does not guarantee future results, and is an indication of the
return to shareholders only for the limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over the periods indicated below that
would equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes the maximum front-end sales charge is deducted
from the initial $1,000 purchase, and 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 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.
27
PAGE
The average annual total return of Growth Series for the one-year period ended
December 31, 1997 and for the period from commencement of operations on May 3,
1993 through December 31, 1997 was 12.3%, and 15.0%, respectively. The average
annual total return of Foreign Equity Series for the one- and five-year periods
ended December 31, 1997 and for the period from commencement of operations on
October 18, 1990 through December 31, 1997 was 11.4%, 15.5% and 12.9%,
respectively. The average annual total return of Emerging Markets Series for the
one-year period ended December 31, 1997 and for the period from commencement of
operations on May 3, 1993 through December 31, 1997 was -11.3%, and 4.5%,
respectively. The average annual total return of Emerging Fixed Income Markets
Series for the period from commencement of operations on June 4, 1997 through
December 31, 1997 was 12.4%.
These figures were calculated according to the SEC formula:
P (1+T)(n) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
$1,000 purchase, and 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 the average
return over the periods indicated above. The cumulative total return of Growth
Series for the one-year period ended December 31, 1997 and for the period from
commencement of operations on May 3, 1993 through December 31, 1997 was 12.3%,
and 91.7%, respectively. The cumulative total return of Foreign Equity Series
for the one- and five-year periods ended December 31, 1997 and for the period
from commencement of operations on October 18, 1990 through December 31, 1997
was 11.4%, 105.7% and 139.4%, respectively. The cumulative total return of
Emerging Markets Series for the one-year period ended December 31, 1997 and for
the period from commencement of operations on May 3, 1993 through December 31,
1997 was -11.3%, and 22.6%, respectively. The cumulative total return of
Emerging Fixed Income Markets Series for the period from commencement of
operations on June 4, 1997 through December 31, 1997 was 12.4%.
VOLATILITY
Occasionally statistics may be used to show a fund's volatility or risk.
Measures of volatility or risk are generally used to compare a fund's Net Asset
Value or performance to a market index. One measure of volatility is beta. Beta
is the volatility of a fund relative to the total market, as represented by an
index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
Sales literature referring to the use of a fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The funds may include in their advertising or sales material information
relating to investment goals and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in a fund may satisfy your
investment goal, 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 invest-
28
PAGE
ments, indices, and averages. These comparisons may include, but are not limited
to, the following examples:
(i) unmanaged indices so that you may compare a fund's results with those of a
group of unmanaged securities widely regarded by investors as representative of
the securities market in general; (ii) other groups of mutual funds tracked by
Lipper Analytical Services, Inc., a widely used independent research firm that
ranks mutual funds by overall performance, investment goals and assets, or
tracked by other services, companies, publications, or persons who rank mutual
funds on overall performance or other criteria; and (iii) the Consumer Price
Index (measure for inflation) to assess the real rate of return from an
investment in a fund. Unmanaged indices may assume the reinvestment of dividends
but generally do not reflect deductions for administrative and management costs
and expenses.
From time to time, the funds and the Investment Managers may also refer to the
following information:
(a) an Investment Manager's and its 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(R) 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(R) or a similar financial organization.
(d) The geographic and industry distribution of each fund's portfolio and the
fund's top ten holdings.
(e) The gross national product and populations, including age characteristics,
literacy rates, foreign investment improvements due to a liberalization of
securities laws and a reduction of foreign exchange controls, and improving
communication technology, of various countries as published by various
statistical organizations.
(f) To assist investors in understanding the different returns and risk
characteristics of various investments, the funds may show historical
returns of various investments and published indices (e.g., Ibbotson
Associates, Inc. Charts and Morgan Stanley EAFE -- Index).
(g) The major industries located in various jurisdictions as published by the
Morgan Stanley Index.
(h) Rankings by DALBAR Surveys, Inc. with respect to mutual fund shareholder
services.
(i) Allegorical stories illustrating the importance of persistent long-term
investing.
(j) The funds' portfolio turnover rates and their rankings relative to industry
standards as published by Lipper Analytical Services, Inc. or Morningstar,
Inc.
(k) A description of the Templeton organization's investment management
philosophy and approach, including its worldwide search for undervalued or
"bargain" securities and its diversification by industry, nation and type of
stocks or other securities.
