Registration No. 33-35779 and 811-6135
As filed with the Securities and Exchange Commission on April 28, 2000
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. 16 X
-------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 18 X
------
TEMPLETON INSTITUTIONAL FUNDS, INC.
-------------------------------------
(Exact Name of Registrant as Specified in Charter)
500 E. BROWARD BOULEVARD, FT. LAUDERDALE, FLORIDA 33394
---------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(954) 527-7500
-----------------
(Registrant's Telephone Number, Including Area Code)
MURRAY L. SIMPSON, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
-------------------------------------------------------------------
(Name and Address of Agent for Service of Process)
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, 2000 pursuant to paragraph (b) of Rule 485
------------
60 days after filing pursuant to paragraph (a)(1) of Rule 485
on (date) pursuant to paragraph (a)(1) of Rule 485
75 days after filing pursuant to paragraph (a)(2) of Rule 485
on (date) 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
PART A
TEMPLETON INSTITUTIONAL FUNDS, INC.
PROSPECTUS
FOREIGN EQUITY SERIES - PRIMARY SHARE
EMERGING MARKETS SERIES
EMERGING FIXED INCOME MARKETS SERIES
PAGE
Prospectus
Templeton
Institutional
Funds, Inc.
INVESTMENT STRATEGY
GLOBAL GROWTH
Foreign Equity Series - Primary Shares
Emerging Markets Series
Emerging Fixed Income Markets Series
MAY 1, 2000
[Insert Franklin Templeton Butterball logo]
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.
CONTENTS
THE FUNDS
[Begin callout]
INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
2 Foreign Equity Series
11 Emerging Markets Series
21 Emerging Fixed Income Markets Series
32 Distributions and Taxes
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
33 Qualified Investors
35 Buying Shares
38 Investor Services
40 Selling Shares
42 Account Policies
44 Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
FOREIGN EQUITY SERIES
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
- -------------------------------------------------------------------------------
GOAL The fund's investment goal is long-term capital growth.
MAIN INVESTMENT STRATEGIES Under normal market conditions, the fund invests at
least 65% of total assets in at least three different nations. The fund normally
will invest primarily in the equity securities of companies located outside the
U.S., including emerging markets.
[Begin callout]
The fund invests primarily in an internationally diversified portfolio of
equity securities.
[End callout]
Equity securities generally entitle the holder to participate in a company's
general operating results. These include common stocks and preferred stocks. The
fund may invest a portion of its assets in smaller companies. For this fund,
smaller company stocks are generally those with market capitalizations of less
than $1 billion. The fund also invests in American, European and Global
Depositary Receipts, which are certificates typically issued by a bank or trust
company that give their holders the right to receive securities issued by a
foreign or domestic company. The fund, from time to time, may have significant
investments in one or more countries or in particular sectors such as technology
(including computer hardware and software, electronics, and telecommunications)
and financial institutions.
Depending upon current market conditions, the fund generally may invest a
portion of its total assets in debt securities of companies and governments
located anywhere in the world. Debt securities represent an obligation of the
issuer to repay a loan of money to it, and generally provide for the payment of
interest. These include bonds, notes and debentures.
When choosing equity investments for this fund, the manager applies a
"bottom-up", value-oriented, long-term approach, focusing on the market price of
a company's securities relative to the manager's evaluation of the company's
long-term earnings, asset value and cash flow potential. The manager also
considers a company's price/earnings ratio, profit margins and liquidation
value.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, the manager may invest up to 100% of the fund's
assets in a temporary defensive manner or hold a substantial portion of the
fund's portfolio in cash. Temporary defensive investments generally may include
money market securities, short-term and medium-term U.S. and foreign government
securities, bank obligations and repurchase agreements. The manager also may
invest in these types of securities or hold cash while looking for suitable
investment opportunities or to maintain liquidity. In these circumstances, the
fund may be unable to achieve its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
- -------------------------------------------------------------------------------
STOCKS While this may not be the case in foreign markets, in the U.S., stocks
historically have outperformed other asset classes over the long term, (over the
short term they tend to go up and down more dramatically). These price movements
may result from factors affecting individual companies, industries or the
securities markets as a whole. Value stock prices are considered "cheap"
relative to the company's perceived value. They may not increase in value, as
anticipated by the manager, if other investors fail to recognize the company's
value and bid up the price or in markets favoring faster-growing companies. The
fund should be thought of as a long-term investment for the aggressive portion
of a well diversified portfolio.
[Begin callout]
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money over
short or even extended periods.
[End callout]
FOREIGN SECURITIES Investing in foreign securities, including securities of
foreign governments and depositary receipts, typically involves more risks than
investing in U.S. securities. Certain of these risks also may apply to
securities of U.S. companies with significant foreign operations. These risks
can increase the potential for losses in the fund and affect its share price.
CURRENCY EXCHANGE RATES. Foreign securities may be issued and traded in foreign
currencies. As a result, their values may be affected by changes in exchange
rates between foreign currencies and the U.S. dollar, as well as between
currencies of countries other than the U.S. For example, if the value of the
U.S. dollar goes up compared to a foreign currency, an investment traded in that
foreign currency will go down in value because it will be worth less U.S.
dollars. The impact of the euro, a relatively new currency adopted by certain
European countries to replace their national currencies, is unclear at this
time.
POLITICAL AND ECONOMIC DEVELOPMENTS. The political, economic and social
structures of some foreign countries may be less stable and more volatile than
those in the U.S. Investments in these countries may be subject to the risks of
internal and external conflicts, currency devaluations, foreign ownership
limitations and tax increases. It is possible that a government may take over
the assets or operations of a company or impose restrictions on the exchange or
export of currency or other assets. Some countries also may have different legal
systems that may make it difficult for the fund to vote proxies, exercise
shareholder rights, and pursue legal remedies with respect to its foreign
investments.
TRADING PRACTICES. Brokerage commissions and other fees generally are higher for
foreign securities. Government supervision and regulation of foreign stock
exchanges, currency markets, trading systems and brokers may be less than in the
U.S. The procedures and rules governing foreign transactions and custody
(holding of the fund's assets) also may involve delays in payment, delivery or
recovery of money or investments.
AVAILABILITY OF INFORMATION. Foreign companies may not be subject to the same
disclosure, accounting, auditing and financial reporting standards and practices
as U.S. companies. Thus, there may be less information publicly available about
foreign companies than about most U.S. companies.
LIMITED MARKETS. Certain foreign securities may be less liquid (harder to sell)
and more volatile than many U.S. securities. This means the fund may at times be
unable to sell foreign securities at favorable prices. In choosing investments,
the fund's manager strongly believes in onsite visits to issuers of prospective
investments to assess critical factors such as management strength and local
conditions.
EMERGING MARKETS. The risks of foreign investments typically are greater in less
developed countries, sometimes referred to as emerging markets. For example,
political and economic structures in these countries may be less established and
may change rapidly. These countries also are more likely to experience high
levels of inflation, deflation or currency devaluation, which can harm their
economies and securities markets and increase volatility. In fact, short-term
volatility in these markets, and declines of 50% or more, are not uncommon.
LIQUIDITY The fund may not invest more than 10% of its assets in securities
which are not publicly traded or which cannot be readily resold because of legal
or contractual restrictions, or which are not otherwise readily marketable
(including repurchase agreements having more than seven days remaining to
maturity). Reduced liquidity affecting an individual security or an entire
market may have an adverse impact on market price and the fund's ability to sell
particular securities when necessary to meet the fund's liquidity needs or in
response to a specific economic event.
COUNTRY, SECTOR OR INDUSTRY FOCUS To the extent the fund invests a significant
portion of its assets in one or more countries, sectors or industries at any
time, the fund will face a greater risk of loss due to factors affecting a
single country, sector or industry than if the fund always maintained wide
diversity among the countries, sectors and industries in which it invests. For
example, technology companies involve risks due to factors such as the rapid
pace of product change, technological developments and new competition. Their
stocks historically have been volatile in price, especially over the short term,
often without regard to the merits of individual companies. Banks and financial
institutions are subject to potentially restrictive governmental controls and
regulations that may limit or adversely affect profitability and shares price.
In addition, securities in that sector may be very sensitive to interest rate
changes throughout the world.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not 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.
[End callout]
[Insert graphic of bull and bear] PERFORMANCE
- -------------------------------------------------------------------------------
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 9 calendar years. The table
shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
PRIMARY SHARES ANNUAL TOTAL RETURNS/1/
[Insert bar graph]
21.39% -1.33% 34.03% 0.24% 12.97% 21.58% 11.43% 10.16% 27.34%
- -------------------------------------------------------------------------------
91 92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q4 '99
16.81%
WORST
QUARTER:
Q3 '99
- -1.98%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
SINCE
INCEPTION
1 YEAR 5 YEARS (10/18/90)
- -----------------------------------------------------------------------------
Foreign Equity Series - Primary Shares 27.34% 16.51% 14.07%
MSCI - All Country World Free Index/2/ 30.91% 12.39% 11.20%
MSCI - EAFE Index/2/ 27.30% 13.15% 10.45%
1. As of March 31, 2000, the fund's year-to-date return was -1.63%.
2. Source: Standard & Poor's Micropal. The unmanaged MSCI All Country World Free
Index measures the performance of securities located in 48 countries, including
emerging markets in Latin America, Asia and Eastern Europe. It includes
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio. The unmanaged MSCI Europe Australia Far
East (EAFE) Index tracks the performance of approximately 1000 securities in 20
countries. It includes reinvested dividends. One cannot invest directly in an
index, nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
- -------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge (load) imposed on purchases None
Exchange fee/1/ $5.00
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management fees 0.70%
Other expenses 0.14%
-----
Total annual fund operating expenses 0.84%
=====
1. This fee is only for market timers (see page 43).
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------
$86 $268 $466 $1,037
[Insert graphic of briefcase] MANAGEMENT
- -------------------------------------------------------------------------------
Templeton Investment Counsel, Inc. (Investment Counsel), 500 East Broward Blvd.,
Ft. Lauderdale, Florida 33394-3091, is the fund's investment manager. Together,
Investment Counsel and its affiliates manage over $229 billion in assets.
The fund's lead portfolio manager is:
GARY P. MOTYL CFA, DIRECTOR AND PRESIDENT OF INVESTMENT COUNSEL
Mr. Motyl has been a manager of the fund since 1996. He joined the Franklin
Templeton Group in 1981.
The following individuals have secondary portfolio management responsibilities:
MARK R. BEVERIDGE CFA, SENIOR VICE PRESIDENT OF INVESTMENT COUNSEL
Mr. Beveridge has been a manager of the fund since 1996. He joined the Franklin
Templeton Group in 1985.
GARY CLEMONS, EXECUTIVE VICE PRESIDENT OF INVESTMENT COUNSEL
Mr. Clemons has been a manager of the fund since 1994. He joined the Franklin
Templeton Group in 1990.
SIMON RUDOLPH, SENIOR VICE PRESIDENT OF INVESTMENT COUNSEL
Mr. Rudolph has been a manager of the fund since 1998. He joined the Franklin
Templeton Group in 1997.
GUANG YANG, VICE PRESIDENT OF INVESTMENT COUNSEL
Mr. Yang has been a manager of the fund since 1998. He joined the Franklin
Templeton Group in 1995.
The fund pays Investment Counsel a fee for managing the fund's assets. For the
fiscal year ended December 31, 1999, the fund paid 0.70% of its average daily
net assets to the manager for its services.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP for the fiscal
year ended December 31, 1999, and by other auditors for the fiscal years before
1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------
1999/1/ 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA ($)
Net asset value, beginning of year 17.76 17.36 16.34 14.04 12.86
------------------------------------------
Net investment income .37 .42 .42 .45 .31
Net realized and unrealized gains 4.42 1.29 1.43 2.54 1.35
-------------------------------------------
Total from investment operations 4.79 1.71 .85 2.99 1.66
------------------------------------------
Distributions from net investment income (.38) (.40) (.43) (.45) (.31)
In excess of net investment income - - - (.02) -
Distributions from net realized gains (.64) (.91) (.40) (.14) (.17)
In excess of net realized gains - - - (.08) -
Total distributions (1.02) (1.31) (.83) (.69) (.48)
--------------------------------------------
Net asset value, end of year 21.53 17.76 17.36 16.34 14.04
============================================
Total return (%) 27.34 10.16 11.43 21.58 13.00
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) 5,248 4,552 3,706 2,858 1,818
Ratios to average net assets: (%)
Expenses .84 .83 .84 .87 .88
Net investment income 1.88 2.33 2.49 3.20 2.70
Portfolio turnover rate (%) 10.56 15.40 15.25 7.39 20.87
</TABLE>
1. Based on average weighted shares outstanding.
EMERGING MARKETS SERIES
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
- -------------------------------------------------------------------------------
GOAL The fund's investment goal is long-term capital growth.
MAIN INVESTMENT STRATEGIES Under normal market conditions, the fund invests at
least 65% of its total assets in equity securities of developing market
companies.
For purposes of the fund's investments, developing market companies are those:
o whose securities trade in developing markets or that have a significant
portion of their assets in developing market countries;
o that derive a significant share of their total revenue from goods or services
produced or sold in developing market countries;
o linked to currencies of developing market countries; or
o organized under the laws of, or with principal offices in, developing market
countries.
Developing market countries include those considered to be developing by the
World Bank, the International Finance Corporation, the United Nations, or the
countries' authorities, or countries with a stock market capitalization of less
than 3% of the Morgan Stanley Capital International World Index. These countries
typically are located in the Asia-Pacific region, Eastern Europe, Central and
South America, and Africa. Developing market countries are described more fully
in the fund's Statement of Additional Information (SAI).
An equity security, or stock, represents a proportionate share of the ownership
of a company. Its value is based on the success of the company's business, any
income paid to stockholders, the value of the company's assets, and general
market conditions. Common stocks and preferred stocks are examples of equity
securities. The fund also invests in American, Global, and European Depositary
Receipts, which are certificates typically issued by a bank or trust company
that give their holders the right to receive securities issued by a foreign or
domestic corporation. The fund, from time to time, may have significant
investments in one or more countries or in particular sectors such as technology
(including computer hardware and software, electronics, and telecommunications)
and financial institutions.
[Begin callout]
The fund invests primarily in the common stocks of developing market companies.
[End callout]
In addition to its main investments, the fund may invest a portion of its assets
in the equity securities of issuers in developed market countries. The fund may
not invest more than 15% of its total assets in securities which are not
publicly traded or which cannot be readily resold because of legal or
contractual restrictions, or which are not otherwise readily marketable
(including repurchase agreements having more than seven days remaining to
maturity).
When choosing equity investments for this fund, the manager applies a "bottom
up", value-oriented, long-term approach, focusing on the market price of a
company's securities relative to its evaluation of the company's long-term
earnings, asset value and cash flow potential. The manager also considers a
company's price/earnings ratio, profit margins and liquidation value. In
choosing investments, the fund's manager strongly believes in onsite visits to
issuers of prospective investments to assess critical factors such as management
strength and local conditions.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, the manager may invest up to 100% of the fund's
assets in a temporary defensive manner or hold a substantial portion of the
fund's portfolio in cash. Temporary defensive investments generally may include
money market securities, short-term and medium-term U.S. and foreign government
securities, short-term corporate obligations, bank obligations, and repurchase
agreements denominated in the currency of any nation. The manager also may
invest in these types of securities or hold cash while looking for suitable
investment opportunities or to maintain liquidity. In these circumstances, the
fund may be unable to achieve its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
- -------------------------------------------------------------------------------
STOCKS While this may not be the case in foreign markets, in the U.S., stocks
historically have outperformed other asset classes over the long term (over the
short term they tend to go up and down more dramatically). These price movements
may result from factors affecting individual companies, industries or the
securities market as a whole. Value stock prices are considered "cheap" relative
to the company's perceived value. They may not increase in value, as anticipated
by the manager, if other investors fail to recognize the company's value and bid
up the price or in markets favoring faster-growing companies. The fund should be
thought of as a long-term investment for the aggressive portion of a well
diversified portfolio.
[Begin callout]
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money over
short or even extended periods.
[End callout]
FOREIGN SECURITIES Investing in foreign securities, including securities of
foreign governments and depositary receipts, typically involves more risks than
investing in U.S. securities. Certain of these risks also may apply to
securities of U.S. companies with significant foreign operations. These risks
can increase the potential for losses in the fund and affect its share price.
CURRENCY EXCHANGE RATES. Foreign securities may be issued and traded in foreign
currencies. As a result, their values may be affected by changes in exchange
rates between foreign currencies and the U.S. dollar, as well as between
currencies of countries other than the U.S. For example, if the value of the
U.S. dollar goes up compared to a foreign currency, an investment traded in that
foreign currency will go down in value because it will be worth less U.S.
dollars. The impact of the euro, a relatively new currency adopted by certain
European countries to replace their national currencies, is unclear at this
time. Restrictions on currency trading that may be imposed by developing market
countries will have an adverse affect on the value of the securities of
companies that trade or operate in such countries.
POLITICAL AND ECONOMIC DEVELOPMENTS. The political, economic and social
structures of some foreign countries may be less stable and more volatile than
those in the U.S. Investments in these countries may be subject to the risks of
internal and external conflicts, currency devaluations, foreign ownership
limitations and tax increases. It is possible that a government may take over
the assets or operations of a company or impose restrictions on the exchange or
export of currency or other assets. Some countries also may have different legal
systems that may make it difficult for the fund to vote proxies, exercise
shareholder rights, and pursue legal remedies with respect to its foreign
investments.
TRADING PRACTICES. Brokerage commissions and other fees generally are higher for
foreign securities. Government supervision and regulation of foreign stock
exchanges, currency markets, trading systems and brokers may be less than in the
U.S. The procedures and rules governing foreign transactions and custody
(holding of the fund's assets) also may involve delays in payment, delivery or
recovery of money or investments.
AVAILABILITY OF INFORMATION. Foreign companies may not be subject to the same
disclosure, accounting, auditing and financial reporting standards and practices
as U.S. companies. Thus, there may be less information publicly available about
foreign companies than about most U.S. companies.
LIMITED MARKETS. Certain foreign securities may be less liquid (harder to sell)
and more volatile than many U.S. securities. This means the fund may at times be
unable to sell foreign securities at favorable prices. In developing markets, a
previously established liquid securities market may become illiquid (temporarily
or for longer periods of time) due to economic or political conditions.
DEVELOPING MARKETS. The fund's investments in developing markets are subject to
all of the risks of foreign investing generally, and have additional heightened
risks due to a lack of established legal, political, business and social
frameworks to support securities markets. Some of the additional significant
risks, include:
o Political and social uncertainty (for example, regional conflicts and risk
of war)
o Currency exchange rate volatility
o Pervasiveness of corruption and crime
o Delays in settling portfolio transactions
o Risk of loss arising out of systems of share registration and custody
o Markets that are comparatively smaller and less liquid than developed markets.
Short-term volatility in these markets and declines of more than 50% are
not unusual. Markets which are generally considered to be liquid may become
illiquid for short or extended periods.
o Less government supervision and regulation of business and industry practices,
stock exchanges, brokers and listed companies than in the U.S.
o Currency and capital controls
o Greater sensitivity to interest rate changes
ALL OF THESE FACTORS MAKE DEVELOPING MARKET EQUITY SECURITIES' PRICES GENERALLY
MORE VOLATILE THAN EQUITY SECURITIES OF COMPANIES IN DEVELOPED MARKETS, AND
INCREASE THE RISK OF LOSS TO THE FUND.