(l) The number of shareholders in the funds or the aggregate number of
shareholders of the open-end investment companies in the Franklin Templeton
Group of Funds or the dollar amount of fund and private account assets
under management.
(m) Comparison of the characteristics of various emerging markets, including
population, financial and economic conditions.
(n) Quotations from the Templeton organization's founder, Sir John Templeton,*
advocating the virtues of diversification and long-term investing, including
the following:
- "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."
29
PAGE
- "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 performance 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 a fund's shares can be expected to
increase. CDs are frequently insured by an agency of the U.S. government. An
investment in a 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 a fund's portfolio, 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 fund to calculate its figures. In addition,
there can be no assurance that a fund will continue its performance as compared
to these other averages.
MISCELLANEOUS INFORMATION
- ---------------------------------------------------------
The funds may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
funds cannot guarantee that these goals will be met.
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 50 years and
now services more than 3 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, a pioneer in international
investing. The Mutual Series team, 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 $232 billion in assets under
management for more than 6 million U.S. based mutual fund shareholder and other
accounts. The Franklin Templeton Group of Funds offers 120 U.S. based open-end
investment companies to the public. Each fund may identify itself by its NASDAQ
symbol or CUSIP number.
30
PAGE
As of April 17, 1998, the principal shareholders of the funds, beneficial or of
record, were as follows:
<TABLE>
<CAPTION>
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
- ---------------- ------------ ----------
<S> <C> <C>
GROWTH SERIES
T. Rowe Price, Trustee...................................... 2,956,149 33.06%
FBO Honeywell
10090 Red Run Blvd.
Owings Mills, MD 21117
Peter Norton, Trustee....................................... 2,738,094 30.62%
Norton Family CRU Trust
225 Arizona Avenue
2nd Floor West
Santa Monica, CA 90401-1210
Peter Norton, Trustee....................................... 947,857 10.60%
Norton Family Foundation Trust
225 Arizona Avenue
2nd Floor West
Santa Monica, CA 90401-1210
National City Bank, Custodian............................... 705,758 7.89%
FBO Mt. Union College
P.O. Box 94984
Cleveland, OH 44101-4984
Northern Trust Company, Custodian........................... 539,055 6.03%
FBO Peter Norton Living Trust
P.O. Box 92956
Chicago, IL 60675-2956
Hal Lashlee, Trustee........................................ 502,731 5.62%
Hal Lashlee Living Trust
P.O. Box 812079
Boca Raton, FL 33481-2079
EMERGING MARKETS SERIES
New York State Common Retirement Fund....................... 39,164,658 18.76%
Alfred E. Smith State Office Building
6th Floor
Albany, NY 12236
EMERGING FIXED INCOME MARKETS SERIES
Templeton Global Investors, Inc............................. 218,947 100%
Corporate Treasury
1850 Gateway Drive-6th Floor
San Mateo, CA 94404
</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.
In the event of disputes involving multiple claims of ownership or authority to
control your account, a fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group 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
31
PAGE
officer and must be completed by the close of the business day following the day
clearance is granted; (ii) copies of all brokerage confirmations and statements
must be sent to a compliance officer; (iii) all brokerage accounts must be
disclosed on an annual basis; and (iv) access persons involved in preparing and
making investment decisions must, in addition to (i), (ii) and (iii) 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, Emerging Markets and Emerging Fixed
Income Markets Series for the fiscal year ended December 31, 1997, 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
multiple classes of shares. The different classes have proportionate interests
in the same portfolio of investment securities. They differ, however, primarily
in their sales charge structures and Rule 12b-1 plans. Shares of the funds are
considered Class I shares for redemption, exchange and other purposes.
Code - Internal Revenue Code of 1986, as amended
Company - Templeton Institutional Funds, Inc., an open-end management investment
company, currently consisting of four separate series: Growth Series, Foreign
Equity Series, Emerging Markets Series and Emerging Fixed Income Markets Series
Distributors - Franklin/Templeton Distributors, Inc., the funds' principal
underwriter
Franklin Templeton Funds - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable Products
Series Fund
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Franklin Templeton Group of Funds - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT Services - Franklin Templeton Services, Inc., the funds' administrator
Investment Manager(s) - A fund's investment manager; Templeton Investment
Counsel, Inc. ("Investment Counsel") for Growth Series and Foreign Equity
Series; Templeton Asset Management Ltd. -- Hong Kong Branch ("Asset Management
Hong Kong") for Emerging Markets Series; and Investment Counsel through its
Global Bond Managers division for Emerging Fixed Income Markets Series
Investor Services - Franklin/Templeton Investor Services, Inc., the funds'
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
Moody's - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
Prospectus - The prospectus for the funds dated May 1, 1998, as may be amended
from time to time
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
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.