The definition of developing markets or countries as used in this prospectus may
differ from the definition of the same terms as used in other Franklin Templeton
fund prospectuses.
COUNTRY, SECTOR OR INDUSTRY FOCUS To the extent the fund invests a significant
portion of its assets in one or more countries, sectors or industries at any
time, the fund will face a greater risk of loss due to factors affecting a
single country, sector or industry than if the fund always maintained wide
diversity among the countries, sectors and industries in which it invests. For
example, technology companies involve risks due to factors such as the rapid
pace of product change, technological developments and new competition. Their
stocks historically have been volatile in price, especially over the short term,
often without regard to the merits of individual companies. Banks and financial
institutions are subject to potentially restrictive governmental controls and
regulations that may limit or adversely affect profitability and share price. In
addition, securities in that sector may be very sensitive to interest rate
changes throughout the world.
LIQUIDITY Reduced liquidity affecting an individual security or an entire market
may have an adverse impact on market price and the fund's ability to sell
particular securities when necessary to meet the fund's liquidity needs or in
response to a specific economic event.
More detailed information about the fund, its policies and risks can be found in
the fund's SAI.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not 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.
[End callout]
[Insert graphic of bull and bear] PERFORMANCE
- -------------------------------------------------------------------------------
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 6 calendar years. The table
shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
ANNUAL TOTAL RETURNS/1/
[Insert bar graph]
- -11.39% -1.23% 18.86% -11.32% -18.03% 56.58%
- -------------------------------------------------------------------------------
94 95 96 97 98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q4 '99
28.37%
WORST
QUARTER:
Q3 '99
- -11.91%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
SINCE
INCEPTION
1 YEAR 5 YEARS (5/3/93)
- -------------------------------------------------------------------------------
Emerging Markets Series 56.58% 5.97% 7.05%
IFC - Investable Composite Index/2/ 67.17% 2.16% 7.45%
MSCI - Emerging Markets Free Index/2/ 66.41% 2.00% 8.03%
1. As of March 31, 2000, the fund's year-to-date return was -6.70%.
2. Source: Standard & Poor's Micropal. The unmanaged IFC-Investable Composite
Index tracks the performance of approximately 2,000 securities in emerging
market countries. It includes reinvested dividends. The unmanaged MSCI-Emerging
Markets Free Index measures the performance of securities located in 25 emerging
market countries such as Brazil, China, Korea and Poland. It includes reinvested
dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
- -------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge (load) imposed on purchases None
Exchange fee/1/ $5.00
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management fees 1.25%
Other expenses 0.18%
-----
Total annual fund operating expenses 1.43%
=====
1. This fee is only for market timers (see page 43).
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------------------------------------
$146 $452 $782 $1,713
[Insert graphic of briefcase] MANAGEMENT
- -------------------------------------------------------------------------------
Templeton Asset Management Ltd. - Hong Kong Branch (Asset Management Hong Kong),
Two Exchange Square, Hong Kong, is the fund's investment manager. Together,
Asset Management Hong Kong and its affiliates manage over $229 billion in
assets.
The fund's lead portfolio manager is:
DR. J. MARK MOBIUS, MANAGING DIRECTOR OF TEMPLETON ASSET MANAGEMENT LTD.
Dr. Mobius has been a manager of the fund since inception. He joined the
Franklin Templeton Group in 1987.
The following individuals have secondary portfolio management responsibilities:
TOM WU, DIRECTOR OF TEMPLETON ASSET MANAGEMENT LTD.
Mr. Wu has been a manager of the fund since inception. He joined the Franklin
Templeton Group in 1987.
H. ALLAN LAM, PORTFOLIO MANAGER OF TEMPLETON ASSET MANAGEMENT LTD.
Mr. Lam has been a manager of the fund since inception. He joined the Franklin
Templeton Group in 1987.
EDDIE CHOW, INVESTMENT ANALYST OF TEMPLETON ASSET MANAGEMENT LTD.
Mr. Chow has been a manager of the fund since 1994. He joined the Franklin
Templeton Group in 1994.
The fund pays Asset Management Hong Kong a fee for managing the fund's assets.
For the fiscal year ended December 31, 1999, the fund paid 1.25% of its average
daily net assets to the manager for its services.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP for the fiscal
year ended December 31, 1999, and by other auditors for the fiscal years before
1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------
1999/1/ 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA ($)
Net asset value, beginning of year 8.31 10.37 12.45 10.75 11.21
-----------------------------------------
Net investment income .10 .18 .18 .15 .19
Net realized and unrealized
gains (losses) 4.59 (2.05) (1.60) 1.86 (.34)
-----------------------------------------
Total from investment operations 4.69 (1.87) (1.42) 2.01 (.15)
-----------------------------------------
Distributions from net investment income (.10) (.19) (.18) (.15) (.17)
Distributions from net realized gains - - (.48) (.16) (.14)
-----------------------------------------
Total distributions (.10) (.19) (.66) (.31) (.31)
------------------------------------------
Net asset value, end of year 12.90 8.31 10.37 12.45 10.75
===========================================
Total return (%) 56.58 (18.03) (11.32) 18.86 (1.23)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) 2,608 1,733 1,923 1,565 798
Ratios to average net assets: (%)
Expenses 1.43 1.51 1.57 1.56 1.52
Net investment income 1.02 2.03 1.42 1.56 2.00
Portfolio turnover rate (%) 49.35 38.11 24.72 7.92 13.47
</TABLE>
1. Based on average weighted shares outstanding.
EMERGING FIXED INCOME MARKETS SERIES
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
- -------------------------------------------------------------------------------
GOAL The fund's investment goal is high total return, consisting of current
income and capital appreciation.
MAIN INVESTMENT STRATEGIES Under normal market conditions, the fund invests at
least 65% of total assets in debt securities of emerging markets issuers, which
include companies, governments and government agencies located in emerging
market countries and entities organized for the purpose of restructuring
securities issued by these issuers. The fund may invest up to 35% of total
assets in securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities. The fund normally will invest at least 65% of total
assets in at least three different nations. The fund focuses on securities
issued by governments and government agencies.
[Begin callout]
The fund invests primarily in debt securities of emerging market issuers, which
include companies, governments and government agencies located in emerging
market countries.
[End callout]
For purposes of the fund's investments, developing or emerging market countries
include those considered such by the World Bank, the International Finance
Corporation, the United Nations, or the countries' authorities.
In addition, developing or emerging market equity securities means those issued
by:
o companies with their principal securities trading market within a developing
or emerging market country, as defined above; or
o companies that derive 50% or more of their total revenue from either goods or
services produced or sales made in developing or emerging market countries; or
o companies organized under the laws of, or with principal offices in,
developing or emerging market countries.
Debt securities represent an obligation of the issuer to repay a loan of money
to it, and generally provide for the payment of interest. These include bonds,
notes and debentures. Debt securities issued by emerging market companies and
governments are generally rated below "investment grade" debt securities, which
means they are not in the top four rating categories as determined by
independent rating agencies such as Standard & Poor's Corporation (S&P) or
Moody's Investors Services, Inc. (Moody's). The fund may buy securities rated in
any category and anticipates that a substantial percentage of its assets will be
invested in debt securities rated below investment grade or unrated securities
determined by the fund's manager to be comparable. As of December 31, 1999,
approximately 71.3% of the fund's net assets were invested in lower rated and
comparable quality unrated debt securities.
The fund may invest in various types of debt securities, such as Eurobonds,
Global Bonds, Yankee Bonds, bonds sold under SEC Rule 144A, and Brady Bonds. The
fund generally invests a substantial portion of its assets in Eurobonds and
Brady Bonds. Brady Bonds are public-issue bonds that are created through an
exchange of existing commercial bank loans to sovereign entities for new
obligations in connection with a debt restructuring plan introduced by former
U.S. Secretary of the Treasury, Nicholas F. Brady.
The fund may buy securities on a "when issued" or "delayed delivery" basis. This
means that the securities will be paid for and delivered to the fund at a future
date.
The fund's manager allocates its assets based upon its assessment of changing
market, political and economic conditions. It will consider various factors,
including evaluation of interest and currency exchange rate changes and credit
and duration risks, in seeking to identify those markets and issuers which are
anticipated to provide the opportunity for high current income and capital
appreciation. The fund, from time to time, may have significant investments in
one or more countries.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, the manager may invest up to 100% of the fund's
assets in a temporary defensive manner or hold a substantial portion of the
fund's portfolio in cash. Temporary defensive investments generally may include
money market securities, short-term and medium-term U.S. and foreign government
securities, bank obligations and repurchase agreements. The manager also may
invest in these types of securities or hold cash while looking for suitable
investment opportunities or to maintain liquidity. In these circumstances, the
fund may be unable to achieve its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
- -------------------------------------------------------------------------------
CREDIT An issuer may be unable to make interest payments or repay principal.
Changes in an issuer's financial strength or in a security's credit rating may
affect its value and, thus, impact the value of fund shares.
Securities rated below investment grade, sometimes called "junk bonds" or "high
yield debt securities," generally have more risk than higher-rated securities.
The principal risks of investing in these securities include:
o SUBSTANTIAL CREDIT RISK. Companies and governments issuing high yield debt
securities are not as strong financially as those with higher credit
ratings. They are more likely to encounter financial difficulties and are
more vulnerable to changes in the economy, such as a recession or a
sustained period of rising interest rates, that could prevent them from
making interest and principal payments.
o DEFAULTED DEBT RISK. If an issuer is not paying or stops paying interest
and/or principal on its securities, payments on the securities may never
resume. These securities may be worthless and the fund could lose its
entire investment.
o VOLATILITY RISK. The prices of high yield debt securities fluctuate more than
higher-quality securities. The entire high yield securities market can
experience sudden and sharp price swings due to changes in economic
conditions, stock market activity, large sustained sales by major
investors, a high-profile default, or other factors. The price of a
company's debt securities is especially sensitive to developments affecting
the company's business and to changes in the ratings assigned by ratings
organizations. Prices are often closely linked with a company's stock
prices and typically rise and fall in response to factors that affect stock
prices. High yield securities are also generally less liquid than
higher-quality bonds. Many of these securities do not trade frequently, and
when they do trade their prices may be significantly higher or lower than
expected. At times, it may be difficult to sell these securities promptly
at an acceptable price, which may limit the fund's ability to sell
securities in response to specific economic events or to meet redemption
requests.
INTEREST RATE When interest rates rise, debt security prices fall. The opposite
is also true: debt security prices rise when interest rates fall. In general,
securities with longer maturities usually are more sensitive to these price
changes.
[Begin callout]
If a security's credit rating is downgraded or an issuer's financial condition
deteriorates, the price of the security will fall and so too will the fund's
share price. If interest rates rise, the value of the fund's debt securities
will also fall. Because the value of the fund's holdings fluctuate in price, the
value of your investment in the fund will go up and down. This means you could
lose money over short or even extended periods.
[End callout]
BRADY BONDS. Brady Bonds may be collateralized or uncollateralized and issued in
various currencies (although most are dollar-denominated). Brady Bonds have been
issued relatively recently, and, accordingly, do not have a long payment
history. Because of 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. The fund may also invest
in restructured external debt that has not undergone a Brady-style debt
exchange, or other types of instruments structured or denominated as bonds.
FOREIGN SECURITIES Investing in foreign securities, including securities of
foreign governments and depositary receipts, typically involves more risks than
investing in U.S. securities. Certain of these risks also may apply to
securities of U.S. companies with significant foreign operations. These risks
can increase the potential for losses in the fund and affect its share price.
CURRENCY EXCHANGE RATES. Foreign securities may be issued and traded in foreign
currencies. As a result, their values may be affected by changes in exchange
rates between foreign currencies and the U.S. dollar, as well as between
currencies of countries other than the U.S. For example, if the value of the
U.S. dollar goes up compared to a foreign currency, an investment traded in that
foreign currency will go down in value because it will be worth less U.S.
dollars. The impact of the euro, a relatively new currency adopted by certain
European countries to replace their national currencies, is unclear at this
time.
POLITICAL AND ECONOMIC DEVELOPMENTS. The political, economic and social
structures of some foreign countries may be less stable and more volatile than
those in the U.S. Investments in these countries may be subject to the risks of
internal and external conflicts, currency devaluations, foreign ownership
limitations and tax increases. It is possible that a government may take over
the assets or operations of a company or impose restrictions on the exchange or
export of currency or other assets. Some countries also may have different legal
systems that may make it difficult for the fund to vote proxies, exercise
shareholder rights, and pursue legal remedies with respect to its foreign
investments.
TRADING PRACTICES. Brokerage commissions and other fees generally are higher for
foreign securities. Government supervision and regulation of foreign stock
exchanges, currency markets, trading systems and brokers may be less than in the
U.S. The procedures and rules governing foreign transactions and custody
(holding of the fund's assets) also may involve delays in payment, delivery or
recovery of money or investments.
AVAILABILITY OF INFORMATION. Foreign companies may not be subject to the same
disclosure, accounting, auditing and financial reporting standards and practices
as U.S. companies. Thus, there may be less information publicly available about
foreign companies than about most U.S. companies.
LIMITED MARKETS. Certain foreign securities may be less liquid (harder to sell)
and more volatile than many U.S. securities. This means the fund may at times be
unable to sell foreign securities at favorable prices.
DEVELOPING OR EMERGING MARKETS. The fund's investments in developing or emerging
markets are subject to all of the risks of foreign investing generally, and have
additional heightened risks due to a lack of established legal, political,
business and social frameworks to support securities markets. Some of the
significant, additional risks include:
o Political and social uncertainty (for example, regional conflicts and risk
of war)
o Currency exchange rate volatility
o Pervasiveness of corruption and crime
o Delays in settling portfolio transactions
o Risk of loss arising out of systems of share registration and custody
o Markets that are comparatively smaller and less liquid than developed markets.
Short-term volatility in these markets and declines of more than 50% are
not unusual. Markets which are generally considered to be liquid may become
illiquid for short or extended periods.
o Less government supervision and regulation of business and industry practices,
stock exchanges, brokers and listed companies than in the United States
o Currency and capital controls
ALL OF THESE FACTORS MAKE DEVELOPING MARKET DEBT SECURITIES' PRICES GENERALLY
MORE VOLATILE THAN EQUITY SECURITIES OF COMPANIES IN DEVELOPED MARKETS, AND
INCREASE THE RISK OF LOSS TO THE FUND.
The definition of developing and emerging markets or countries may differ from
the definition of the same term as used in managing other Franklin Templeton
Funds.
LIQUIDITY The fund may not invest more than 15% of its total assets in
securities which are not publicly traded or which cannot be readily resold
because of legal or contractual restrictions, or which are not otherwise readily
marketable (including repurchase agreements having more than seven days
remaining to maturity). Reduced liquidity may have an adverse impact on market
price and the fund's ability to sell particular securities when necessary to
meet the fund's liquidity needs or in response to a specific economic event such
as the deterioration in the creditworthiness of an issuer.
DIVERSIFICATION The fund is a non-diversified fund. It may invest a greater
portion of its assets in the securities of one issuer than a diversified fund.
The fund may be more sensitive to economic, business, political or other changes
affecting similar issuers or securities, which may result in greater fluctuation
in the value of the fund's shares. The fund, however, intends to meet certain
tax diversification requirements.
COUNTRY FOCUS To the extent the fund invests a significant portion of its assets
in one or more countries, the fund will face a greater risk of loss due to
factors affecting a single country than if the fund always maintained wide
diversity among the countries in which it invests.
PORTFOLIO TURNOVER The manager's attempt to seek high total return may cause the
fund's portfolio turnover rate to be high. High turnover will increase the
fund's transaction costs and may increase your tax liability.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not 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.
[End callout]
[Insert graphic of bull and bear] PERFORMANCE
- -------------------------------------------------------------------------------
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 2 calendar years. The table
shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
ANNUAL TOTAL RETURNS/1/
[Insert bar graph]
- -3.90% 11.77%
- --------------------------
98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q4 '99
7.15%
WORST
QUARTER:
Q3 '99
- -1.32%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
SINCE
INCEPTION
1 YEAR (6/4/97)
- ---------------------------------------------------------------------------
Emerging Fixed Income Markets Series 11.77% 7.57%
J.P. Morgan Emerging Markets Bond Index Plus/2/ 25.97% 4.60%
1. As of March 31, 2000, the fund's year-to-date return was 4.9%.
2. Source: Standard & Poor's Micropal. The unmanaged J. P. Morgan Emerging
Markets Bond Index Plus tracks the total returns of broker-traded external debt
instruments that are issued by governments and corporations in the emerging
markets and have at least $500 million outstanding. It includes reinvested
interest. One cannot invest directly in an index, nor is an index representative
of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
- -------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge (load) imposed on purchases None
Exchange fee/1/ $5.00
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management fees/2/ 0.70%
Other expenses 1.92%
-----
Total annual fund operating expenses/2/ 2.62%
=====
1. This fee is only for market timers (see page 43).
2. For the fiscal year ended December 31, 1999, the manager and administrator
had agreed in advance to limit their respective fees and to assume as their own
expense certain expenses otherwise payable by the fund. With this reduction, the
fund paid no management fees and total annual fund operating expenses were
1.25%. After April 30, 2001, the transfer agent, the manager and administrator
may end this arrangement at any time.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
$265 $814 $1,390 $2,954
[Insert graphic of briefcase] MANAGEMENT
- -------------------------------------------------------------------------------
Templeton Investment Counsel, Inc. (Investment Counsel), 500 East Broward Blvd.,
Ft. Lauderdale, Florida 33394-3091, through its Templeton Global Bond Managers
division (Global Bond Managers), is the fund's investment manager. Together,
Investment Counsel and its affiliates manage over $229 billion in assets. A team
from Global Bond Managers is responsible for the day-to-day management of the
fund.
The fund pays Investment Counsel a fee for managing the fund's assets and making
its investment decisions. For the fiscal year ended December 31, 1999,
management fees, before any advance waiver, were 0.70% of the fund's average
daily net assets for its services. Under an agreement by the manager to waive
its fees, the fund did not pay any management fees. After April 30, 2001, the
manager may end this arrangement at any time upon notice to the fund's Board of
Directors.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
This table presents the fund's financial performance for the past three years.
This information has been audited by PricewaterhouseCoopers LLP for the fiscal
year ended December 31, 1999, and by other auditors for the fiscal years before
1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------
1999/1/ 1998 1997/2/
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE DATA ($)
Net asset value, beginning of year 8.59 10.47 10.00
-------------------------------------
Net investment income .77 .84 .44
Net realized and unrealized gains (losses) .22 (1.27) .79
-------------------------------------
Total from investment operations .99 (.43) .23
-------------------------------------
Distributions from net investment income (.76) (.86) (.44)
Distributions from net realized gains - (.56) (.32)
Tax return of capital - (.03) -
-------------------------------------
Total distributions (.76) (1.45) (.76)
-------------------------------------
Net asset value, end of year 8.82 8.59 10.47
========================================
Total return (%)/3/ 11.77 (3.98) 12.42
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 000) 2,103 1,881 2,249
Ratios to average net assets: (%)
Expenses 1.25 1.25 1.25/4/
Expenses excluding waiver and payments by
affiliate 2.62 3.74 6.40/4/
Net investment income 8.57 8.55 7.26/4/
Portfolio turnover rate (%) 297.46 525.94 172.62
</TABLE>
1. Based on average weighted shares outstanding.
2. For the period June 4, 1997 (commencement of operations) to December 31,
1997.