U.S. - United States
We/Our/Us - Unless a different meaning is indicated by the context, these terms
refer to the fund(s) and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.
32
PAGE
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
(1) Audited Financial Statements filed in Part B.
Incorporated by reference to 1996 Annual Reports to
Shareholders of Growth Series, Foreign Equity Series,
Emerging Markets Series and Emerging Fixed Income
Markets Series:
Independent Auditor's Report as of December 31, 1997
Statement of Assets and Liabilities as of
December 31, 1997
Statement of Operations for fiscal period ended
December 31, 1997
Statement of Changes in Net Assets for the years ended
December 31, 1997 and 1996
Portfolio of Investments as of December 31, 1997
Notes to Financial Statements
(b) EXHIBITS
(1) (a) Articles of Incorporation***
(b) Articles of Amendment dated January 11,1993***
(c) Articles Supplementary dated January 11, 1993***
(d) Articles Supplementary dated April 28, 1993***
(e) Articles Supplementary dated July 1, 1993***
(f) Articles Supplementary dated September 30, 1993***
(g) Articles Supplementary dated March 1, 1994****
(h) Articles Supplementary dated January 5,1995****
(i) Articles Supplementary dated January 17, 1996***
(j) Articles Supplementary dated April 15, 1996***
(k) Articles Supplementary dated December 27, 1996*
(l) Articles Supplementary dated April 10, 1997*
(m) Articles Supplementary dated February 27, 1998
(2) Amended and Restated By-Laws*
(3) Not Applicable
(4) Specimen Security*****
(5) (a) Amended and Restated Investment Management Agreement for
Foreign Equity Series***
(b) Amended and Restated Investment Management Agreement for
Growth Series***
(c) Amended and Restated Investment Management Agreement for
Emerging Markets Series***
(d) Form of Investment Management Agreement for
Emerging Fixed Income Markets Series**
(e) Addendum to the Investment Management Agreement for
Emerging 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
(11) Consent of Independent Public Accountants
(12) Not Applicable
(13) Letter concerning initial capital***
(14) Not Applicable
(15) Not Applicable
(16) Schedule showing computation of performance quotations
provided in response to Item 22****
(27) Financial Data Schedules
- ---------------------
* Filed with Post-Effective Amendment No. 11 to the Registration
Statement on May 1, 1997
** Filed with Post-Effective Amendment No. 10 to the Registration
Statement on February 14, 1997
*** Filed with Post-Effective Amendment No. 9 to the Registration
Statement on April 28, 1996
**** Filed with Post-Effective Amendment No. 8 to the Registration
Statement on May 1, 1995.
***** Filed with Pre-Effective Amendment No. 3 to the Registration
Statement on October 17, 1990.
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 21 as of March 31, 1998
Foreign Equity Series
Class of Common Shares 997 as of March 31, 1998
Emerging Markets Series
Class of Common Shares 466 as of March 31, 1998
Emerging Fixed Income Markets Series
Class of Common Shares 1 as of March 31, 1998
</TABLE>
ITEM 27. INDEMNIFICATION.
Reference is made to Articles Eight and Eleven of the Registrant's
Articles of Incorporation incorported by reference hereto
Post-Eeffective Amendment No. 9 filed on April 28, 1996.
Reference is made to Article Five of the Registrant's By-Laws
incorported by reference hereto Post-Eeffective Amendment No. 11 filed
on May 1, 1997.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant by the Registrant pursuant to
the Articles of Incorporation or otherwise, the Registrant is aware
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and,
therefore, is unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by directors, officers or
controlling persons of the Registrant in connection with he successful
defense of any act, suit or proceeding) is asserted by such directors,
officers or controlling persons in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
ndemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issues.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER AND ITS
OFFICERS AND DIRECTORS
The business and other connections of Registrant's Investment Managers
are described in Part B of this Registration Statement.
For information relating to the Investment Managers' officers and
directors, reference is made to Forms ADV filed under the Investment
Advisers Act of 1940 by Templeton Investment Counsel, Inc. and
Templeton Asset Management Ltd., which are incorporated herein by
reference.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Franklin Templeton Distributors, Inc. also acts as principal
underwriter of shares of:
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 Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Municipal Securities Trust
Franklin Mutual Series Fund, Inc.
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
(b) The directors and officers of FTD, located at 777 Mariners Island
Blvd., San Mateo, CA 94404,unless otherwise indicated 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
Harmon E. Burns Executive Vice President and Vice President
Director
Rupert H. Johnson, Jr. Executive Vice President and Vice President
Director
Peter Jones Executive Vice President None
100 Fountain Parkway
St. Petersburg, Fl
Daniel T. O'Lear Executive Vice President None
Deborah R. Gatzek Senior Vice President and Assistant Vice President
Secretary
Richard O. Conboy Senior Vice President None
Charles E. Johnson Senior Vice President Vice President
500 E. Broward Blvd.
Ft. Lauderdale, Fl
Edward V. McVey Senior Vice President None
H.G. (Toby) Mumford, Jr. Senior Vice President None
Richard C. Stoker Senior Vice President None
Kent P. Strazza Vice President None
Jimmy A. Escobedo Vice President None
Bert W. Feuss Vice President None
Loretta Fry Vice President None
Robert N. Geppner Vice President None
Mike Hackett Vice President None
Phil J. Kearns Vice President None
Laura Komar Vice President None
Ken Leder Vice President None
Jack Lemein Vice President None
John R. McGee Vice President None
Vivian J. Palmieri Vice President None
Sarah Stypa Vice President None
</TABLE>
PAGE
<TABLE>
<CAPTION>
POSITION WITH POSITION WITH
NAME UNDERWRITER THE REGISTRANT
<S> <C> <C>
Francie Arnone Assistant Vice President None
Alison Hawksley Assistant Vice President None
Bernadette Marino Howard Assistant Vice President None
John R. Kay Assistant Vice President Vice President
500 E. Broward Blvd.
Ft. Lauderdale
Virginia Marans Assistant Vice President None
Susan Thompson Assistant Vice President None
Kenneth A. Lewis Treasurer None
Karen DeBellis Assistant Treasurer Assistant Treasurer
100 Fountain Parkway
St. Petersburg, Fl
Philip A. Scatena Assistant Treasurer None
Leslie M. Kratter Secretary None
</TABLE>
(c) Not Applicable (Information on unaffiliated underwriters).
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Certain accounts, books, and other documents required to be maintained
by Registrant pursuant to Section 31(a) of the Investment Company Act
of 1940 and rules promulgated thereunder are located at 500 East
Broward Blvd., Fort Lauderdale, Florida 33394. Others records are
maintained at the offices of Franklin Templeton Investor Services,
Inc., 100 Fountain Parkway, St. Petersburg, Florida 33716-1205 and
Franklin Resources, Inc., 777 Mariners Island Blvd., San Mateo,
California 94404.
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS.
(a) Not Applicable.
(b) Not Applicable.
(c) Registrant undertakes to furnish to each person to
whom its Prospectus is provided a copy of its latest
Annual Report, upon request and without charge.
PAGE
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of the Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this amendment
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Ft. Lauderdale, Florida on the[ ] day of April,
1998.
TEMPLETON INSTITUTIONAL FUNDS, INC.
By:
Donald F. Reed, President*
*By:/s/BARBARA J. GREEN
Barbara J. Green
attorney-in-fact**
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
Charles B. Johnson* Director April 30, 1998
Constantine Dean Tseretopoulos* Director April 30, 1998
Frank J. Crothers* Director April 30, 1998
Harris J. Ashton* Director April 30, 1998
S. Joseph Fortunato* Director April 30, 1998
Fred R. Millsaps* Director April 30, 1998
Gordon S. Macklin* Director April 30, 1998
Andrew H. Hines, Jr.* Director April 30, 1998
John Wm. Galbraith* Director April 30, 1998
Nicholas F. Brady* Director April 30, 1998
Betty P. Krahmer* Director April 30, 1998
Edith E. Holiday* Director April 30, 1998
Donald F. Reed* President (Chief April 30, 1998
Executive Officer)
James R. Baio* Treasurer (Chief April 30, 1998
Financial and
Accounting
Officer)
</TABLE>
*By:/s/BARBARA J. GREEN
Barbara J. Green
as attorney-in-fact**
** Powers of Attorney are contained in Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A of Templeton Institutional Funds, Inc. (File
No. 33-35779), filed on February 14, 1997.