3. Total return is not annualized.
4. Annualized
[Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
INCOME AND CAPITAL GAINS DISTRIBUTIONS The funds intend to pay a dividend at
least annually representing substantially all of their net investment income and
any net realized capital gains. The amount of these distributions will vary and
there is no guarantee the funds will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record date for the funds' distributions will vary. Please keep in mind that if
you invest in the funds shortly before the record date of a distribution, any
distribution will lower the value of the funds' shares by the amount of the
distribution and you will receive some of your investment back in the form of a
taxable distribution. If you would like information on upcoming record dates for
the funds' distributions, please call Institutional Services at 1-800/321-8563.
TAX CONSIDERATIONS In general, fund distributions are taxable to you as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional fund shares or receive them in cash. Any capital
gains a fund distributes are taxable to you as long-term capital gains no matter
how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, a fund must withhold 31% of your taxable distributions and redemption
proceeds if you do not provide your correct social security or taxpayer
identification number and certify that you are not subject to backup
withholdings, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of a fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale.
Fund distributions and gains from the sale or exchange of your shares generally
will be subject to state and local income tax. Any foreign taxes a fund pays on
its investments may be passed through to you as a foreign tax credit. Non-U.S.
investors may be subject to U.S. withholding and estate tax. You should consult
your tax advisor about the federal, state, local or foreign tax consequences of
your investment in a fund.
YOUR ACCOUNT
[Insert graphic of pencil marking an X] QUALIFIED INVESTORS
- -------------------------------------------------------------------------------
The following investors may qualify to buy shares of the funds.
o Defined contribution plans such as employer stock, bonus, pension or profit
sharing plans that meet the requirements for qualification under section
401 of the Internal Revenue Code, including salary reduction plans
qualified under section 401(k) of the Internal Revenue Code, and that are
sponsored by an employer (i) with at least 1,000 employees (10,000 for the
Foreign Equity Series), or (ii) with retirement plan assets of $10 million
or more ($100 million or more for the Foreign Equity Series). Minimum
investments: No initial or additional minimums. Minimum investments for
plans with less than 1,000 employees or $10 million in plan assets
(excluding Foreign Equity Series): $1 million initial investment or an
investment of $1 million over the subsequent 13-month period in the funds
or any of the Franklin Templeton Funds and no additional minimum.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Templeton Variable Insurance Products
Trust and Templeton Capital Accumulator Fund, Inc.
[End callout]
o Trust companies and bank trust departments initially investing in the Franklin
Templeton Funds at least $1 million of 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. Minimum investments: $1 million initial investment or an
investment of $1 million over the subsequent 13-month period in the funds
or any of the Franklin Templeton Funds and no additional minimum.
o Defined benefit plans or governments, municipalities, and tax-exempt entities
that meet the requirements for qualification under section 501 of the
Internal Revenue Code. Minimum investments: $1 million initial investment.
o Service agents and broker-dealers who have entered into an agreement with
Franklin Templeton Distributors, Inc. (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.
o An investor who 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 Funds, including at least $1 million in the
funds. See the Institutional Application. Minimum investments: $1 million.
If the investor does not invest at least $5 million in shares of the funds
or other Franklin Templeton Funds within the 13-month period, the shares
actually purchased will be involuntarily redeemed and the proceeds sent to
the investor at the address of record. Any redemptions made by the
shareholder during the 13-month period will be subtracted from the amount
of purchases for purposes of determining whether the terms of the Letter
have been completed.
o Any investor, including a private investment vehicle such as a family trust or
foundation, who is a member of a qualified group. Minimum investments: $5
million initial investment. For minimum investment purposes, the group's
investments are added together. The group may combine all of its shares in
the Franklin Templeton Funds for purposes of determining whether it meets
the $5 million minimum, as long as $1 million is invested or to be invested
in the funds. There are certain other requirements and the group must have
a purpose other than buying fund shares.
o Other investors. Minimum investments: $5 million initial investment.
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.
Certain Franklin Templeton Funds offer multiple share classes not offered by the
funds. Please note that for selling or exchanging your shares, or for other
purposes, the funds' shares are considered Advisor Class shares.
[Insert graphic of paper with lines and someone writing] BUYING SHARES
- -------------------------------------------------------------------------------
For defined contribution plans that meet the requirements for qualification
under section 401 of the Internal Revenue Code and that are sponsored by an
employer with at least 1,000 employees or with retirement plan assets of $10
million or more, you may continue to add to your Foreign Equity Series account
or buy additional shares through the reinvestment of dividend or capital gains
distributions if you were a shareholder of record of Foreign Equity Series as of
May 1, 1999.
ACCOUNT APPLICATION If you are opening a new account, please complete and sign
an Institutional Account Application.
<TABLE>
<CAPTION>
BUYING SHARES
- --------------------------------------- -------------------------------------- --------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- ---------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
[Insert graphic of hands shaking] Contact your investment Contact your investment
representative representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- ---------------------------------------- -------------------------------------- --------------------------------------
[Insert graphic of envelope] Make your check, Federal Reserve Make your check, Federal Reserve
draft or negotiable bank draft draft or negotiable bank draft
BY MAIL payable to the fund. payable to the fund. Include your
account number.
Mail the check, Federal Reserve
draft or negotiable bank draft and Fill out the deposit slip from your
your signed Institutional Account account statement. If you do not
Application to Institutional have a slip, include a note with
Services. your name, the fund name, and your
account number.
Mail the check, Federal Reserve
draft or negotiable bank draft
and deposit slip or note to
Institutional Services.
- ---------------------------------------- -------------------------------------- --------------------------------------
[Insert graphic of three lightning Call to receive a wire control Call to receive a wire control
bolts] number and wire instructions. number and wire instructions.
BY WIRE Wire the funds and mail your signed To make a same day wire investment,
1-800/321-8563 Institutional Account Application to please call us by 1:00 p.m. Pacific
(or 1-650/312-3600 collect) Institutional Services. Please time and make sure your wire arrives
include the wire control number or by 3:00 p.m.
your new account number on the
application.
To make a same day wire investment,
please call us by 1:00 p.m. Pacific
time and make sure your wire arrives
by 3:00 p.m.
- ---------------------------------------- -------------------------------------- --------------------------------------
[Insert graphic of two arrows Call Institutional Services at the Call Institutional Services at the
pointing in opposite directions] number below, or send signed written number below, or send signed written
instructions. (Please see page 38 instructions. (Please see page 38
BY EXCHANGE for information on exchanges.) for information on exchanges.)
- ---------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
FRANKLIN TEMPLETON INSTITUTIONAL SERVICES P.O. BOX 7777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/321-8563
(MONDAY THROUGH FRIDAY 6:00 A.M. TO 5:00 P.M., PACIFIC TIME)
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 purchase order may be rejected by
Distributors or by Templeton Institutional Funds, Inc. (Company).
Shares of the funds may be purchased with 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, 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 for an in-kind
purchase, call Institutional Services. Investors who are affiliated persons of
the Company (as defined in the Investment Company Act of 1940) may not purchase
shares in this manner absence SEC approval.
[Insert graphic of person with handset] INVESTOR SERVICES
- -------------------------------------------------------------------------------
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You may initiate many transactions and make certain other
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.
For accounts with more than one registered owner, telephone privileges also
allow a fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests. Of course,
you can decline telephone exchange or redemption privileges on your account
application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton Funds
within the same class and between funds in Templeton Institutional Funds, Inc.
You also may exchange your shares for Class A shares of a fund that does not
currently offer an Advisor Class (without any sales charge)* or for Class Z
shares of Franklin Mutual Series Fund Inc. If you exchange shares held for less
than six months, however, you may be charged the difference between the initial
sales charge of the two funds if the difference is more than 0.25%.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges, including minimum investment amounts. Exchanges also have the same
tax consequences as ordinary sales and purchases.
[End callout]
If you do not qualify to buy Advisor Class shares of a Franklin Templeton Fund,
you also may exchange your shares for Class A shares of the fund (without any
sales charge).*
*If you exchange into Class A shares and you later decide you would like to
exchange into a fund that offers an Advisor Class or Class Z, you may exchange
your Class A shares for Advisor Class or Class Z shares if you otherwise qualify
to buy the fund's Advisor Class or Class Z shares.
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee.
Frequent exchanges can interfere with fund management or operations and drive up
costs for all shareholders. To protect shareholders, there are limits on the
number and amount of exchanges you may make (please see "Market Timers" on page
43).
[Insert graphic of certificate] SELLING SHARES
- -------------------------------------------------------------------------------
You can sell your shares at any time.
SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can be
made over the phone or with a simple letter. If you have completed and returned
the Institutional Telephone Privileges Agreement, amounts over $100,000 may also
be redeemed. Sometimes, however, to protect you and the funds we will need
written instructions signed by all registered owners, with a signature guarantee
for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a
signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of record, or
preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the funds
against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with a
check or draft, we may delay sending you the proceeds until your check or draft
has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days after
we receive your request in proper form. We are not able to receive or pay out
cash in the form of currency. Redemption proceeds may be delayed if we have not
yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in a
Franklin Templeton Trust Company retirement plan. For participants under age
59 1/2, tax penalties may apply. Call Retirement Services at 1-800/527-2020 for
details.
<TABLE>
<CAPTION>
SELLING SHARES
- ----------------------------------- --------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- ----------------------------------- --------------------------------------------
<S> <C>
[Insert graphic of hands shaking] Contact your investment representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- ----------------------------------- --------------------------------------------
[Insert graphic of envelope] Send written instructions and endorsed share
certificates (if you hold share certificates)
to Institutional Services. Corporate,
partnership or trust accounts may need to
BY MAIL send additional documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. Be sure to include all necessary
signatures and any additional documents, as
well as signature guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise
according to your written instructions.
- ----------------------------------- ---------------------------------------------
[Insert graphic of phone] As long as your transaction is for $100,000
or less, you do not hold share certificates
and you have not changed your address by
BY PHONE phone within the last 15 days, you can sell
1-800/321-8563 your shares by phone.
(Only available if you have A check will be mailed to the name(s) and
completed and sent the address on the account. Written instructions,
Institutional Telephone with a signature guarantee, are required to
Privileges Agreement) send the check toanother address or to make
it payable to another person.
- ----------------------------------- ---------------------------------------------
[Insert graphic of three You can call or write to have redemption
lightning bolts] proceeds sent to a bank account. See the
policies above for selling shares by mail or
phone.
BY ELECTRONIC FUNDS Before requesting to have redemption proceeds
TRANSFER (ACH) sent to a bank account, please make sure we
have your bank account information on file. If
we do not have this information, you will need
to send written instructions with your
bank's name and address, a voided check or
savings account deposit slip, and a
signature guarantee if the ownership of the
bank and fund accounts is different.
If we receive your request in proper form by
1:00 p.m. Pacific, proceeds sent by ACH
generally will be available within two to
three business days.
- ----------------------------------- -----------------------------------------------
[Insert graphic of two arrows Obtain a current prospectus for the fund you
pointing in opposite directions] are considering.
Call Institutional Services at the number below,
BY EXCHANGE or send signed written instructions. See the
policies above for selling shares by mail or
phone.
If you hold share certificates, you will
need to return them to the fund before your
exchange can be processed.
- ----------------------------------- ------------------------------------------------
</TABLE>
FRANKLIN TEMPLETON INSTITUTIONAL SERVICES P.O. BOX 7777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/321-8563
(MONDAY THROUGH FRIDAY 6:00 A.M. TO 5:00 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
- -------------------------------------------------------------------------------
CALCULATING SHARE PRICE Each fund calculates the net asset value per share (NAV)
each business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. Pacific time). Each fund's NAV is calculated by dividing its
net assets by the number of its shares outstanding.
Each fund's assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value. If
a fund holds securities listed primarily on a foreign exchange that trades on
days when the funds are not open for business, the value of your shares may
change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated after
we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $1,000
because you sell some of your shares, we may mail you a notice asking you to
bring the account back up to $1,000. If you choose not to do so within 30 days,
we may close your account and mail the proceeds to the address of record.
STATEMENTS AND REPORTS You will receive quarterly account statements that show
all your account transactions during the quarter. You also will receive written
notification after each transaction affecting your account (except for
distributions and transactions made through automatic investment or withdrawal
programs, which will be reported on your quarterly statement). You also will
receive the funds' financial reports every six months. To reduce fund expenses,
we try to identify related shareholders in a household and send only one copy of
the financial reports. If you need additional copies, please call 1-800/DIAL
BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive copies of all notifications and statements
and other information about your account directly from a fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have an
agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with two or
more owners are registered as "joint tenants with rights of survivorship" (shown
as "Jt Ten" on your account statement). To make any ownership changes to a joint
account, all owners must agree in writing, regardless of the law in your state.
MARKET TIMERS The funds may restrict or refuse purchases or exchanges by market
timers. If accepted, each exchange by a market timer will be charged $5 by
Franklin/Templeton Investor Services, Inc., the funds' transfer agent. You will
be considered a market timer if you have (i) requested a redemption or exchange
out of a fund within two weeks of an earlier redemption or exchange request, or
(ii) purchased and redeemed shares (directly or by exchange) out of a fund more
than twice in a calendar quarter, or (iii) purchased or exchanged shares equal
to at least $5 million, or more than 1% of a fund's net assets, or (iv)
otherwise seem to follow a timing pattern. Shares under common ownership or
control are combined for these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies and
reserves certain rights, including:
o The funds may refuse any order to buy shares, including any purchase under the
exchange privilege.
o At any time, the funds may change its investment minimums or waive or lower
its minimums for certain purchases.
o The funds may modify or discontinue the exchange privilege on 60 days' notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or postpone
the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the funds reserve the right to make
payments in securities or other assets of the funds, in the case of an
emergency or if the payment by check, wire or electronic funds transfer
would be harmful to existing shareholders.
o To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to the funds promptly.
DEALER COMPENSATION Qualifying dealers who sell shares may receive up to 0.25%
of the amount invested. This amount is paid by Franklin Templeton Distributors,
Inc. from its own resources.
[Insert graphic of question mark] QUESTIONS
- -------------------------------------------------------------------------------
If you have any questions about the funds or your account, you can write to us
at P.O. Box 7777, San Mateo, CA 94403-7777. You also can call us at one of the
following numbers. For your protection and to help ensure we provide you with
quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- -------------------------------------------------------------------------------
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m.
(Saturday)
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Advisor Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about each fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies, financial
statements, detailed performance information, portfolio holdings and the
auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about each fund, their investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
INSTITUTIONAL SERVICES 1-800/321-8563
TDD (Hearing Impaired) 1-800/851-0637
www.franklintempleton.com
You also can obtain information about each fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-202/942-8090) or the EDGAR Database
on the SEC's Internet site at http://www.sec.gov. You can obtain copies of this
information, after paying a duplicating fee, by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102 or by electronic request at the
following E-mail address: publicinfo(R)sec.gov.
Investment Company Act file #811-6135 ZTIFI P 05/00
PAGE
PART A
PROSPECTUS
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES - SERVICE SHARES
PAGE
Prospectus
Templeton
Institutional
Funds, Inc.
INVESTMENT STRATEGY
GLOBAL GROWTH
Foreign Equity Series - Service Shares
MAY 1, 2000
[Insert Franklin Templeton Butterball logo]
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.
CONTENTS
THE FUND
[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
2 Goal and Strategies
4 Main Risks
7 Performance
8 Fees and Expenses
9 Management
10 Distributions and Taxes
12 Financial Highlights
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
13 Qualified Investors
15 Buying Shares
17 Investor Services
18 Selling Shares
20 Account Policies
22 Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]
Back Cover
THE FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
- -------------------------------------------------------------------------------
GOAL The fund's investment goal is long-term capital growth.
MAIN INVESTMENT STRATEGIES Under normal market conditions, the fund invests at
least 65% of total assets in at least three different nations. The fund normally
will invest primarily in the equity securities of companies located outside the
U.S., including emerging markets.
[Begin callout]
The fund invests primarily in an internationally diversified portfolio of
equity securities.
[End callout]
Equity securities generally entitle the holder to participate in a company's
general operating results. These include common stocks and preferred stocks. The
fund may invest a portion of its assets in smaller companies. For this fund,
smaller company stocks are generally those with market capitalizations of less
than $1 billion. The fund also invests in American, European and Global
Depositary Receipts, which are certificates typically issued by a bank or trust
company that give their holders the right to receive securities issued by a
foreign or domestic company. The fund, from time to time, may have significant
investments in one or more countries or in particular sectors such as technology
(including computer hardware and software, electronics, and telecommunications)
and financial institutions.
Depending upon current market conditions, the fund generally may invest a
portion of its total assets in debt securities of companies and governments
located anywhere in the world. Debt securities represent an obligation of the
issuer to repay a loan of money to it, and generally provide for the payment of
interest. These include bonds, notes and debentures.
When choosing equity investments for the fund, the manager applies a
"bottom-up", value-oriented, long-term approach, focusing on the market price of
a company's securities relative to the manager's evaluation of the company's
long-term earnings, asset value and cash flow potential. The manager also
considers a company's price/earnings ratio, profit margins and liquidation
value.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, the manager may invest up to 100% of the fund's
assets in a temporary defensive manner or hold a substantial portion of the
fund's portfolio in cash. Temporary defensive investments generally may include
money market securities, short-term and medium-term U.S. and foreign government
securities, bank obligations and repurchase agreements. The manager also may
invest in these types of securities or hold cash while looking for suitable
investment opportunities or to maintain liquidity. In these circumstances, the
fund may be unable to achieve its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
- -------------------------------------------------------------------------------
STOCKS While this may not be the case in foreign markets, in the U.S., stocks
historically have outperformed other asset classes over the long term (over the
short term they tend to go up and down more dramatically). These price movements
may result from factors affecting individual companies, industries or the
securities markets as a whole. Value stock prices are considered "cheap"
relative to the company's perceived value. They may not increase in value, as
anticipated by the manager, if other investors fail to recognize the company's
value and bid up the price or in markets favoring faster-growing companies.
[Begin callout]
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money over
short or even extended periods.
[End callout]
FOREIGN SECURITIES Investing in foreign securities, including securities of
foreign governments and depositary receipts, typically involves more risks than
investing in U.S. securities. Certain of these risks also may apply to
securities of U.S. companies with significant foreign operations. These risks
can increase the potential for losses in the fund and affect its share price.
CURRENCY EXCHANGE RATES. Foreign securities may be issued and traded in foreign
currencies. As a result, their values may be affected by changes in exchange
rates between foreign currencies and the U.S. dollar, as well as between
currencies of countries other than the U.S. For example, if the value of the
U.S. dollar goes up compared to a foreign currency, an investment traded in that
foreign currency will go down in value because it will be worth less U.S.
dollars. The impact of the euro, a relatively new currency adopted by certain
European countries to replace their national currencies, is unclear at this
time.