PAGE
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS FILED WITH
POST-EFFECTIVE AMENDMENT NO. 13 TO
REGISTRATION STATEMENT
ON
FORM N-1A
TEMPLETON INSTITUTIONAL FUNDS, INC.
PAGE
EXHIBIT LIST
EXHIBIT NUMBER NAME OF EXHIBIT
( 1)(m) Articles Supplementary dated February 27, 1998
( 5)(e) Addendum to the Investment Management Agreement
for Emerging Markets Series
(10) Opinion and Consent of Counsel
(11) Consent of Independent Public Accountants
(27) Financial Data Schedules
TEMPLETON INSTITUTIONAL FUNDS, INC.
ARTICLES SUPPLEMENTARY
TEMPLETON INSTITUTIONAL FUNDS, INC., a Maryland corporation
with 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 aggregate number of shares of capital stock of the
Corporation is increased by ONE HUNDRED MILLION (100,000,000) shares of Common
Stock, of which ONE HUNDRED MILLION (100,000,000) shares are classified as
Emerging Markets Series. The shares of the Emerging Markets Series, as so
classified by the Board of Directors, shall have the preferences and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption as set forth in the
Articles of Incorporation of the Corporation as heretofore amended and
supplemented (the "Articles") and shall be subject to all provisions of the
Articles relating to shares generally.
SECOND: Immediately before the increase as hereinabove set
forth, the Corporation was authorized to issue EIGHT HUNDRED FORTY MILLION
(840,000,000) shares of capital stock, all of which was Common Stock par value
$0.01 per share, such shares having the following designations:
<TABLE>
<CAPTION>
NUMBER OF SHARES DESIGNATIONS
<S> <C>
ONE HUNDRED TWENTY MILLION
(120,000,000) Growth Series
THREE HUNDRED FIFTY FIVE MILLION
(355,000,000) Foreign Equity Series
TWO HUNDRED TWENTY FIVE MILLION
(225,000,000) Emerging Markets Series
ONE HUNDRED FORTY MILLION
(140,000,000) Emerging Fixed Income Markets Series
</TABLE>
PAGE
and having an aggregate par value of EIGHT MILLION FOUR HUNDRED THOUSAND
($8,400,000) dollars. As increased, the Corporation is authorized to issue a
total of NINE HUNDRED FORTY MILLION (940,000,000) shares of capital stock, all
of which is Common Stock par value $0.01 per share, having an aggregate par
value of NINE MILLION FOUR HUNDRED THOUSAND ($9,400,000) dollars. Immediately
after the increase and giving effect to the classification of shares set forth
in Article First hereof, such shares were classified as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DESIGNATIONS
<S> <C>
ONE HUNDRED TWENTY MILLION
(120,000,000) Growth Series
THREE HUNDRED FIFTY FIVE MILLION
(355,000,000) Foreign Equity Series
THREE HUNDRED TWENTY FIVE MILLION
(325,000,000) Emerging Markets Series
ONE HUNDRED FORTY MILLION
(140,000,000) Emerging Fixed Income Markets Series
</TABLE>
THIRD: The Corporation is registered as an open-end
investment company under the Investment Company Act of 1940, as amended.
FOURTH: The Board of Directors of the Corporation increased
the total number of shares of capital stock that the Corporation has authority
to issue pursuant to Section 2-105(c) of the Maryland General Corporation Law
and classified the shares of the Emerging Markets Series under the authority
contained in the Articles.
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 and state, under the penalties of perjury, 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.
Date: February 27, 1998
TEMPLETON INSTITUTITIONAL FUNDS, INC.
[CORPORATE SEAL]
By: /s/JOHN R. KAY
---------------------------
John R. Kay
Vice President
Attest:
/s/JEFFREY L. STEELE
- ------------------------
Jeffrey L. Steele
Assistant Secretary
ADDENDUM PURSUANT TO SECTION 6.2 OF THE CODE OF CONDUCT OF
THE HONG KONG SECURITIES & FUTURES COMMISSION (THE "SFC")
This Addendum (the "Addendum") is made and entered into as of this 2nd
day of December, 1997 by the Templeton Institutional Funds, Inc. (the "Company")
on behalf of Emerging Markets Series (the "Fund") and Templeton Asset Management
Ltd. (the "Investment Manager").
WHEREAS, the Fund and the Investment Manager are parties to the
Investment Management Agreement dated as of the 3rd day of May, 1993, and
amended and restated as of the 25th day of February, 1994, the 25th day of May,
1995 and the 23rd day of November, 1995 (the "Investment Management Agreement");
and
WHEREAS, Section 6.2 of the SFC's Code of Conduct for Persons
Registered with the Securities and Futures Commission (the "Code") requires that
certain additional information be included in the Investment Management
Agreement.
NOW THEREFORE, the parties hereto agree that, pursuant to Section 6.2
of the Code, the following information is included in the Investment Management
Agreement:
SECTION 1. UNDERTAKINGS. Each party undertakes to notify the other
party in the event of any material change to the information provided in the
Investment Management Agreement.
SECTION 2. CERTAIN INFORMATION ABOUT THE INVESTMENT MANAGER.
(a) The Investment Manager's full name and address is:
Templeton Asset Management Ltd. - Hong Kong branch
2 Exchange Square, Suite 3905-08
Hong Kong
(b) The Investment Manager's registration status with the SFC is
active.
SECTION 3. CERTAIN INFORMATION ABOUT THE FUND. The Fund's full name
and verified address is:
Templeton Institutional Funds, Inc.
on behalf of Emerging Markets Series
500 East Broward Boulevard
Fort Lauderdale, Florida 33394
PAGE
IN WITNESS WHEREOF, the parties hereto have caused this
Addendum to be duly executed by their respective duly authorized
officers and their respective corporate seals to be hereunto duly
affixed and attested.
TEMPLETON INSTITUTIONAL FUNDS, INC.
ON BEHALF OF EMERGING MARKETS SERIES
By: /s/BARBARA J. GREEN
--------------------------------
Barbara J. Green
Secretary
TEMPLETON ASSET MANAGEMENT LTD.
By: /s/GREGORY E.MCGOWAN
--------------------------------
Gregory E. McGowan
Director
<TABLE>
<CAPTION>
LAW OFFICES OF
<S> <C> <C>
30 ROCKEFELLER PLAZA DECHERT PRICE & RHOADS TEN POST OFFICE SQUARE SOUTH
NEW YORK, NY 10112 BOSTON, MA 02109-4603
(212) 698-3500 1775 EYE STREET, N.W. (617) 728-7100
4000 BELL ATLANTIC TOWER WASHINGTON, DC 20006-2401 90 STATE HOUSE SQUARE
1717 ARCH STREET HARTFORD, CT 06103-3702
PHILADELPHIA, PA 19103-2793 (860) 524-3999
(215) 994-4000 TELEPHONE: (202) 261-3300
65 AVENUE LOUISE
THIRTY NORTH THIRD STREET FAX: (202) 261-3333 1050 BRUSSELS, BELGIUM
HARRISBURG, PA 17101-1603 (32-2) 535-5411
(717) 237-2000
TITMUSS SAINER DECHERT
PRINCETON PIKE CORPORATE CENTER 2 SERJEANTSINN
P.O. BOX 5218 LONDON EC4Y 1LT, ENGLAND
PRINCETON, NJ 08543-5218 (44-171) 583-5353
(609) 520-3200
151, BOULEVARD HAUSSMANN
75008 PARIS, FRANCE
(33-1) 53 83 84 70
</TABLE>
March 27, 1998
Templeton Institutional Funds, Inc.
500 E. Broward Boulevard
Suite 2100
Ft. Lauderdale, FL 33394
Dear Sirs:
As counsel for Templeton Institutional Funds, Inc. (the "Fund"), a Maryland
corporation, we are familar with the Fund's registration under the Investment
Company Act of 1940 and with the registration statement relating to its Common
Shares (the "Shares") under the Securities Act of 1933 (File No. 33-37511) (the
"Registration Statement"). We have obtained a Certificate of Good Standing for
the Fund issued by the Maryland State Department of Assessements and Taxation
and have also examined the Fund's Articles of Incorporation and by-laws, and
such other corporate records, agreements, documents and instruments as we deemed
appropriate.
Based upon the foregoing, it is our opinion that the Shares registered
pursuant to the Fund's Registration Statement, when sold at the public
offering price and delivered by the Fund against receipt of the net asset value
of the Shares in accordance with the terms of the Registration Statement and
the requirements of applicable law, will have been duly and validly authorized,
legally and validly issued, and fully paid and non-assessable.
We consent to the filing of this opinion in connection with Post-Effective
Amendment No. 13 which is filed under the Investment Company Act of 1933 on
behalf of the Fund with the Securities and Exchange Commission.