POLITICAL AND ECONOMIC DEVELOPMENTS. The political, economic and social
structures of some foreign countries may be less stable and more volatile than
those in the U.S. Investments in these countries may be subject to the risks of
internal and external conflicts, currency devaluations, foreign ownership
limitations and tax increases. It is possible that a government may take over
the assets or operations of a company or impose restrictions on the exchange or
export of currency or other assets. Some countries also may have different legal
systems that may make it difficult for the fund to vote proxies, exercise
shareholder rights, and pursue legal remedies with respect to its foreign
investments.
TRADING PRACTICES. Brokerage commissions and other fees generally are higher for
foreign securities. Government supervision and regulation of foreign stock
exchanges, currency markets, trading systems and brokers may be less than in the
U.S. The procedures and rules governing foreign transactions and custody
(holding of the fund's assets) also may involve delays in payment, delivery or
recovery of money or investments.
AVAILABILITY OF INFORMATION. Foreign companies may not be subject to the same
disclosure, accounting, auditing and financial reporting standards and practices
as U.S. companies. Thus, there may be less information publicly available about
foreign companies than about most U.S. companies.
LIMITED MARKETS. Certain foreign securities may be less liquid (harder to sell)
and more volatile than many U.S. securities. This means the fund may at times be
unable to sell foreign securities at favorable prices. In choosing investments,
the fund's manager strongly believes in onsite visits to issuers of prospective
investments to assess critical factors such as management strength and local
conditions.
EMERGING MARKETS. The risks of foreign investments typically are greater in less
developed countries, sometimes referred to as emerging markets. For example,
political and economic structures in these countries may be less established and
may change rapidly. These countries also are more likely to experience high
levels of inflation, deflation or currency devaluation, which can harm their
economies and securities markets and increase volatility. In fact, short-term
volatility in these markets, and declines of 50% or more, are not uncommon.
LIQUIDITY The fund may not invest more than 10% of its assets in securities
which are not publicly traded or which cannot be readily resold because of legal
or contractual restrictions, or which are not otherwise readily marketable
(including repurchase agreements having more than seven days remaining to
maturity). Reduced liquidity affecting an individual security or an entire
market may have an adverse impact on market price and the fund's ability to sell
particular securities when necessary to meet the fund's liquidity needs or in
response to a specific economic event.
COUNTRY, SECTOR OR INDUSTRY FOCUS To the extent the fund invests a significant
portion of its assets in one or more countries, sectors or industries at any
time, the fund will face a greater risk of loss due to factors affecting a
single country, sector or industry than if the fund always maintained wide
diversity among the countries, sectors and industries in which it invests. For
example, technology companies involve risks due to factors such as the rapid
pace of product change, technological developments and new competition. Their
stocks historically have been volatile in price, especially over the short term,
often without regard to the merits of individual companies. Banks and financial
institutions are subject to potentially restrictive governmental controls and
regulations that may limit or adversely affect profitability and shares price.
In addition, securities in that sector may be very sensitive to interest rate
changes throughout the world.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not 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.
[End callout]
[Insert graphic of bull and bear] PERFORMANCE
- -------------------------------------------------------------------------------
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 9 calendar years. The table
shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
SERVICE SHARES ANNUAL TOTAL RETURNS/1/,/2/
[Insert bar graph]
21.39% -1.33% 34.03% 0.24% 12.97% 21.58% 11.43% 10.16% 27.34%
- -------------------------------------------------------------------------------
91 92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q4 '99
16.80%
WORST
QUARTER:
Q3 '99
- -1.98%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
SINCE
INCEPTION
1 YEAR 5 YEARS (10/18/90)
- -------------------------------------------------------------------------------
Foreign Equity Series - Service Shares 27.34% 16.51% 14.07%
MSCI - EAFE Index/3/ 27.30% 13.15% 10.45%
1. As of March 31, 2000, the fund's year-to-date return was -1.59%.
2. Before May 1, 1999, only a single class of fund shares was offered without
Rule 12b-1 expenses. Returns shown are a restatement of the original class to
include the Rule 12b-1 fees applicable to Service Shares as though in effect
from the fund's inception.
3. Source: Standard & Poor's Micropal. The unmanaged MSCI Europe Australia Far
East (EAFE) Index tracks the performance of approximately 1,000 securities in 20
countries. It includes reinvested dividends. One cannot invest directly in an
index, nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
SERVICE SHARES
- -------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases None
Maximum deferred sales charge (load) None
Exchange fee/1/ $5.00
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
SERVICE SHARES
- -------------------------------------------------------------------------------
Management fees 0.70%
Distribution and service (12b-1) fees 0.35%
Other expenses 0.14%
-----
Total annual fund operating expenses 1.19%
=====
1. This fee is only for market timers (see page 21).
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
$121 $378 $654 $1,346
[Insert graphic of briefcase] MANAGEMENT
- -------------------------------------------------------------------------------
Templeton Investment Counsel, Inc. (Investment Counsel), 500 East Broward Blvd.,
Ft. Lauderdale, Florida 33394-3091, is the fund's investment manager. Together,
Investment Counsel and its affiliates manage over $229 billion in assets.
The fund's lead portfolio manager is:
GARY P. MOTYL CFA, DIRECTOR AND PRESIDENT OF INVESTMENT COUNSEL
Mr. Motyl has been a manager of the fund since 1996. He joined the Franklin
Templeton Group in 1981.
The following individuals have secondary portfolio management responsibilities:
MARK R. BEVERIDGE CFA, SENIOR VICE PRESIDENT OF INVESTMENT COUNSEL
Mr. Beveridge has been a manager of the fund since 1996. He joined the Franklin
Templeton Group in 1985.
GARY CLEMONS, EXECUTIVE VICE PRESIDENT OF INVESTMENT COUNSEL
Mr. Clemons has been a manager of the fund since 1994. He joined the Franklin
Templeton Group in 1990.
SIMON RUDOLPH, SENIOR VICE PRESIDENT OF INVESTMENT COUNSEL
Mr. Rudolph has been a manager of the fund since 1998. He joined the Franklin
Templeton Group in 1997.
GUANG YANG, VICE PRESIDENT OF INVESTMENT COUNSEL
Mr. Yang has been a manager of the fund since 1998. He joined the Franklin
Templeton Group in 1995.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. The fee is equal to a annual rate of 0.70% of its average
daily net assets.
[Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least annually representing substantially all of its net investment income and
any net realized capital gains. The amount of these distributions will vary and
there is no guarantee the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record date for the fund's distributions will vary. Please keep in mind that if
you invest in the fund shortly before the record date of a distribution, any
distribution will lower the value of the fund's shares by the amount of the
distribution and you will receive some of your investment back in the form of a
taxable distribution. If you would like information on upcoming record dates for
the fund's distributions, please call Institutional Services at 1-800/321-8563.
TAX CONSIDERATIONS In general, fund distributions are taxable to you as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional fund shares or receive them in cash. Any capital
gains the fund distributes are taxable to you as long-term capital gains no
matter how long you have owned your shares.
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
[Begin callout]
BACKUP WITHHOLDING
By law, fund must withhold 31% of your taxable distributions and proceeds if you
do not provide your correct social security or taxpayer identification number or
certify that you are not subject to backup withholdings, or if the IRS instructs
the fund to do so.
[End callout]
When you sell your shares of the fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The individual tax rate on any gain from
the sale or exchange of your shares depends on how long you have held your
shares.
Fund distributions and gains from the sale or exchange of your shares generally
will be subject to state and local income tax. Any foreign taxes paid by the
fund that invests more than 50% of its assets in foreign securities may be
passed through to you as a foreign tax credit. Non-U.S. investors may be subject
to U.S. withholding and estate tax. You should consult your tax advisor about
the federal, state, local or foreign tax consequences of your investment in the
fund.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
This table presents the fund's financial performance since its inception. This
information has been audited by PricewaterhouseCoopers LLP.
YEAR ENDED
DECEMBER 31, 1999/1/
- -------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 19.53
-----
Net investment income .25
Net realized and unrealized gains 2.73
-----
Total from investment operations 2.98
-----
Distributions from net investment income (.37)
Distributions from net realized gains (.61)
------
Total distributions (.99)
------
Net asset value, end of year 21.53
======
Total return (%)/2/ 15.49
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 22
Ratios to average net assets: (%)
Expenses .84%/3/
Net investment income 1.91%/3/
Portfolio turnover rate (%) 10.56%
1. For the period May 3, 1999 (effective date) to December 31, 1999. Based on
average weighted shares outstanding.
2. Total return is not annualized.
3. Annualized
YOUR ACCOUNT
[Insert graphic of pencil marking an X] QUALIFIED INVESTORS
- -------------------------------------------------------------------------------
The following investors may qualify to buy shares of the funds.
o Defined contribution plans such as employer stock, bonus, pension or profit
sharing plans that meet the requirements for qualification under section
401 of the Internal Revenue Code, including salary reduction plans
qualified under section 401(k) of the Internal Revenue Code, and that are
sponsored by an employer (i) with at least 1,000 employees, or (ii) with
retirement plan assets of $10 million or more. Minimum investments: No
initial or additional minimums. Minimum investments for plans with less
than 1,000 employees or $10 million in plan assets: $1 million initial
investment or an investment of $1 million over the subsequent 13-month
period in the fund or any of the Franklin Templeton Funds and no additional
minimum.
o Trust companies and bank trust departments initially investing in the Franklin
Templeton Funds at least $1 million of 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. Minimum investments: $1 million initial investment or an
investment of $1 million over the subsequent 13-month period in the fund or
any of the Franklin Templeton Funds and no additional minimum.
[Begin callout]
The Franklin Templeton Funds include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Templeton Insurance Variable Products
Trust and Templeton Capital Accumulator Fund, Inc.
[End callout]
o Defined benefit plans, governments, municipalities, and tax-exempt entities
that meet the requirements for qualification under section 501 of the
Internal Revenue Code. Minimum investments: $1 million initial investment.
o An investor who 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 Funds, including at least $1 million in the
funds. See the Institutional Application. Minimum investments: $1 million.
If the investor does not invest at least $5 million in shares of the funds
or other Franklin Templeton Funds within the 13-month period, the shares
actually purchased will be involuntarily redeemed and the proceeds sent to
the investor at the address of record. Any redemptions made by the
shareholder during the 13-month period will be subtracted from the amount
of purchases for purposes of determining whether the terms of the Letter
have been completed.
o Any investor, including a private investment vehicle such as a family trust or
foundation, who is a member of a qualified group. Minimum investments: $5
million initial investment. For minimum investment purposes, the group's
investments are added together. The group may combine all of its shares in
the Franklin Templeton Funds for purposes of determining whether it meets
the $5 million minimum, as long as $1 million is invested or to be invested
in the funds. There are certain other requirements and the group must have
a purpose other than buying fund shares.
o Other investors. Minimum investments: $5 million initial.
Shares of the fund may be purchased at net asset value without a sales charge
through any broker that has a dealer agreement with Franklin Templeton
Distributors Inc. (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.
Certain Franklin Templeton Funds offer multiple share classes not offered by the
fund. Please note that for selling or exchanging your shares, or for other
purposes, the fund's shares are considered Class A shares.
DISTRIBUTION AND SERVICE (12B-1) FEES Service Shares has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay distribution
fees of up to 0.35% per year to those who sell and distribute Service Shares and
provide other services to shareholders. Because these fees are paid out of
Service Shares' assets on an on-going basis, over time these fees will increase
the cost of your investment and may cost you more than paying other types of
sales charges.
[Insert graphic of paper with lines and someone writing] BUYING SHARES
- -------------------------------------------------------------------------------
ACCOUNT APPLICATION If you are opening a new account, please complete and sign
an Institutional Account Application.
<TABLE>
<CAPTION>
BUYING SHARES
- --------------------------------------- -------------------------------------- --------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- ---------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
[Insert graphic of hands shaking] Contact your investment Contact your investment
representative representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- ---------------------------------------- -------------------------------------- --------------------------------------
[Insert graphic of envelope] Make your check, Federal Reserve Make your check, Federal Reserve
draft or negotiable bank draft draft or negotiable bank draft
BY MAIL payable to the fund. payable to the fund. Include your
account number.
Mail the check, Federal Reserve
draft or negotiable bank draft and Fill out the deposit slip from your
your signed Institutional Account account statement. If you do not
Application to Institutional have a slip, include a note with
Services. your name, the fund name, and your
account number.
Mail the check, Federal Reserve
draft or negotiable bank draft
and deposit slip or note to
Institutional Services.
- ---------------------------------------- -------------------------------------- --------------------------------------
[Insert graphic of three lightning Call to receive a wire control Call to receive a wire control
bolts] number and wire instructions. number and wire instructions.
BY WIRE Wire the funds and mail your signed To make a same day wire investment,
1-800/321-8563 Institutional Account Application to please call us by 1:00 p.m. Pacific
(or 1-650/312-3600 collect) Institutional Services. Please time and make sure your wire arrives
include the wire control number or by 3:00 p.m.
your new account number on the
application.
To make a same day wire investment,
please call us by 1:00 p.m. Pacific
time and make sure your wire arrives
by 3:00 p.m.
- ---------------------------------------- -------------------------------------- --------------------------------------
[Insert graphic of two arrows Call Institutional Services at the Call Institutional Services at the
pointing in opposite directions] number below, or send signed written number below, or send signed written
instructions. (Please see page 38 instructions. (Please see page 38
BY EXCHANGE for information on exchanges.) for information on exchanges.)
- ---------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
FRANKLIN TEMPLETON INSTITUTIONAL SERVICES P.O. BOX 7777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/321-8563
(MONDAY THROUGH FRIDAY 6:00 A.M. TO 5:00 P.M., PACIFIC TIME)
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 purchase order may be rejected by
Distributors or by Templeton Institutional Funds, Inc. (Company).
Shares of the fund may be purchased with 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, 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 fund next computed after such
receipt. To obtain the approval of the Company for an in-kind purchase, call
Institutional Services. Investors who are affiliated persons of the Company (as
defined in the Investment Company Act of 1940) may not purchase shares in this
manner absent SEC approval.
[Insert graphic of person with handset] INVESTOR SERVICES
- -------------------------------------------------------------------------------
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You may initiate many transactions and make certain other
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.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests. Of course,
you can decline telephone exchange or redemption privileges on your account
application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton Funds
within the same class (without any sales charge).
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges, including minimum investment amounts. Exchanges also have the same
tax consequences as ordinary sales and purchases.
[End callout]
Frequent exchanges can interfere with fund management or operations and drive up
costs for all shareholders. To protect shareholders, there are limits on the
number and amount of exchanges you may make (please see "Market Timers" on page
21).
[Insert graphic of certificate] SELLING SHARES
- -------------------------------------------------------------------------------
You can sell your shares at any time.
SELLING SHARES IN WRITING Requests to sell $100,000 or less can generally be
made over the phone or with a simple letter. If you have completed and returned
the Institutional Telephone Privileges Agreement, amounts over $100,000 may also
be redeemed. Sometimes, however, to protect you and the fund we will need
written instructions signed by all registered owners, with a signature guarantee
for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE HELPS PROTECT YOUR ACCOUNT AGAINST FRAUD. YOU CAN OBTAIN A
SIGNATURE guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of record, or
preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the fund
against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with a
check or draft, we may delay sending you the proceeds until your check or draft
has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days after
we receive your request in proper form. We are not able to receive or pay out
cash in the form of currency. Redemption proceeds may be delayed if we have not
yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in a
Franklin Templeton Trust Company retirement plan. For participants under age
59 1/2, tax penalties may apply. Call Retirement Services at 1-800/527-2020 for
details.
<TABLE>
<CAPTION>
SELLING SHARES
- ----------------------------------- --------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- ----------------------------------- --------------------------------------------
<S> <C>
[Insert graphic of hands shaking] Contact your investment representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- ----------------------------------- --------------------------------------------
[Insert graphic of envelope] Send written instructions and endorsed share
certificates (if you hold share certificates)
to Institutional Services. Corporate,
partnership or trust accounts may need to
BY MAIL send additional documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. Be sure to include all necessary
signatures and any additional documents, as
well as signature guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise
according to your written instructions.
- ----------------------------------- ---------------------------------------------
[Insert graphic of phone] As long as your transaction is for $100,000
or less, you do not hold share certificates
and you have not changed your address by
BY PHONE phone within the last 15 days, you can sell
1-800/321-8563 your shares by phone.
(Only available if you have A check will be mailed to the name(s) and
completed and sent the address on the account. Written instructions,
Institutional Telephone with a signature guarantee, are required to
Privileges Agreement) send the check toanother address or to make
it payable to another person.
- ----------------------------------- ---------------------------------------------
[Insert graphic of three You can call or write to have redemption
lightning bolts] proceeds sent to a bank account. See the
policies above for selling shares by mail or
phone.
BY ELECTRONIC FUNDS Before requesting to have redemption proceeds
TRANSFER (ACH) sent to a bank account, please make sure we
have your bank account information on file. If
we do not have this information, you will need
to send written instructions with your
bank's name and address, a voided check or
savings account deposit slip, and a
signature guarantee if the ownership of the
bank and fund accounts is different.
If we receive your request in proper form by
1:00 p.m. Pacific, proceeds sent by ACH
generally will be available within two to
three business days.
- ----------------------------------- -----------------------------------------------
[Insert graphic of two arrows Obtain a current prospectus for the fund you
pointing in opposite directions] are considering.
Call Institutional Services at the number below,
BY EXCHANGE or send signed written instructions. See the
policies above for selling shares by mail or
phone.
If you hold share certificates, you will
need to return them to the fund before your
exchange can be processed.
- ----------------------------------- ------------------------------------------------
</TABLE>
FRANKLIN TEMPLETON INSTITUTIONAL SERVICES P.O. BOX 7777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/321-8563
(MONDAY THROUGH FRIDAY 6:00 A.M. TO 5:00 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
- ------------------------------------------------------------------------------
CALCULATING SHARE PRICE The fund calculates the net asset value per share (NAV)
each business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. Pacific time). The NAV for Service Shares is calculated by
dividing its net assets by the number of its shares outstanding.
The fund's assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value. If
the fund holds securities listed primarily on a foreign exchange that trades on
days when the fund is not open for business, the value of your shares may change
on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated after
we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $1,000
because you sell some of your shares, we may mail you a notice asking you to
bring the account back up to $1,000. If you choose not to do so within 30 days,
we may close your account and mail the proceeds to the address of record.
STATEMENTS AND REPORTS You will receive quarterly account statements that show
your account transactions during the quarter. You also will receive written
notification after each transaction affecting your account (except for
distributions and transactions made through automatic investment or withdrawal
programs, which will be reported on your quarterly statement). You also will
receive the fund's financial reports every six months. To reduce fund expenses,
we try to identify related shareholders in a household and send only one copy of
the financial reports. If you need additional copies, please call 1-800/DIAL
BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive confirmations, account statements and other
information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have an
agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with two or
more owners are registered as "joint tenants with rights of survivorship" (shown
as "Jt Ten" on your account statement). To make any ownership changes to a joint
account, all owners must agree in writing, regardless of the law in your state.