Very truly yours,
/s/DECHERT PRICE & RHOADS
Dechert Price & Rhoads
MCGLADREY & PULLEN, LLP
Certified Public Accountants and Consultants
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our report dated January 30, 1998 on the
financial statements of the Growth Series, the Foreign Equity Series, the
Emerging Markets Series and the Emerging Fixed Income Markets Series of
Templeton Institutional Funds, Inc. referred to therein, which appears in the
1997 Annual Reports to Shareholders, and which is incorporated herein by
reference, in Post-Effective Amendment No. 13 to the Registration Statement on
Form N1-A, File No. 33-35779, as filed with the Securities and Exchange
Commission.
We also consent to the reference to our firm in the Prospectus under the
caption "Financial Highlights" and in the Statement of Additional Information
under the caption "Auditors".
/s/MCGLADREY & PULLEN, LLP
McGladrey & Pullen, LLP
New York, New York
April 20, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FOREIGN EQUITY SERIES DECEMBER 31, 1997 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000865722
<NAME> TEMPLETON INSTITUIONAL FUNDS, INC.
<SERIES>
<NUMBER> 001
<NAME> FOREIGN EQUITY SERIES
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 3056415570
<INVESTMENTS-AT-VALUE> 3703319040
<RECEIVABLES> 22822419
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3726141459
<PAYABLE-FOR-SECURITIES> 5922605
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 14212710
<TOTAL-LIABILITIES> 20135315
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3047997817
<SHARES-COMMON-STOCK> 213429570
<SHARES-COMMON-PRIOR> 174840843
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (675469)
<ACCUMULATED-NET-GAINS> 11780326
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 646903470
<NET-ASSETS> 3706006144
<DIVIDEND-INCOME> 87085786
<INTEREST-INCOME> 26537854
<OTHER-INCOME> 0
<EXPENSES-NET> 28658834
<NET-INVESTMENT-INCOME> 84964806
<REALIZED-GAINS-CURRENT> 111423125
<APPREC-INCREASE-CURRENT> 161093064
<NET-CHANGE-FROM-OPS> 357480995
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (86272005)
<DISTRIBUTIONS-OF-GAINS> (82399083)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 60131124
<NUMBER-OF-SHARES-REDEEMED> (30430203)
<SHARES-REINVESTED> 8887806
<NET-CHANGE-IN-ASSETS> 848415411
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (2669031)
<OVERDIST-NET-GAINS-PRIOR> (13512324)
<GROSS-ADVISORY-FEES> 23912568
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 28658834
<AVERAGE-NET-ASSETS> 3416081094
<PER-SHARE-NAV-BEGIN> 16.34
<PER-SHARE-NII> 0.42
<PER-SHARE-GAIN-APPREC> 1.43
<PER-SHARE-DIVIDEND> (0.43)
<PER-SHARE-DISTRIBUTIONS> (0.40)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.36
<EXPENSE-RATIO> 0.84
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINACIAL INFORMATION EXTRACTED FROM THE GROWTH
SERIES DECEMBER 31, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000865722
<NAME> TEMPLETON INSTITUTIONAL FUNDS, INC.
<SERIES>
<NUMBER> 002
<NAME> GROWTH SERIES
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 110771794
<INVESTMENTS-AT-VALUE> 117266115
<RECEIVABLES> 2668327
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 744395
<TOTAL-ASSETS> 120678837
<PAYABLE-FOR-SECURITIES> 84599
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 224571
<TOTAL-LIABILITIES> 309170
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 78163307
<SHARES-COMMON-STOCK> 8840303
<SHARES-COMMON-PRIOR> 19993055
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (16933)
<ACCUMULATED-NET-GAINS> 35728972
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6494321
<NET-ASSETS> 120369667
<DIVIDEND-INCOME> 6618060
<INTEREST-INCOME> 1749559
<OTHER-INCOME> 0
<EXPENSES-NET> 2378384
<NET-INVESTMENT-INCOME> 5989235
<REALIZED-GAINS-CURRENT> 75507706
<APPREC-INCREASE-CURRENT> (49401146)
<NET-CHANGE-FROM-OPS> 32095795
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (7267170)
<DISTRIBUTIONS-OF-GAINS> (5222663)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2784905
<NUMBER-OF-SHARES-REDEEMED> (14852462)
<SHARES-REINVESTED> 914805
<NET-CHANGE-IN-ASSETS> (147788124)
<ACCUMULATED-NII-PRIOR> 134012
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (717828)
<GROSS-ADVISORY-FEES> 1946728
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2378384
<AVERAGE-NET-ASSETS> 278103936
<PER-SHARE-NAV-BEGIN> 13.41
<PER-SHARE-NII> 0.73
<PER-SHARE-GAIN-APPREC> 0.89
<PER-SHARE-DIVIDEND> (0.87)
<PER-SHARE-DISTRIBUTIONS> (0.54)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.62
<EXPENSE-RATIO> 0.86
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
EMERGING MARKETS SERIES DECEMBER 31, 1997 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000865722
<NAME> TEMPLETON INSTITUTIONAL FUNDS, INC.