MARKET TIMERS The fund may restrict or refuse purchases or exchanges by market
timers. If accepted, each exchange by a market timer will be charged $5 by
Franklin/Templeton Investor Services, Inc., the fund's transfer agent. You will
be considered a market timer if you have (i) requested a redemption or exchange
out of the fund within two weeks of an earlier redemption or exchange request,
or (ii) purchased or redeemed shares (directly or by exchange) out of the fund
more than twice in a calendar quarter, or (iii) purchased or exchanged shares
equal to at least $5 million, or more than 1% of the fund's net assets, or (iv)
otherwise seem to follow a timing pattern. Shares under common ownership or
control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies and
reserves certain rights, including:
o The fund may refuse any order to buy shares, including any purchase under the
exchange privilege.
o At any time, the fund may change its investment minimums or waive or lower its
minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days' notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or postpone
the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right to make
payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check or wire would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to the fund promptly.
[Insert graphic of question mark] QUESTIONS
- -------------------------------------------------------------------------------
If you have any questions about the fund or your account, you can write to us at
P.O. Box 7777, San Mateo, CA 94403-7777. You also can call us at one of the
following numbers. For your protection and to help ensure we provide you with
quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- -------------------------------------------------------------------------------
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m.
(Saturday)
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Advisor Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies, financial
statements, detailed performance information, portfolio holdings and the
auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
INSTITUTIONAL SERVICES 1-800/321/8563
TDD (Hearing Impaired) 1-800/851-0637
www.franklintempleton.com
You also can obtain information about each fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-202/942-8090) or the EDGAR Database
on the SEC's Internet site at http://www.sec.gov. You can obtain copies of this
information, after paying a duplicating fee, by writing to the to the SEC's
Public Reference Section, Washington, D.C. 20549-0102 or by electronic request
at the following E-mail address: [email protected].
Investment Company Act file #811-6135 Z954 P 05/00
PAGE
PART B
STATEMENT OF ADDITIONAL INFORMATION
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES - PRIMARY SHARES
EMERGING MARKETS SERIES
EMERGING FIXED INCOME MARKETS SERIES
PAGE
TEMPLETON
INSTITUTIONAL
FUNDS, INC.
FOREIGN EQUITY SERIES - PRIMARY SHARES
EMERGING MARKETS SERIES
EMERGING FIXED INCOME MARKETS SERIES
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000
[FRANKLIN TEMPLETON BUTTERBALL LOGO]
P.O. BOX 33030, ST. PETERSBURG, FL 33733-8030
1-800/321-8563 (INSTITUTIONAL SERVICES)
- -------------------------------------------------------------------------------
This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the funds' prospectus. The funds'
prospectus, dated May 1, 2000, which we may amend from time to time, contains
the basic information you should know before investing in the fund. You should
read this SAI together with the funds' prospectus.
The audited financial statements and auditor's report in the funds' Annual
Report to Shareholders, for the fiscal year ended December 31, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/321-8563.
CONTENTS
Goals and Strategies................. 2
Risks................................ 15
Officers and Directors............... 19
Management and Other Services........ 23
Portfolio Transactions............... 25
Distributions and Taxes.............. 26
Organization, Voting Rights and
Principal Holders.................... 27
Buying and Selling Shares............ 28
Pricing Shares....................... 31
The Underwriter...................... 31
Performance.......................... 32
Miscellaneous Information............ 33
Description of Bond Ratings.......... 34
- -------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT INSURED BY THE FEDERAL EPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- -------------------------------------------------------------------------------
ZTIFI SAI 05/00
GOALS AND STRATEGIES
- -------------------------------------------------------------------------------
FOREIGN EQUITY SERIES The fund's investment goal is long-term capital growth.
This goal is fundamental, which means it may not be changed without shareholder
approval.
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 invests at least 65% of its total assets in foreign
equity securities. Under normal market conditions, the fund invests in the
equity securities of companies located outside the U.S., including emerging
markets. Foreign Equity Series may also invest up to 35% of its total assets in
debt securities when, in the judgment of the manager, they offer greater
potential for capital appreciation than is available through investment in
stocks. In selecting securities for Foreign Equity Series, the 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.
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. The fund may invest in
securities issued by smaller companies.
EMERGING MARKETS SERIES The fund's investment goal is long-term capital growth.
This goal is fundamental, which means it may not be changed without shareholder
approval.
The fund seeks long-term capital growth by investing primarily in the equity
securities of developing market issuers. Emerging Markets Series may invest up
to 100% of its total assets in developing markets, including up to 5% of its
total assets in Russian securities. At least 65% of its total assets will be
invested in issuers located in at least three different countries (including the
U.S.). With respect to 75% of its total assets, Emerging Markets Series may
invest up to 5% of its total assets in securities issued by any one company or
foreign government. Emerging Markets Series may invest any amount of its assets
in U.S. government securities. Emerging Markets Series may invest in any
industry although it will not concentrate (invest more than 25% of its total
assets) in any one industry. Emerging Markets Series may invest up to 15% of its
total assets in foreign securities that are not listed on a recognized U.S. or
foreign securities exchange, including up to 10% of its total assets in
restricted securities, securities that are not readily marketable, repurchase
agreements with more than seven days to maturity, and over-the-counter options
bought by the fund.
DEVELOPING OR EMERGING MARKETS The fund's investments in developing or emerging
markets are subject to all of the risks of foreign investing generally, and have
additional heightened risks due to a lack of established legal, political,
business and social frameworks to support securities markets. Some of the
additional significant risks, include:
o Political and social uncertainty (for example, regional conflicts and risk
of war)
o Currency exchange rate volatility
o Pervasiveness of corruption and crime
o Delays in settling portfolio transactions
o Risk of loss arising out of systems of share registration and custody
o Markets that are comparatively smaller and less liquid than developed
markets. While short-term volatility in these markets can be disconcerting,
declines of more than 50% are not unusual.
o Less government supervision and regulation of business and industry
practices, stock exchanges, brokers and listed companies than in the United
States.
o Currency and capital controls.
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 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 The fund's investment goal is high total
return, consisting of current income and capital appreciation. This goal is
fundamental, which means it may not be changed without shareholder approval.
Under normal market conditions, Emerging Fixed Income Markets Series will invest
at least 65% of total assets in debt securities of companies, governments and
government agencies located in emerging market countries. Emerging Fixed Income
Markets Series may invest up to 35% of total assets in securities issued or
guaranteed by the U.S. government, its agencies and instrumentalities.
Emerging Fixed Income Markets Series seeks high total return 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 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.
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 which are discussed below.
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.
With respect to up to 35% of its total assets, Emerging Fixed Income Markets
Series may (i) invest in dividend-paying common stock of U.S. and foreign
corporations; (ii) invest in preferred equity securities, including those debt
securities which may have equity features, such as conversion or exchange
rights, or which carry warrants to purchase common stock or other equity
interests; and (iii) engage in transactions involving the various investment
techniques described below. 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 manager to be of comparable
quality). Emerging Fixed Income Markets Series may borrow up to one-third of the
value of its total assets and may lend portfolio securities with an aggregate
market value of up to one-third of its total assets. Emerging Fixed Income
Markets Series may purchase and sell put and call options on securities or
indices, provided that (i) the value of the underlying securities on which
options may be written at any one time will not exceed 25% of the fund's total
assets, and (ii) the fund will not purchase put or call options if the aggregate
premium paid for such options would exceed 5% of its total assets. Emerging
Fixed Income Markets Series may enter into forward foreign currency contracts
and may purchase and write put and call options on foreign currencies. For
hedging purposes only (including anticipatory hedges where the 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, 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.
With the exception of the investment objectives and restrictions specifically
identified as fundamental, all investment policies and practices described in
the prospectus and this SAI may be changed by the board of directors without
shareholder approval. Each fund's policies and restrictions discussed in the
prospectus and this 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.
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.
The following is a description of the various types of securities the funds may
buy.
EQUITY SECURITIES The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner of
an equity security may participate in a company's success through the receipt of
dividends which are distributions of earnings by the company to its owners.
Equity security owners may also participate in a company's success or lack of
success through increases or decreases in the value of the company's shares as
traded in the public trading market for such shares. Equity securities generally
take the form of common stock or preferred stock. Preferred stockholders
typically receive greater dividends but may receive less appreciation than
common stockholders and may have greater voting rights as well. Equity
securities may also include convertible securities, warrants or rights.
Convertible securities typically are debt securities or preferred stocks which
are convertible into common stock after certain time periods or under certain
circumstances. Warrants or rights give the holder the right to purchase a common
stock at a given time for a specified price. 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.
DEPOSITARY RECEIPTS Depositary receipts are certificates that give their holders
the right to receive securities (a) of a foreign issuer deposited in a U.S. bank
or trust company (American Depositary Receipts, "ADRs"); or (b) of a foreign or
U.S. issuer deposited in a foreign bank or trust company (Global Depositary
Receipts, "GDRs" or European Depositary Receipts, "EDRs"). 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.
DEBT SECURITIES A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes,
debentures and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the fund's net asset value.
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. Eurobonds are
generally issued in bearer form, carry a fixed or floating rate of interest, and
typically amortize principal through a bullet payment with semiannual interest
payments in the currency in which the bond was issued. Yankee bonds are foreign
bonds denominated in U.S. dollars and registered with the Securities and
Exchange Commission for sale in the U.S. A Global Bond is a certificate
representing the total debt of an issue. Such bonds are created to control the
primary market distribution of an issue in compliance with selling restrictions
in certain jurisdictions or because definitive bond certificates are not
available. A global bond is also known as a global certificate.
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
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. The funds may buy debt securities rated as low as C by
Moody's or S&P (or comparable unrated securities as determined by each fund's
manager). Debt securities rated C by Moody's are the lowest rated class of bonds
and may be regarded as having extremely poor prospects of ever attaining any
real investment standing. Debt securities rated C by S&P are typically
subordinated to senior debt which is vulnerable to default and is dependent on
favorable conditions to meet timely payment of interest and repayment of
principal. Debt securities rated C are therefore risky and speculative
investments.
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.
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.
To the extent a fund invests in debt securities, it may accrue and report
interest on high yield bonds structured as zero coupon bonds or pay-in-kind
securities as income even though it receives no corresponding cash payment until
a later time, generally the security's maturity date. In order to qualify for
beneficial tax treatment, a fund must distribute substantially all of its net
investment income to shareholders on an annual basis (see 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.
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 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 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 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 flows on the underlying instruments may be
apportioned among the newly issued structured investments to create securities
with different investment characteristics such as varying maturities, payment
priorities or interest rate provisions; the extent of the payments made with
respect to structured investments is dependent on the extent of the cash flows
on the underlying instruments. Because structured investments of the type in
which the funds anticipate investing typically involve no credit enhancement,
their credit risk will generally be equivalent to that of the underlying
instruments. The funds are permitted to invest in a class of structured
investments that is either subordinated or unsubordinated to the right of
payment of another class. Subordinated structured investments typically have
higher yields and present greater risks than unsubordinated structured
investments. Although 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 leveraged for purposes of the
limitations placed on the extent of assets that may be used for borrowing
activities.
Certain issuers of structured investments may be deemed to be "investment
companies" as defined in the Investment Company Act of 1940 (1940 Act). As a
result, a fund's investment in these structured investments may be limited by
the restrictions contained in the 1940 Act. Structured investments are typically
sold in private placement transactions, and there currently is no active trading
market for structured investments. To the extent such investments are illiquid,
they will be subject to the fund's restrictions on investments in illiquid
securities. Each of the funds, except Emerging Fixed Income Markets Series, will
limit its investment in structured investments to 5% of its total assets.
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 manager to be of investment grade quality.
REPURCHASE AGREEMENTS Each fund generally will have a portion of its assets in
cash or cash equivalents for a variety of reasons, including waiting for a
special investment opportunity or taking a defensive position. To earn income on
this portion of its assets, each fund may enter into repurchase agreements.
Under a repurchase agreement, the fund agrees to buy securities guaranteed as to
payment of principal and interest by the U.S. government or its agencies from a
qualified bank or broker-dealer and then to sell the securities back to the bank
or broker-dealer after a short period of time (generally, less than seven days)
at a higher price. The bank or broker-dealer must transfer to the fund's
custodian securities with an initial market value of at least 102% of the dollar
amount invested by the fund in each repurchase agreement. The 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 bank or broker dealer, including possible delays or restrictions upon the
fund's ability to sell the underlying securities. The fund will enter into
repurchase agreements only with parties who meet certain creditworthiness
standards, i.e., banks or broker-dealers that the manager has determined present
no serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
LOANS OF PORTFOLIO SECURITIES The funds may lend certain of its portfolio
securities to qualified securities dealers and other institutional investors.
These loans may not exceed up to one-third of the value of the fund's total
assets, measured at the time of the most recent loan. Each loan must be secured
with collateral (consisting of cash, securities issued by the U.S. government
and its agencies and instrumentalities, or irrevocable letters of credit) in an
amount at least equal (in a daily marked-to market basis) of the current market
value of the loaned securities. The fund may retain all or a portion of the
interest received on investment of the cash collateral or receives a fee from
the borrower. The fund effectively receives any distributions paid on the loaned
securities. The fund may terminate a loan at any time and obtain the return of
the securities loaned within the normal settlement period for the security
involved.
Where voting rights with respect to the loaned securities pass with the lending
of the securities, the manager intends to call the loaned securities to vote
proxies, or to use other practicable and legally enforceable means to obtain
voting rights, when the manager has knowledge that, in its opinion, a material
event affecting the loaned securities will occur or the manager otherwise
believes it necessary to vote. As with other extensions of credit, there are
risks of delay in recovery or even loss of rights in collateral in the event of
default or insolvency of the borrower. The fund will loan its securities only to
parties who meet creditworthiness standards approved by the fund's board of
directors, i.e., banks or broker-dealers that the manager has determined present
no serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the loan.
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, the
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 the 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 or gains received from the securities purchased with borrowed funds.
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 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.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, the manager may invest up to 100% of the fund's
assets in a temporary defensive manner or hold a substantial portion of the
fund's portfolio in cash. Unfavorable market or economic conditions may include
excessive volatility or a prolonged general decline in the securities markets,
the securities in which the fund normally invests, or the economies of the
countries where the fund invests.
Temporary defensive investments generally may include 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 the fund's 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, the 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 the fund will limit its
investment in time deposits for which there is a penalty for early withdrawal to
10% of its total assets. The manager also may invest in these types of
securities or hold cash while looking for suitable investment opportunities or
to maintain liquidity.
ILLIQUID INVESTMENTS 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. Illiquid securities also include securities
which are not publicly traded or which cannot be readily resold because of legal
or contractual restrictions, or which are not otherwise readily marketable
(including repurchase agreements having more than seven days remaining to
maturity).
The 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 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.
FUTURES CONTRACTS Although the funds have the authority to buy and sell
financial futures contracts, they presently have no intention of entering into
such transactions. For hedging purposes only (including anticipatory hedges
where the 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. 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.
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.
At the time a fund purchases a futures contract, an amount of liquid assets
equal to the market value of the futures contract will be segregated. When
writing a futures contract, a fund will segregate liquid assets that, when added
to the amounts deposited with a futures commission merchant or broker as margin,
are equal to the market value of the instruments underlying the contract.
Alternatively, a fund may "cover" its position by owning the instruments
underlying the contract (or, in the case of an index futures contract, a
portfolio with a volatility substantially similar to that of the index on which
the futures contract is based), or holding a call option permitting the fund to
purchase the same futures contract at a price no higher than the price of the
contract written by the fund (or at a higher price if the fund maintains the
difference in liquid assets).
OPTIONS ON SECURITIES OR INDICES Although the funds have the authority to write
(i.e., sell) covered put and call options in order to hedge a portion of its
portfolio and/or to generate income to offset operating expenses and buy put and
call options on securities or securities indices in order to hedge against
market shifts, they presently have no intention of entering into such
transactions. Options purchased or written by a fund will be 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 that is segregated) 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 segregated liquid assets. 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, 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 manager, are
expected to be similar to those of the index, or in such other manner as may be
in accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations. Nevertheless, where a fund covers a call option
on a stock index through ownership of securities, such securities may not match
the composition of the index. In that event, a fund will not be fully covered
and could be subject to risk of loss in the event of adverse changes in the
value of the index. A fund will cover put options on stock indices that it
writes by segregating assets equal to the option's exercise price, or in such
other manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations.
A fund will receive a premium from writing a put or call option, which increases
the fund's gross income in the event the option expires unexercised or is closed
out at a profit. If the value of a security or an index on which a fund has
written a call option falls or remains the same, the fund will realize a profit
in the form of the premium received (less transaction costs) that could offset
all or a portion of any decline in the value of the portfolio securities being
hedged. If the value of the underlying security or index rises, however, a fund
will realize a loss in its call option position, which will reduce the benefit
of any unrealized appreciation in the fund's investments. By writing a put
option, a fund assumes the risk of a decline in the underlying security or
index. To the extent that the price changes of the portfolio securities being
hedged correlate with changes in the value of the underlying security or index,
writing covered put options on indices or securities will increase a fund's
losses in the event of a market decline, although such losses will be offset in
part by the premium received for writing the option.
A fund may also purchase put options to hedge its investments against a decline
in value. By purchasing a put option, a fund will seek to offset a decline in
the value of the portfolio securities being hedged through appreciation of the
put option. If the value of a fund's investments does not decline as
anticipated, or if the value of the option does not increase, the fund's loss
will be limited to the premium paid for the option plus related transaction
costs. The success of this strategy will depend, in part, on the accuracy of the
correlation between the changes in value of the underlying security or index and
the changes in value of a fund's security holdings being hedged.
A fund may purchase call options on individual securities to hedge against an
increase in the price of securities that the fund anticipates purchasing in the
future. Similarly, a fund may purchase call options on a securities index to
attempt to reduce the risk of missing a broad market advance, or an advance in
an industry or market segment, at a time when the fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options, a
fund will bear the risk of losing all or a portion of the premium paid if the
value of the underlying security or index does not rise.
There can be no assurance that a liquid market will exist when a fund seeks to
close out an option position. Trading could be interrupted, for example, because
of supply and demand imbalances arising from a lack of either buyers or sellers,
or the options exchange could suspend trading after the price has risen or
fallen more than the maximum specified by the exchange. Although a fund may be
able to offset to some extent any adverse effects of being unable to liquidate
an option position, the fund may experience losses in some cases as a result of
such inability.
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.
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. 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. 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." 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. 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 those liquid assets available
sufficient to cover any commitments under these contracts or to limit any
potential risk. In addition, when the fund sells a forward contract, it will
cover its obligation under the contract by segregating liquid assets, or by
owning securities denominated in the corresponding currency and with a market
value equal to or greater than the fund's obligation. The segregated assets 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 manager to forecast
currency exchange rate movements correctly. Should exchange rates move in an
unexpected manner, a fund may not achieve the anticipated benefits of foreign
currency futures or may realize losses.
SWAP AGREEMENTS Emerging Fixed Income Markets Series may enter into interest
rate, index and currency exchange rate swap agreements for purposes of
attempting to obtain a particular desired return at a lower cost to the fund
than if the fund had invested directly in an instrument that yielded that
desired return. Swap agreements are two-party contracts entered into primarily
by institutional investors for periods ranging from a few weeks to more than one
year. In a standard "swap" transaction, two parties agree to exchange the
returns (or differentials in rates of return) earned or realized on particular
predetermined investments or instruments. The gross returns to be exchanged or
"swapped" between the parties are calculated with respect to a "notional
amount," i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency, or in
a "basket" of securities representing a particular index. The "notional amount"
of the swap agreement is only a fictive basis on which to calculate the
obligations which the parties to a swap agreement have agreed to exchange.