<SERIES>
<NUMBER> 003
<NAME> EMERGING MARKETS SERIES
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 2173681700
<INVESTMENTS-AT-VALUE> 1906990575
<RECEIVABLES> 22862998
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 1873780
<TOTAL-ASSETS> 1931727353
<PAYABLE-FOR-SECURITIES> 515846
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7330277
<TOTAL-LIABILITIES> 7846123
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2237547314
<SHARES-COMMON-STOCK> 185527984
<SHARES-COMMON-PRIOR> 125711773
<ACCUMULATED-NII-CURRENT> 1568894
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (47878968)
<ACCUM-APPREC-OR-DEPREC> (267356010)
<NET-ASSETS> 1923881230
<DIVIDEND-INCOME> 50908822
<INTEREST-INCOME> 10650963
<OTHER-INCOME> 0
<EXPENSES-NET> 32341023
<NET-INVESTMENT-INCOME> 29218762
<REALIZED-GAINS-CURRENT> 31325228
<APPREC-INCREASE-CURRENT> (373187334)
<NET-CHANGE-FROM-OPS> (312643344)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (29706898)
<DISTRIBUTIONS-OF-GAINS> (80352717)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 74259980
<NUMBER-OF-SHARES-REDEEMED> (24610709)
<SHARES-REINVESTED> 10166940
<NET-CHANGE-IN-ASSETS> 358344611
<ACCUMULATED-NII-PRIOR> 865476
<ACCUMULATED-GAINS-PRIOR> 2340075
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 25766850
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 32341023
<AVERAGE-NET-ASSETS> 2061358872
<PER-SHARE-NAV-BEGIN> 12.45
<PER-SHARE-NII> 0.18
<PER-SHARE-GAIN-APPREC> (1.60)
<PER-SHARE-DIVIDEND> (0.18)
<PER-SHARE-DISTRIBUTIONS> (0.48)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.37
<EXPENSE-RATIO> 1.57
<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
EMERGING FIXED INCOME MARKETS SERIES DECEMBER 31, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000865722
<NAME> TEMPLETON INSTITUTIONAL FUNDS, INC.
<SERIES>
<NUMBER> 004
<NAME> EMERGING FIXED INCOME MARKETS SERIES
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUN-04-1997<F1>
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 2131667
<INVESTMENTS-AT-VALUE> 2188480
<RECEIVABLES> 39194
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 34520
<TOTAL-ASSETS> 2262194
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 12889
<TOTAL-LIABILITIES> 12889
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2151000
<SHARES-COMMON-STOCK> 214746
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 942
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 40550
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 56813
<NET-ASSETS> 2249305
<DIVIDEND-INCOME> 1030
<INTEREST-INCOME> 102117
<OTHER-INCOME> 0
<EXPENSES-NET> 15205
<NET-INVESTMENT-INCOME> 87942
<REALIZED-GAINS-CURRENT> 104550
<APPREC-INCREASE-CURRENT> 56813
<NET-CHANGE-FROM-OPS> 249305
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (87000)
<DISTRIBUTIONS-OF-GAINS> (64000)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 200000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 14746
<NET-CHANGE-IN-ASSETS> 2249305
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 8484
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 77520
<AVERAGE-NET-ASSETS> 2106529
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.44
<PER-SHARE-GAIN-APPREC> 0.79
<PER-SHARE-DIVIDEND> (0.44)
<PER-SHARE-DISTRIBUTIONS> (0.32)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.47
<EXPENSE-RATIO> 1.25<F2>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1> COMMENCEMENT OF OFFERING OF SALES JUNE 4, 1997.
<F2> RATIO OF EXPENSES TO AVERAGE NET ASSETS WITHOUT THE FEE WAIVER IS 6.40%.
EXPENSE RATIO IS ANNUALIZED.
</FN>
</TABLE>