Emerging Fixed Income Markets Series' obligations (or rights) under a swap
agreement will generally be equal only to the net amount to be paid or received
under the agreement based on the relative values of the positions held by each
party to the agreement (the "net amount"). Emerging Fixed Income Markets Series'
obligations under a swap agreement will be accrued daily (offset against any
amounts owing to the fund) and any accrued but unpaid net amounts owed to a swap
counterparty will be covered by the maintenance of a segregated account
consisting of cash, U.S. government securities, or high grade debt obligations,
to avoid any potential leveraging of the fund's portfolio. Emerging Fixed Income
Markets Series will not enter into a swap agreement with any single party if the
net amount 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 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
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.
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.
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.
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.
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.
PORTFOLIO TURNOVER 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 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 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 manager carefully weighs the anticipated benefits of
short-term investment against these consequences.
INVESTMENT RESTRICTIONS Each fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50% of
the fund's outstanding shares 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
this SAI).
2. Purchase or retain securities of any company in which directors or officers
of Templeton Institutional Funds, Inc. or a fund's manager, individually owning
more than 1/2 of 1% of the securities of such company, in the aggregate own more
than 5% of the securities of such company.
3. Purchase any security (other than obligations of the U.S. government, its
agencies or instrumentalities) if, as a result, as to 75% of the fund's total
assets (i) more than 5% of the fund's total assets would then be invested in
securities of any single issuer, or (ii) the fund would then own more than 10%
of the voting securities of any single issuer; provided, however, that this
restriction does not apply to the Emerging Fixed Income Markets Series.
4. Act as an underwriter; issue senior securities except as set forth in
investment restriction 6 below; or purchase on margin or sell short (but a fund
may make margin payments in connection with options on securities or securities
indices and foreign currencies; futures contracts and related options; and
forward contracts and related options).
5. Loan money apart from the purchase of a portion of an issue of publicly
distributed bonds, debentures, notes and other evidences of indebtedness,
although a fund may buy from a bank or broker-dealer U.S. government obligations
with a simultaneous agreement by the seller to repurchase them within no more
than seven days at the original purchase price plus accrued interest and loan
its portfolio securities. Emerging Fixed Income Markets Series may invest in
debt instruments of all types consistent with its investment objectives and
policies.
6. Borrow money, except that a fund may borrow money from banks in an amount not
exceeding 33 1/3% of the value of its total assets (including the amount
borrowed).
7. Invest more than 5% of the value of its total assets in securities of issuers
which have been in continuous operation less than three years; provided that
this restriction does not apply to Emerging Fixed Income Markets Series.
8. Invest more than 5% of its total assets in warrants, whether or not listed on
the NYSE or 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 "Risks" below and "Goals and Strategies" above as to
transactions in the same securities for a fund and/or other mutual funds with
the same or affiliated advisers.)
A fund also may be subject to investment limitations imposed by foreign
jurisdictions in which the fund sells its shares.
1. The SEC considers each foreign government to be a separate industry.
If a bankruptcy or other extraordinary event occurs concerning a particular
security a fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens the fund
intends to sell such investments as soon as practicable while trying to maximize
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when a fund makes an investment. In most cases, the fund is not
required to sell a security because circumstances change and the security no
longer meets one or more of the fund's policies or restrictions. If a percentage
restriction or limitation 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 will not be considered a violation of the restriction or
limitation.
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.
RISKS
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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 goal 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 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 SECURITIES You 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 New York Stock
Exchange (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.
EURO On January 1, 1999, the European Economic and Monetary Union (EMU)
introduced a new single currency called the euro. By July 1, 2002, the euro,
which will be implemented in stages, will have replaced the national currencies
of the following member countries: Austria, Belgium, Finland, France, Germany,
Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.
Currently, the exchange rate of the currencies of each of these countries is
fixed to the euro. The euro trades on currency exchanges and is available for
non-cash transactions. The participating countries currently issue sovereign
debt exclusively in euro. By July 1, 2002, euro-denominated bills and coins will
replace the bills and coins of the above countries.
The new European Central Bank has control over each country's monetary policies.
Therefore, the participating countries no longer control their own monetary
policies by directing independent interest rates for their currencies. The
national governments of the participating countries, however, have retained the
authority to set tax and spending policies and public debt levels.
The change to the euro as a single currency is new and untested. It is not
possible to predict the impact of the euro on currency values or on the business
or financial condition of European countries and issuers and issuers in other
regions, whose securities the fund may hold, or the impact, if any, on fund
performance. In the first six months of the euro's existence, the exchange rates
of the euro versus many of the world's major currencies steadily declined. In
this environment, U.S. and other foreign investors experienced erosion of their
investment returns on their euro-denominated securities. The transition and the
elimination of currency risk among EMU countries may change the economic
environment and behavior of investors, particularly in European markets.
While the implementation of the euro could have a negative effect on the fund,
the fund's manager and its affiliated service providers are taking steps they
believe are reasonably designed to address the euro issue.
EMERGING MARKETS. 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 that may restrict the
fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in many developing countries, of a capital market
structure or market-oriented economy; and (vii) the possibility that recent
favorable economic developments in some developing countries may be slowed or
reversed by unanticipated political or social events in such countries.
In addition, many countries in which the funds may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Investments in developing countries may involve risks of nationalization,
expropriation and confiscatory taxation. For example, 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. Further, no accounting
standards exist in certain developing countries. Finally, even though the
currencies of some developing countries, such as certain Eastern European
countries may be convertible into U.S. dollars, the conversion rates may be
artificial to the actual market values and may be adverse to fund shareholders.
RUSSIAN SECURITIES. 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 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 the fund to lose its registration
through fraud, negligence or even mere oversight. While the 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 the 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 the fund from
investing in the securities of certain Russian companies deemed suitable by the
manager. Further, this also could cause a delay in the sale of Russian company
securities by the fund if a potential purchaser is deemed unsuitable, which may
expose the fund to potential loss on the investment.
CURRENCY Each fund's management endeavors to buy and sell foreign currencies on
as favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when the 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 the fund from
transferring cash out of the country, 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 tax on income or other amounts, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), default in foreign government securities, political or social
instability, or diplomatic developments that could affect investments in
securities of issuers in those nations. The funds may be affected either
unfavorably or favorably by fluctuations in the relative rates of exchange
between the currencies of different nations, by exchange control regulations and
by indigenous economic and political developments. Some countries in which the
funds may invest may also have fixed or managed currencies that are not
free-floating against the U.S. dollar. Further, certain currencies may not be
internationally traded.
Certain of these currencies have experienced a steady devaluation relative to
the U.S. dollar. Any devaluations in the currencies in which a fund's portfolio
securities are denominated may have a detrimental impact on the fund. Through
each fund's flexible policy, management endeavors to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where, from time to time, it places the fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove profitable
and others may not. No assurance can be given that profits, if any, will exceed
losses.
INTEREST RATE RISK To the extent a fund invests in debt securities, changes in
interest rates in any country where the fund is invested will affect the value
of the fund's portfolio and, consequently, its share price. Rising interest
rates, which often occur during times of inflation or a growing economy, are
likely to cause the face value of a debt security to decrease, having a negative
effect on the value of a fund's shares. Of course, interest rates have increased
and decreased, sometimes very dramatically, in the past. These changes are
likely to occur again in the future at unpredictable times.
CREDIT RISK It is possible that an issuer will be unable to make interest
payments and repay principal. Changes in an issuer's financial strength or in a
security's credit rating may affect a security's value and, thus, impact fund
performance.
LOW-RATED SECURITIES RISK Bonds which are rated C by Moody's are the lowest
rated class of bonds, and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing. Bonds rated C by
S&P are obligations on which no interest is being paid.
Although they may offer higher yields than do higher rated securities, low rated
and unrated debt securities generally involve greater volatility of price and
risk of principal and income, including the possibility of default by, or
bankruptcy of, the issuers of the securities. In addition, the markets in which
low rated and unrated debt securities are traded are more limited than those in
which higher rated securities are traded. The existence of limited markets for
particular securities may diminish a fund's ability to sell the securities at
fair value either to meet redemption requests or to respond to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
Reduced secondary market liquidity for certain low rated or unrated debt
securities may also make it more difficult for a fund to obtain accurate market
quotations for the purposes of valuing the fund's portfolio. Market quotations
are generally available on many low rated or unrated securities only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of low rated debt securities,
especially in a thinly traded market. Analysis of the creditworthiness of
issuers of low rated debt securities may be more complex than for issuers of
higher rated securities, and the ability of the fund to achieve its investment
goal may, to the extent of investment in low rated debt securities, be more
dependent upon such creditworthiness analysis than would be the case if a fund
were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of low rated debt securities have been found to be less sensitive to
interest rate changes than higher rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. A projection of
an economic downturn or of a period of rising interest rates, for example, could
cause a decline in low rated debt securities prices because the advent of a
recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of low
rated debt securities defaults, a fund may incur additional expenses to seek
recovery. A fund will not invest more than 5% of its total assets in defaulted
debt securities, which may be illiquid.
MORTGAGE-BACKED SECURITIES RISK Mortgage securities differ from conventional
debt securities because principal is paid back over the life of the security
rather than at maturity. A fund may receive unscheduled prepayments of principal
prior to the security's maturity date due to voluntary prepayments, refinancing
or foreclosure on the underlying mortgage loans. To the fund this means a loss
of anticipated interest, and a portion of its principal investment represented
by any premium the fund may have paid. Mortgage prepayments generally increase
with falling interest rates and decrease with rising interest rates. An
unexpected rise in interest rates could reduce the rate of principal prepayments
on mortgage securities and extend the life of these securities. This could cause
the price of these securities and a fund's share price to fall and would make
these securities more sensitive to interest rate changes. This is called
"extension risk."
SMALLER COMPANIES RISK Historically, smaller company securities have been more
volatile in price than larger company securities, especially over the
short-term. Among the reasons for the greater price volatility are the less
certain growth prospects of smaller companies, the lower degree of liquidity in
the markets for such securities, and the greater sensitivity of smaller
companies to changing economic conditions.
In addition, small companies may lack depth of management, they may be unable to
generate funds necessary for growth or development, or they may be developing or
marketing new products or services for which markets are not yet established and
may never become established.
Therefore, while smaller companies may offer greater opportunities for capital
growth than larger, more established companies, they also involve greater risks
and should be considered speculative.
DERIVATIVE SECURITIES RISK 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. Each fund intends 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 manager's ability to predict correctly
movements in the direction of the market, as to which no assurance can be given.
REPURCHASE AGREEMENT RISK The use of repurchase agreements involves certain
risks. For example, if the other party to the agreement defaults on its
obligation to repurchase the underlying security at a time when the value of the
security has declined, a fund may incur a loss upon disposition of the security.
If the other party to the agreement becomes insolvent and subject to liquidation
or reorganization under the bankruptcy code or other laws, a court may determine
that the underlying security is collateral for a loan by a fund not within the
control of the fund, and therefore the realization by the fund on the collateral
may be automatically stayed. Finally, it is possible that a fund may not be able
to substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement.
LEVERAGE RISK 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.
OFFICERS AND DIRECTORS
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Templeton Institutional Funds, Inc. (Company) has a board of directors. The
board is responsible for the overall management of the funds, including general
supervision and review of each fund's investment activities. The board, in turn,
elects the officers of the funds who are responsible for administering the
funds' day-to-day operations. The board also monitors the Foreign Equity Series
to ensure no material conflicts exist among share classes. While none is
expected, the board will act appropriately to resolve any material conflict that
may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the funds, and principal occupations during
the past five years are shown below.
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
DIRECTOR
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 48 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers) (until 1998).
*Nicholas F. Brady (70)
16 North Washington Street, Easton, MD 21601
DIRECTOR
Chairman, Templeton Emerging Markets Investment Trust PLC, Templeton Latin
America Investment Trust PLC, Darby Overseas Investments, Ltd. and Darby
Emerging Markets Investments LDC (investment firms) (1994-present); Director,
Templeton Global Strategy Funds, Amerada Hess Corporation (exploration and
refining of oil and gas), C2, Inc. (operating and investment business), and H.J.
Heinz Company (processed foods and allied products); director or trustee, as the
case may be, of 19 of the investment companies in the Franklin Templeton Group
of Funds; and FORMERLY, Secretary of the United States Department of the
Treasury (1988-1993), Chairman of the Board, Dillon, Read & Co., Inc.
(investment banking) (until 1988) and U.S. Senator, New Jersey (April
1982-December 1982).
Frank J. Crothers (55)
P.O. Box N-3238, Nassau, Bahamas
DIRECTOR
Chairman, Caribbean Electric Utility Services Corporation and Atlantic Equipment
& Power Ltd.; Vice Chairman, Caribbean Utilities Co., Ltd.; President, Provo
Power Corporation; director of various other business and non-profit
organizations; and director or trustee, as the case may be, of 11 of the
investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
DIRECTOR
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or trustee,
as the case may be, of 50 of the investment companies in the Franklin Templeton
Group of Funds.
John Wm. Galbraith (78)
360 Central Avenue, Suite 1300, St. Petersburg, FL 33701
DIRECTOR
President, Galbraith Properties, Inc. (personal investment company); Director
Emeritus, Gulf West Banks, Inc. (bank holding company) (1995-present); director
or trustee, as the case may be, of 18 of the investment companies in the
Franklin Templeton Group of Funds; and 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. (77)
One Progress Plaza, Suite 290, St. Petersburg, FL 33701
DIRECTOR
Consultant, Triangle Consulting Group; Executive-in-Residence, Eckerd College
(1991-present); director or trustee, as the case may be, of 20 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Chairman and
Director, Precise Power Corporation (1990-1997), Director, Checkers Drive-In
Restaurant, Inc. (1994-1997), and Chairman of the Board and Chief Executive
Officer, Florida Progress Corporation (holding company in the energy area)
(1982-1990) and director of various of its subsidiaries.
Edith E. Holiday (48)
3239 38th Street, N.W., Washington, DC 20016
DIRECTOR
Director, Amerada Hess Corporation (exploration and refining of oil and gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present, H.J.
Heinz Company (processed foods and allied products) (1994-present) and RTI
International Metals, Inc. (manufacture and distribution of titanium) (July
1999-present); director or trustee, as the case may be, of 25 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Assistant to
the President of the United States and Secretary of the Cabinet (1990-1993),
General Counsel to the United States Treasury Department (1989-1990), and
Counselor to the Secretary and Assistant Secretary for Public Affairs and Public
Liaison-United States Treasury Department (1988-1989).
*Charles B. Johnson (67)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND DIRECTOR
Chairman of the Board, Chief Executive Officer, Member - Office of the Chairman
and Director, Franklin Resources, Inc.; Chairman of the Board and Director,
Franklin Investment Advisory Services, Inc.; Chairman of the Board, Franklin
Advisers, Inc.; Vice President, 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 49 of the investment
companies in the Franklin Templeton Group of Funds.
Betty P. Krahmer (70)
2201 Kentmere Parkway, Wilmington, DE 19806
DIRECTOR
Director or trustee of various civic associations; director or trustee, as the
case may be, of 19 of the investment companies in the Franklin Templeton Group
of Funds; and FORMERLY, Economic Analyst, U.S. government.
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
DIRECTOR
Director, Martek Biosciences Corporation, MCI WorldCom, Inc. (information
services), MedImmune, Inc. (biotechnology), Overstock.com (internet services);
White Mountains Insurance Group, Ltd. (holding company) and Spacehab, Inc.
(aerospace services); director or trustee, as the case may be, of 48 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Chairman, White River Corporation (financial services) (until 1998), Hambrecht &
Quist Group (investment banking) (until 1992) and President, National
Association of Securities Dealers, Inc. (until 1987).
Fred R. Millsaps (71)
2665 NE 37th Drive, Fort Lauderdale, FL 33308
DIRECTOR
Manager of personal investments (1978-present); director of various business and
nonprofit organizations; director or trustee, as the case may be, of 20 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Chairman and Chief Executive Officer, Landmark Banking Corporation (1969-1978),
Financial Vice President, Florida Power and Light (1965-1969), and Vice
President, Federal Reserve Bank of Atlanta (1958-1965).
Constantine Dean Tseretopoulos (46)
Lyford Cay Hospital, P.O. Box N-7776, Nassau, Bahamas
DIRECTOR
Physician, Lyford Cay Hospital (1987-present); director of various nonprofit
organizations; director or trustee, as the case may be, of 11 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Cardiology
Fellow, University of Maryland (1985-1987) and Internal Medicine Intern, Greater
Baltimore Medical Center (1982-1985).
James R. Baio (46)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
TREASURER
Certified Public Accountant; Senior Vice President, Templeton Worldwide, Inc.,
Templeton Global Investors, Inc. and Templeton Funds Trust Company; officer of
20 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Senior Tax Manager, Ernst & Young (certified public accountants)
(1977-1989).
Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice Chairman, Member-Office of the Chairman and Director, Franklin Resources,
Inc.; Executive Vice President and Director, Franklin Templeton Distributors,
Inc. and Franklin Templeton Services, Inc.; Executive Vice President, Franklin
Advisers, Inc.; Director, Franklin Investment Advisory Services, Inc. and
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 52 of the investment companies in the Franklin Templeton
Group of Funds.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Member-Office of the President, Chief Financial Officer and Chief
Operating Officer, Franklin Resources, Inc.; Senior Vice President, Chief
Financial Officer and Director, Franklin/Templeton Investor Services, Inc.;
Senior Vice President and Chief Financial Officer; Franklin Mutual Advisers,
LLC; Executive Vice President, Chief Financial Officer and Director, Templeton
Worldwide, Inc.; Executive Vice President, Chief Operating Officer and Director,
Templeton Investment Counsel, Inc.; Executive Vice President and Chief Financial
Officer, Franklin Advisers, Inc.; Executive Vice President and Chief Financial
Officer, Franklin Advisory Services, Inc. and Franklin Investment Advisory
Services, LLC; Director, Franklin Templeton Services, Inc.; officer and/or
director of some of the other subsidiaries of Franklin Resources, Inc.; and
officer and/or director or trustee, as the case may be, of 52 of the investment
companies in the Franklin Templeton Group of Funds.
David P. Goss (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Chief Executive Officer and Director, Franklin Select Realty Trust,
Property Resources, Inc., Property Resources Equity Trust, Franklin Real Estate
Management, Inc. and Franklin Properties, Inc.; officer and director of some of
the other subsidiaries of Franklin Resources, Inc.; officer of 53 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Director, Franklin Real Estate Income
Fund and Franklin Advantage Real Estate Income Fund (until 1996).
Barbara J. Green (52)
777 Mariners Island Blvd., San Mateo, CA 94404
SECRETARY AND VICE PRESIDENT
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior Vice
President, Templeton Worldwide, Inc. and Templeton Global Investors, Inc.;
officer of some of the other subsidiaries of Franklin Resources, Inc. and of 53
of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Deputy Director, 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 (until 1986), and Judicial Clerk, U.S.
District Court (District of Massachusetts) (until 1979).
Mark G. Holowesko (40)
Lyford Cay, Nassau, Bahamas
VICE PRESIDENT
President, Templeton Global Advisors Limited; Chief Investment Officer, Global
Equity Group; Executive Vice President and Director, Templeton Worldwide, Inc.;
officer of 19 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Investment Administrator, RoyWest Trust Corporation
(Bahamas) Limited (1984-1985).
Charles E. Johnson (43)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Member-Office of the President and Director, Franklin Resources,
Inc.; Senior Vice President, Franklin Templeton Distributors, Inc.; President
and Director, Templeton Worldwide, Inc. and Franklin Advisers, Inc.; Director,
Templeton Investment Counsel, Inc.; President, Franklin Investment Advisory
Services, Inc.; officer and/or director of some of the other subsidiaries of
Franklin Resources, Inc.; and officer and/or director or trustee, as the case
may be, of 33 of the investment companies in the Franklin Templeton Group of
Funds.
Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice Chairman, Member-Office of the Chairman and Director, Franklin Resources,
Inc.; Executive Vice President and Director, Franklin Templeton Distributors,
Inc.; Director, Franklin Advisers, Inc., Franklin Investment Advisory Services,
Inc. and Franklin/Templeton Investor Services, Inc.; Senior Vice President,
Franklin Advisory Services, LLC; and officer and/or director or trustee, as the
case may be, of most of the other subsidiaries of Franklin Resources, Inc.
and of 52 of the investment companies in the Franklin Templeton Group of Funds.
John R. Kay (59)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
VICE PRESIDENT
Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin
Templeton Distributors, Inc.; officer of 24 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Vice President and Controller,
Keystone Group, Inc.
Elizabeth M. Knoblock (45)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
VICE PRESIDENT - COMPLIANCE
General Counsel, Secretary and Senior Vice President, Templeton Investment
Counsel, Inc.; Senior Vice President, Templeton Global Investors, Inc.; officer
of other subsidiaries of Franklin Resources, Inc., and of 23 of the investment
companies in the Franklin Templeton 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, Division of Investment Management, U.S. Securities and Exchange
Commission (1984-1986).
J. Mark Mobius (63)
Two Exchange Square, 39th Floor,
Suite 3905-08, Hong Kong
VICE PRESIDENT
Portfolio Manager of various Templeton advisory affiliates; Managing Director,
Templeton Asset Management Ltd.; Executive Vice President and Director;
Templeton Global Advisors Limited; officer of eight of the investment companies
in the Franklin Templeton Group of Funds; and FORMERLY, President, International
Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund)
(1986-1987) and Director, Vickers da Costa, Hong Kong (1983-1986).
Donald F. Reed (55)
1 Adelaide Street East, Suite 2101
Toronto, Ontario Canada M5C 3B8
PRESIDENT
Executive Vice President and Director, Templeton Worldwide, Inc.; Chairman,
Chief Executive Officer and Director, Templeton Investment Counsel, Inc.;
President, Chief Executive Officer and Director, Templeton Management Limited;
officer and/or director, as the case may be, of some of the other subsidiaries
of Franklin Resources, Inc.; Co-founder and Director, International Society of
Financial Analysts; Chairman, Canadian Council of Financial Analysts; and
formerly, President and Director, Reed Monahan Nicholishen Investment Counsel
(1982-1989).
Murray L. Simpson (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer
and/or director of some of the subsidiaries of Franklin Resources, Inc.; officer
of 53 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin
Investment Services (Asia) Limited (until January 2000) and Director, Templeton
Asset Management, Ltd. (until 1999).
*This board member is considered an "interested person" under federal securities
laws. Mr. Brady's status as an interested person results from his business
affiliations with Franklin Resources, Inc. and Templeton Global Advisors
Limited. Mr. Brady and Franklin Resources, Inc. are both limited partners of
Darby Overseas Partners, L.P. (Darby Overseas). In addition, Darby Overseas and
Templeton Global Advisors Limited are limited partners of Darby Emerging Markets
Fund, L.P.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father
and uncle, respectively, of Charles E. Johnson.
The Company pays noninterested board members and Mr. Brady an annual retainer of
$12,000 and a fee of $900 per board meeting attended. Board members who serve on
the audit committee of the Company and other funds in the Franklin Templeton
Group of Funds receive a flat fee of $2,000 per committee meeting attended, a
portion of which is allocated to the Company. Members of a committee are not
compensated for any committee meeting held on the day of a board meeting.
Noninterested board members also may serve as directors or trustees of other
funds in the Franklin Templeton Group of Funds and may receive fees from these
funds for their services. The following table provides the total fees paid to
noninterested board members and Mr. Brady by the Company and by the Franklin
Templeton Group of Funds.
<TABLE>
<CAPTION>
TOTAL FEES NUMBER OF BOARDS
RECEIVED FROM IN THE FRANKLIN
TOTAL FEES THE FRANKLIN TEMPLETON GROUP
RECEIVED FROM TEMPLETON GROUP OF FUNDS ON WHICH
NAME THE FUND(1)($) OF FUNDS(2)($) EACH SERVES(3)
- -------------------------- --------------------- -------------------- ------------------
<S> <C> <C> <C>
Harris J. Ashton 16,500 363,165 48
Nicholas F. Brady 16,500 138,700 19
Frank J. Crothers 20,632 72,400 11
S. Joseph Fortunato 16,500 363,238 50
John Wm. Galbraith 17,030 144,200 18
Andrew H. Hines, Jr. 17,004 203,700 20
Edith E. Holiday 16,500 237,265 25
Betty P. Krahmer 16,500 138,700 19
Gordon S. Macklin 16,500 363,165 48
Fred R. Millsaps 17,341 201,700 20
Constantine D. Tseretopoulos 19,611 70,400 11
</TABLE>
1. For the fiscal year ended December 31, 1999.
2. For the calendar year ended December 31, 1999.
3. 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 53 registered investment companies, with approximately 155 U.S. based
funds or series.
Noninterested board members 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 fund or other funds in the
Franklin Templeton Group of Funds. Certain officers or board members who are
shareholders of Franklin Resources, Inc. may be deemed to receive indirect
remuneration by virtue of their participation, if any, in the fees paid to its
subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
- -------------------------------------------------------------------------------
MANAGER AND SERVICES PROVIDED Foreign Equity Series' manager is Templeton
Investment Counsel, Inc. The Emerging Markets Series investment manager is
Templeton Asset Management Ltd. -- Hong Kong. The Emerging Fixed Income Markets
Series' manager is Templeton Investment Counsel, Inc., through its Global Bond
Managers division. The managers are wholly owned subsidiaries of Franklin
Resources, Inc. (Resources), a publicly owned company engaged in the financial
services industry through its subsidiaries. Charles B. Johnson and Rupert H.
Johnson, Jr. are the principal shareholders of Resources.
The managers provide investment research and portfolio management services, and
select the securities for the funds to buy, hold or sell. The managers also
select the brokers who execute the funds' portfolio transactions. The manager
provides periodic reports to the board, which reviews and supervises the
managers' investment activities. To protect the funds, the managers and its
officers, directors and employees are covered by fidelity insurance. Templeton
Asset Management Ltd. -- Hong Kong renders its services to the Emerging Markets
Series from outside the U.S.
The Templeton organization has been investing globally since 1940. The managers
and their affiliates have offices in Argentina, the Bahamas, Brazil, Canada,
Peoples Republic of China, Cyprus, France, Germany, Hong Kong, India, Italy,
Japan, Korea, Luxembourg, Mauritius, the Netherlands, Poland, Russia, Singapore,
South Africa, Spain, Sweden, Switzerland, Taiwan, Turkey, United Kingdom,
Venezuela and the U.S.
The managers and their affiliates manage numerous other investment companies and
accounts. The managers may give advice and take action with respect to any of
the other funds it manages, or for its own account, that may differ from action
taken by the managers on behalf of the funds. Similarly, with respect to the
funds, the managers are not obligated to recommend, buy or sell, or to refrain
from recommending, buying or selling any security that the managers and access
persons, as defined by applicable federal securities laws, may buy or sell for
its or their own account or for the accounts of any other fund. The managers are
not obligated to refrain from investing in securities held by the funds or other
funds it manages.
The fund, its manager and principal underwriter have each adopted a code of
ethics, as required by federal securities laws. Under the code of ethics,
employees who are designated as access persons may engage in personal securities
transactions, including transactions involving securities that are being
considered for the fund or that are currently held by the fund, subject to
certain general restrictions and procedures. The personal securities
transactions of access persons of the fund, its manager and principal
underwriter will be governed by the code of ethics. The code of ethics is on
file with, and available from, the U.S. Securities and Exchange Commission
(SEC).
MANAGEMENT FEES Foreign Equity Series and Emerging Fixed Income Markets Series
pay their respective managers a monthly fee equal on an annual basis to 0.70% of
their average daily net assets during the year. Emerging Markets Series pays its
manager a monthly fee equal on an annual basis to 1.25% of its average daily net
assets during the year.
For the last three fiscal years ended December 31, the funds paid the following
management fees:
MANAGEMENT FEES PAID ($)
------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------
Foreign Equity Series 32,611,710 30,272,145 23,912,568
Emerging Markets Series 25,876,285 23,147,831 25,766,850
Emerging Fixed Income
Markets Series 0(1) 0(2) 0(3)
1. For the period January 1, 1999 through December 31, 1999, management fees,
before any advance waiver, totaled $13,710. Under an agreement by the manager to
waive its fees, the fund paid no management fees.
2. For the period January 1, 1998 through December 31, 1998, management fees,
before any advance waiver, totaled $15,136. Under an agreement by the manager to
waive its fees, the fund paid no management fees.
3. For the period June 4, 1997 (inception) through December 31, 1997, management
fees, before any advance waiver, totaled $8,484. Under an agreement by the
manager to waive its fees, the fund paid no management fees.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the Company to provide certain administrative
services and facilities for the funds. FT Services is wholly owned by Resources
and is an affiliate of the funds' managers and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The Company pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the funds' combined average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion; and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended December 31, the Company paid FT
Services the following administration fees:
ADMINISTRATION FEES PAID ($)
------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------
Foreign Equity Series 3,896,265 3,636,696 2,903,341
Emerging Markets Series 1,730,530 1,557,264 1,751,904
Emerging Fixed Income
Markets Series 0(1) 0(2) 0(3)
1. For the period January 1, 1999 through December 31, 1999, administration
fees, before any advance waiver, totaled $1,639. Under an agreement by FT
Services to waive its fees, the fund paid no administration fees.
2. For the period January 1, 1998 through December 31, 1998, administration
fees, before any advance waiver, totaled $1,818. Under an agreement by FT
Services to waive its fees, the fund paid no administration fees.
3. For the period June 4, 1997 (inception) through December 31, 1997,
administration fees, before any advance waiver, totaled $1,030. Under an
agreement by FT Services to waive its fees, the fund paid no administration
fees.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/ Templeton Investor Services,
Inc. (Investor Services) is the funds' shareholder servicing agent and acts as
the funds' transfer agent and dividend-paying agent. Investor Services is
located at 100 Fountain Parkway, St. Petersburg, FL 33716-1205. Please send all
correspondence to Investor Services to P.O. Box 33030, St. Petersburg, FL
33733-8030.
For its services, Investor Services receives a fixed fee per account. The funds
also will reimburse Investor Services for certain out-of-pocket expenses, which
may include payments by Investor Services to entities, including affiliated
entities, that provide sub-shareholder services, recordkeeping and/or transfer
agency services to beneficial owners of the funds. The amount of reimbursements
for these services per benefit plan participant fund account per year will not
exceed the per account fee payable by the funds to Investor Services in
connection with maintaining shareholder accounts.
CUSTODIAN The Chase Manhattan Bank, at its principal office at MetroTech Center,
Brooklyn, NY 11245, and at the offices of its branches and agencies throughout
the world, acts as custodian of the funds' assets. As foreign custody manager,
the bank selects and monitors foreign sub-custodian banks, selects and evaluates
non-compulsory foreign depositories, and furnishes information relevant to the
selection of compulsory depositories.
AUDITOR PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, NY
10036, is the funds' independent auditor. The auditor gives an opinion on the
financial statements included in the funds' Annual Report to Shareholders and
reviews the funds' registration statement filed with the SEC.
PORTFOLIO TRANSACTIONS
- -------------------------------------------------------------------------------
The managers select 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 managers seek to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid is negotiated between
the 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 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 the
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.
The managers may pay certain brokers commissions that are higher than those
another broker may charge, if the managers determine 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 managers' overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to the managers 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 managers in carrying out their investment advisory
responsibilities. These services may not always directly benefit the funds. They
must, however, be of value to the managers in carrying out their overall
responsibilities to its clients.
Since most purchases by the Emerging Fixed Income Markets Series are principal
transactions at net prices, the fund incurs little or no brokerage costs. The
fund deals directly with the selling or buying principal or market maker without
incurring charges for the services of a broker on its behalf, unless it is
determined that a better price or execution may be obtained by using the
services of a broker. 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 prices. The
fund seeks to obtain prompt execution of orders at the most favorable net price.
Transactions may be directed to dealers in return for research and statistical
information, as well as for special services provided by the dealers in the
execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services the managers receive from dealers effecting transactions in
portfolio securities. The allocation of transactions to obtain additional
research services allows the managers to supplement their own research and
analysis activities and to receive the views and information of individuals and
research staffs of other securities firms. As long as it is lawful and
appropriate to do so, the managers and their affiliates may use this research
and data in their investment advisory capacities with other clients. If the
funds' 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, also may be considered a factor in the selection of broker-dealers to
execute the funds' portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when the funds tender portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the funds,
any portfolio securities tendered by the funds will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to the managers will be reduced by the amount of any fees received
by Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the funds and one or more other
investment companies or clients supervised by the managers 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 managers, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. In some cases this procedure could
have a detrimental effect on the price or volume of the security so far as the
funds are concerned. In other cases it is possible that the ability to
participate in volume transactions may improve execution and reduce transaction
costs to the funds.
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 last three fiscal years ended December 31, the funds paid the
following brokerage commissions:
BROKERAGE COMMISSIONS ($)
------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------
Foreign Equity Series 1,502,739 3,863,065 2,666,430
Emerging Markets Series 7,000,468 5,522,111 6,813,142
Emerging Fixed Income
Markets Series 0 0 0(1)
1. For the period June 4, 1997 (inception) through December 31, 1997.
For the fiscal year ended December 31, 1999, Templeton Institutional Funds, Inc.
- - Emerging Markets Series paid brokerage commissions of $6,997,702 from
aggregate portfolio transactions of $2,001,288,321 to brokers who provided
research services. For the fiscal year ended December 31, 1999, Templeton
Institutional Funds, Inc. - Foreign Equity Series paid brokerage commissions of
$1,742,821 from aggregate portfolio transactions of $671,683,936 to brokers who
provided research services.
As of December 31, 1999, the funds did not own securities of their regular
broker-dealers.
DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
Distributions are subject to approval by the board. The funds do not pay
"interest" or guarantee any fixed rate of return on an investment in their
shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The funds receive income generally in the
form of dividends and interest on their investments. This income, less expenses
incurred in the operation of a fund, constitutes a fund's net investment income
from which dividends may be paid to you. Any distributions by a 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 The funds may derive capital gains and losses in
connection with sales or other dispositions of their portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in a fund. Any net capital gains realized by a fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, to reduce or eliminate excise or income taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by a
fund. Similarly, foreign exchange losses realized by a fund on the sale of debt
securities are generally treated as ordinary losses. These gains when
distributed will be taxable to you as ordinary dividends, and any losses will
reduce a fund's ordinary income otherwise available for distribution to you.
This treatment could increase or decrease a fund's ordinary income distributions
to you, and may cause some or all of a fund's previously distributed income to
be classified as a return of capital.
A fund may be subject to foreign withholding taxes on income from certain
foreign securities. This, in turn, could reduce ordinary income distribution to
you. If more than 50% of a fund's total assets at the end of the fiscal year are
invested in securities of foreign corporations, a fund may elect to pass-through
to you your pro rata share of foreign taxes paid by the fund. If this election
is made, the year-end statement you receive from a fund 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
(subject to limitations) claim a foreign tax credit for such taxes against your
U.S. federal income tax. A fund will provide you with the information necessary
to complete your individual income tax return if it makes this election.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held fund shares for a full year, a fund may designate and distribute 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.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY Each fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code. The funds have qualified as a regulated investment company for its
most recent fiscal year, and intends to continue to qualify during the current
fiscal year. As regulated investment companies, the funds generally pay no
federal income tax on the income and gains they distribute to you. 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
shareholders. 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 such fund's earnings
and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires a fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year. Each fund intends to declare and pay these distributions in
December (or to pay them in January, in which case you must treat them as
received in December) but can give no assurances that its distributions will be
sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions (including redemptions in kind) and
exchanges of fund shares are taxable transactions for federal and state income
tax purposes. If you redeem your fund shares, or exchange your fund shares for
shares of a different Franklin Templeton Fund, the IRS will require that you
report any gain or loss on your redemption or exchange. If you hold your shares
as a capital asset, the gain or loss that you realize will be capital gain or
loss and will be long-term or short-term, generally depending on how long you
hold your shares.
Beginning after the year 2005 (2000 for certain shareholders), gains from the
sale of fund shares held for more than five years may be subject to a reduced
tax rate.
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 the fund on those shares.
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 buy other shares in such 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 buy.
U.S. GOVERNMENT SECURITIES States grant tax-free status to dividends paid to you
from interest earned on certain U.S. government securities, subject in some
states to minimum investment or reporting requirements that must be met by the
fund. Investments in Government National Mortgage Association or Federal
National Mortgage Association securities, bankers' acceptances, commercial paper
and repurchase agreements collateralized by U.S. government securities generally
do not qualify for tax-free treatment. The rules on exclusion of this income are
different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because each fund's income is
derived primarily from investments in foreign rather than domestic securities
(except in the case of the Emerging Fixed Income Markets Series, the income
derived primarily from interest rather than dividends), generally none of its
distributions will be eligible for the corporate dividends-received deduction.
INVESTMENT IN COMPLEX SECURITIES The funds may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by a fund are
treated as ordinary income or capital gain, accelerate the recognition of income
to a fund (possibly causing a fund to sell securities to raise the cash for
necessary distributions) and/or defer a fund's ability to recognize losses, and,
in limited cases, subject a fund to U.S. federal income tax on income from
certain foreign securities. These rules may affect the amount, timing or
character of the income distributed to you by a fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- -------------------------------------------------------------------------------
Each fund is a diversified series of Templeton Institutional Funds, Inc.
(Company), an open-end management investment company, commonly called a mutual
fund. The Company was organized as a Maryland corporation on July 6, 1990, and
is registered with the SEC.
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 (except Foreign Equity
Series - Service Shares) are considered Advisor Class shares for redemption,
exchange and other purposes. Foreign Equity Series - Service Shares are
considered Class A shares for redemption, exchange and other purposes.
The Foreign Equity Series currently offers two classes of shares, Primary Shares
and Service Shares. Before May 1, 1999, Primary Shares did not have a class
designation. The fund began offering Service Shares on May 1, 1999. The fund may
offer additional classes of shares in the future. The full title of each class
is:
Foreign Equity Series - Primary Shares
Foreign Equity Series - Service Shares
Shares of each class of the Foreign Equity Series represent proportionate
interests in the fund's assets. On matters that affect the fund as a whole, each
class has the same voting and other rights and preferences as any other class.
On matters that affect only one class, only shareholders of that class may vote.
Each class votes separately on matters affecting only that class, or expressly
required to be voted on separately by state or federal law. 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. Additional series may be offered in the future.
The Company has noncumulative voting rights. For board member elections, 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 be called by the board to consider the removal of a
board member if requested in writing 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. A
special meeting also may be called by the board in its discretion.
As of April 3, 2000, the principal shareholders of the funds, beneficial or of
record, were:
PERCENTAGE
NAME AND ADDRESS %
- ------------------------------------------------------------------
EMERGING FIXED INCOME MARKETS SERIES
Templeton Global Investors Inc.(1)
Corporate Accounting Attn: Michael Corcoran
555 Airport Road Blvd., 4th Fl,
Burlingame, CA 94010 100
EMERGING MARKETS SERIES
New York State Common
Retirement Fund
Alfred E. Smith,
State Office Building Sixth Fl,
Albany, NY 12236 22
FOREIGN EQUITY - SERVICE SHARES
Franklin Resources Inc.(2)
Corporate Accounting Attn: MichaelCorcoran
555 Airport Road Blvd., 4th Fl,
Burlingame, CA 94010 100
1. Templeton Global Investors, Inc. is a Delaware corporation and is wholly
owned subsidiary of Templeton Worldwide, Inc., which is a wholly owned
subsidiary of Franklin Resources, Inc. Franklin Resources, Inc. is a Delaware
corporation.
2. Note: Charles B. Johnson and Rupert H. Johnson, Jr., who are officers and/or
directors of the fund, may be considered beneficial holders of the fund shares
held by Franklin Resources, Inc. (Resources). As principal shareholders of
Resources, they may be able to control the voting of Resources' shares of the
fund.
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.
As of April 3, 2000, the officers and board members, as a group, owned of record
and beneficially less than 1% of the outstanding shares of each fund and class.
The board members may own shares in other funds in the Franklin Templeton Group
of Funds.
BUYING AND SELLING SHARES
- -------------------------------------------------------------------------------
The funds continuously offer its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial institutions that
sell shares of the funds may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the funds should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of a fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank. We may deduct any applicable banking charges
imposed by the bank from your account.
When you buy shares, if you submit a check or a draft that is returned unpaid to
a fund we may impose a $10 charge against your account for each returned item.
If you buy shares through the reinvestment of dividends, the shares 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.
GROUP PURCHASES As described in the prospectus, members of a qualified group may
add the group's investments together for minimum investment purposes.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
DEALER COMPENSATION Distributors and/or its affiliates may provide financial
support to 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
and/or total assets with the Franklin Templeton Group of Funds. 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 rules of the National Association of Securities Dealers,
Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the funds 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 the funds' investment goals exist
immediately. This money will then be withdrawn from the short-term,
interest-bearing money market instruments and invested in portfolio securities
in as orderly a manner as is possible when attractive investment opportunities
arise.
The proceeds from the sale of shares of an investment company generally are not
available until the seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh 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.
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 U.S. Securities and
Exchange Commission (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 funds' 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 Distribution and Taxes).
SHARE CERTIFICATES We will credit your shares to your fund account. We do not
issue share certificates unless you specifically request them. This eliminates
the costly problem of replacing lost, stolen or destroyed certificates. If a
certificate is lost, stolen or destroyed, you may have to pay an insurance
premium of up to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want to
sell or exchange those shares. The certificates should be properly endorsed. You
can do this either by 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.
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.
Sending redemption proceeds by wire or electronic funds transfer (ACH) is a
special service that we make available whenever possible. By offering this
service to you, the fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire or ACH is not processed as described in the prospectus.
Franklin/Templeton Investor Services, Inc. (Investor Services) may pay certain
financial institutions that maintain omnibus accounts with the fund on behalf of
numerous beneficial owners for recordkeeping operations performed with respect
to such owners. For each beneficial owner in the omnibus account, the fund may
reimburse Investor Services an amount not to exceed the per account fee that the
fund normally pays Investor Services. These financial institutions also may
charge a fee for their services directly to their clients.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. If you sell shares through your securities
dealer, it is your dealer's responsibility to transmit the order to the fund in
a timely fashion. 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. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a notice of levy.
PRICING SHARES
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When you buy shares, you pay the offering price. The offering price is the net
asset value (NAV) per share plus any applicable sales charge, calculated to two
decimal places using standard rounding criteria.
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.
The funds calculate the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. Pacific
time). The funds do not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, each fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the Nasdaq National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The fund values over-the-counter portfolio securities within
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the fund
values them according to the broadest and most representative market as
determined by the manager.
The fund values portfolio securities underlying actively traded call options at
their market price as determined above. The current market value of any option
the fund holds is its last sale price on the relevant exchange before the fund
values its assets. If there are no sales that day or if the last sale price is
outside the bid and ask prices, the fund values options within the range of the
current closing bid and ask prices if the fund believes the valuation fairly
reflects the contract's market value.
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 NAV is not calculated. Thus, the calculation of the fund's NAV
does not take place contemporaneously with the determination of the prices of
many of the portfolio securities used in the calculation and, if events
materially affecting the values of these foreign securities occur, the
securities will be valued at fair value as determined by management and approved
in good faith by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the NAV
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 NAV.
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
fund may use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
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Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of each fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. Each fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
PERFORMANCE
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Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return quotations used by the fund are based on the
standardized methods of computing performance mandated by the SEC. An
explanation of these and other methods used by the fund 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.
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 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 initial sales
charge currently in effect.
The average annual total returns for the indicated periods ended December 31,
1999, were:
SINCE
INCEPTION 1 YEAR 5 YEARS INCEPTION
DATE (%) (%) (%)
- --------------------------------------------------------------------
Foreign Equity Series -
Primary 10/18/90 27.34 16.51 14.07
Emerging Markets Series 5/3/93 56.58 5.97 7.05
Emerging Fixed Income
Markets Series 6/4/97 11.77 -- 7.57
The following SEC formula was used to calculate these figures:
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 income dividends and capital gain distributions are reinvested at
net asset value. Cumulative total return, however, is based on the actual return
for a specified period rather than on the average return over the periods
indicated above. The cumulative total returns for the indicated periods ended
December 31, 1999, were:
SINCE
INCEPTION 1 YEAR 5 YEARS INCEPTION
DATE (%) (%) (%)
- --------------------------------------------------------------------------
Foreign Equity Series -
Primary 10/18/90 27.34 114.70 235.78
Emerging Markets Series 5/3/93 56.58 33.63 57.40
Emerging Markets Fixed
Income Series 6/4/97 11.77 -- 20.65
VOLATILITY Occasionally statistics may be used to show the fund's volatility or
risk. Measures of volatility or risk are generally used to compare the fund's
net asset value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities in
which the fund invests. A beta of more than 1.00 indicates volatility greater
than the market and a beta of less than 1.00 indicates volatility less than the
market. Another measure of volatility or risk is standard deviation. Standard
deviation is used to measure variability of net asset value or total return
around an average over a specified period of time. The idea is that greater
volatility means greater risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS Sales literature referring to the use of the fund
as a potential investment for 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 fund may include in its advertising or sales material information relating
to investment goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Franklin Resources, Inc. 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 the fund may
satisfy your investment goal, advertisements and other materials about the fund
may discuss certain measures of fund performance as reported by various
financial publications. Materials also may compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
These comparisons may include, but are not limited to, the following examples:
(i) unmanaged indices so that you may compare the 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(R) 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 the fund.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for administrative and management costs and expenses.
From time to time, the funds and the managers also may refer to the following
information:
o The 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.
o The performance of U.S. equity and debt markets relative to foreign markets
prepared or published by Morgan Stanley Capital International or a similar
financial organization.
o The capitalization of U.S. and foreign stock markets as prepared or published
by the International Finance Corporation, Morgan Stanley Capital International
or a similar financial organization.
o The geographic and industry distribution of the fund's portfolio and each
fund's top ten holdings.
o 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.
o To assist investors in understanding the different returns and risk
characteristics of various investments, a fund may show historical returns of
various investments and published indices (e.g., Ibbotson Associates, Inc.
Charts and Morgan Stanley Capital International EAFE(R) Index).
o The major industries located in various jurisdictions as published by the
Morgan Stanley Index.
o Rankings by DALBAR Surveys, Inc. with respect to mutual fund shareholder
services.
o Allegorical stories illustrating the importance of persistent long-term
investing.
o The funds' portfolio turnover rate and its ranking relative to industry
standards as published by Lipper(R) Inc. or Morningstar, Inc.
o 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.
o Comparison of the characteristics of various emerging markets, including
population, financial and economic conditions.
o Quotations from the Templeton organization's founder, Sir John Templeton,*
advocating the virtues of diversification and long-term investing.
* Sir John Templeton sold the Templeton organization to Franklin Resources, Inc.
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 also may compare a fund's performance to the
return on certificates of deposit (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. 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 a fund to calculate its figures. In addition,
there can be no assurance that the 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 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.
Templeton Institutional Funds, Inc. 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
is one of the oldest mutual fund organizations and now services approximately 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 $229 billion in assets under management for more than 5
million U.S. based mutual fund shareholder and other accounts. The Franklin
Templeton Group of Funds offers 103 U.S. based open-end investment companies to
the public. Each fund may identify itself by its Nasdaq symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the fund are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.
You will receive the funds' financial reports every six months. If you would
like to receive an interim report of the funds' portfolio holdings, please call
1-800/DIAL BEN(R).
DESCRIPTION OF BOND RATINGS
- -------------------------------------------------------------------------------
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
INVESTMENT GRADE
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 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 that 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 that 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. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
BELOW INVESTMENT GRADE
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. These 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 that are speculative to a high degree.
These 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.
STANDARD & POOR'S RATINGS GROUP (S&P (R))
INVESTMENT GRADE
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 a 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.
BELOW INVESTMENT GRADE
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 these bonds will likely have some quality and protective
characteristics, they 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 also may 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.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
PAGE
PART B
STATEMENT OF ADDITIONAL INFORMATION
TEMPLETON INSTITUTIONAL FUNDS, INC.
FOREIGN EQUITY SERIES - SERVICE SHARES
PAGE
TEMPLETON
INSTITUTIONAL
FUNDS, INC.
FOREIGN EQUITY SERIES - SERVICE SHARES
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000
[FRANKLIN TEMPLETON BUTTERBALL LOGO]
P.O. BOX 33030, ST. PETERSBURG, FL 33733-8030
1-800/321-8563 (INSTITUTIONAL SERVICES)
- -------------------------------------------------------------------------------
This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the fund's prospectus. The fund's
prospectus, dated May 1, 2000, which we may amend from time to time, contains
the basic information you should know before investing in the fund. You should
read this SAI together with the fund's prospectus.
The audited financial statements and auditor's report in the fund's Annual
Report to Shareholders, for the fiscal year ended December 31, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/321-8563.
CONTENTS
Goal and Strategies.................. 2
Risks................................ 11
Officers and Directors............... 15
Management and Other Services........ 19
Portfolio Transactions............... 20
Distributions and Taxes.............. 21
Organization, Voting Rights and
Principal Holders.................... 23
Buying and Selling Shares............ 24
Pricing Shares....................... 26
The Underwriter...................... 27
Performance.......................... 28
Miscellaneous Information............ 30
Description of Bond Ratings.......... 30
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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Z954 SAI 05/00
GOAL AND STRATEGIES
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The fund's investment goal is long-term capital growth. This goal is
fundamental, which means it may not be changed without shareholder approval.
The fund 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. Under normal market
conditions, the fund invests primarily in the equity securities of companies
located outside the U.S., including emerging markets. The fund normally invests
at least 65% of its total assets in foreign equity securities. The fund may also
invest up to 35% of its total assets in debt securities when, in the judgment of
the manager, they offer greater potential for capital appreciation than is
available through investment in stocks. In selecting securities for the fund,
the 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.
The fund 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. The fund 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. The fund 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. The fund 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. The fund may enter into forward
foreign currency contracts and may purchase and write put and call options on
foreign currencies. For hedging purposes only, the fund 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. The fund may invest in
securities issued by smaller companies.
The following is a description of the various types of securities the fund may
buy.
EQUITY SECURITIES The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner of
an equity security may participate in a company's success through the receipt of
dividends which are distributions of earnings by the company to its owners.
Equity security owners may also participate in a company's success or lack of
success through increases or decreases in the value of the company's shares as
traded in the public trading market for such shares. Equity securities generally
take the form of common stock or preferred stock. Preferred stockholders
typically receive greater dividends but may receive less appreciation than
common stockholders and may have greater voting rights as well. Equity
securities may also include convertible securities, warrants or rights.
Convertible securities typically are debt securities or preferred stocks which
are convertible into common stock after certain time periods or under certain
circumstances. Warrants or rights give the holder the right to purchase a common
stock at a given time for a specified price. 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 the fund does not exercise or dispose of a warrant before its expiration, it
will expire worthless.
DEPOSITARY RECEIPTS Depositary receipts are certificates that give their holders
the right to receive securities (a) of a foreign issuer deposited in a U.S. bank
or trust company (American Depositary Receipts, "ADRs"); or (b) of a foreign or
U.S. issuer deposited in a foreign bank or trust company (Global Depositary
Receipts, "GDRs" or European Depositary Receipts, "EDRs"). 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 fund's investment policies, the fund's investments in depositary receipts
will be deemed to be investments in the underlying securities.
DEBT SECURITIES A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes,
debentures and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the fund's net asset value.
The fund is not limited as to the type of debt securities in which it 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. Eurobonds are debt
instruments issued by banks or companies through the international market with
terms of more than five years. Eurobonds are generally issued in bearer form,
carry a fixed or floating rate of interest, and typically amortize principal
through a bullet payment with semiannual interest payments in the currency in
which the bond was issued. Yankee bonds are foreign bonds denominated in U.S.
dollars and registered with the Securities and Exchange Commission for sale in
the U.S. A Global Bond is a certificate representing the total debt of an issue.
Such bonds are created to control the primary market distribution of an issue in
compliance with selling restrictions in certain jurisdictions or because
definitive bond certificates are not available. A global bond is also known as a
global certificate.
Debt securities purchased by the fund may be rated below BBB by S&P or Baa by
Moody's or, if unrated, of comparable quality as determined by the fund's
manager. The fund 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 fund and their shareholders. The fund may buy debt
securities rated as low as C by Moody's or S&P (or comparable unrated securities
as determined by the fund's manager). Debt securities rated C by Moody's are the
lowest rated class of bonds and may be regarded as having extremely poor
prospects of ever attaining any real investment standing. Debt securities rated
C by S&P are typically subordinated to senior debt which is vulnerable to
default and is dependent on favorable conditions to meet timely payment of
interest and repayment of principal. Debt securities rated C are therefore risky
and speculative investments.
The 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.
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. The fund 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.
To the extent the fund invests in debt securities, it may accrue and report
interest on high yield bonds structured as zero coupon bonds or pay-in-kind
securities as income even though it receives no corresponding cash payment until
a later time, generally the security's maturity date. In order to qualify for
beneficial tax treatment, the fund must distribute substantially all of its net
investment income to shareholders on an annual basis (see Distributions and
Taxes). Thus, the 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.
STRUCTURED INVESTMENTS Included among the issuers of debt securities in which
the fund 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 flows on the underlying instruments may be
apportioned among the newly issued structured investments to create securities
with different investment characteristics such as varying maturities, payment
priorities or interest rate provisions; the extent of the payments made with
respect to structured investments is dependent on the extent of the cash flows
on the underlying instruments. Because structured investments of the type in
which the fund anticipates investing typically involve no credit enhancement,
their credit risk will generally be equivalent to that of the underlying
instruments.
The fund is permitted to invest in a class of structured investments that is
either subordinated or unsubordinated to the right of payment of another class.
Subordinated structured investments typically have higher yields and present
greater risks than unsubordinated structured investments. Although 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 leveraged for purposes of the limitations placed on the extent of
assets that may be used for borrowing activities. Certain issuers of structured
investments may be deemed to be "investment companies" as defined in the
Investment Company Act of 1940 (1940 Act). As a result, the fund's investment in
these structured investments may be limited by the restrictions contained in the
1940 Act. Structured investments are typically sold in private placement
transactions, and there currently is no active trading market for structured
investments. To the extent such investments are illiquid, they will be subject
to the fund's restrictions on investments in illiquid securities. The fund will
limit its investment in structured investments to 5% of its total assets.
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 the 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. The 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 the
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 manager to be of investment
grade quality.
REPURCHASE AGREEMENTS The fund generally will have a portion of its assets in
cash or cash equivalents for a variety of reasons, including waiting for a
special investment opportunity or taking a defensive position. To earn income on
this portion of its assets, the fund may enter into repurchase agreements. Under
a repurchase agreement, the fund agrees to buy securities guaranteed as to
payment of principal and interest by the U.S. government or its agencies from a
qualified bank or broker-dealer and then to sell the securities back to the bank
or broker-dealer after a short period of time (generally, less than seven days)
at a higher price. The bank or broker-dealer must transfer to the fund's
custodian securities with an initial market value of at least 102% of the dollar
amount invested by the fund in each repurchase agreement. The 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 bank or broker dealer, including possible delays or restrictions upon the
fund's ability to sell the underlying securities. The fund will enter into
repurchase agreements only with parties who meet certain creditworthiness
standards, I.E., banks or broker-dealers that the manager has determined present
no serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
LOANS OF PORTFOLIO SECURITIES The fund may lend certain of its portfolio
securities to qualified securities dealers and other institutional investors.
These loans many not exceed up to one-third of its total assets, measured at the
time of the most recent loan. Each loan must be secured with collateral
(consisting of cash, securities issued by the U.S. government and its agencies
and instrumentalities, or irrevocable letters of credit) in an amount at least
equal (on a daily marked-to-market basis) of the current market value of the
loaned securities. The fund may retain all or a portion of the interest received
on investment of the cash collateral or receives a fee from the borrower. The
fund effectively receives any distributions paid on the loaned securities. The
fund may terminate a loan at any time and obtain the return of the securities
loaned within the normal settlement period for the security involved.
Where voting rights with respect to the loaned securities pass with the lending
of the securities, the manager intends to call the loaned securities to vote
proxies, or to use other practicable and legally enforceable means to obtain
voting rights, when the manager has knowledge that, in its opinion, a material
event affecting the loaned securities will occur or the manager otherwise
believes it necessary to vote. As with other extensions of credit, there are
risks of delay in recovery or even loss of rights in collateral in the event of
default or insolvency of the borrower. The fund will loan its securities only to
parties who meet creditworthiness standards approved by the fund's board of
directors, I.E., banks or broker-dealers that the manager has determined present
no serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the loan.
BORROWING The 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, the
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 the 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 the 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 or gains received from the securities purchased with borrowed funds.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES The 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 fund 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 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. The 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.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, the manager may invest up to 100% of the fund's
assets in a temporary defensive manner or hold a substantial portion of the
fund's portfolio in cash. Unfavorable market or economic conditions may include
excessive volatility or a prolonged general decline in the securities markets,
the securities in which the fund normally invests, or the economies of the
countries where the fund invests.
Temporary defensive investments generally may include 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 the fund's 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, the 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 the fund will limit its
investment in time deposits for which there is a penalty for early withdrawal to
10% of its total assets. The manager also may invest in these types of
securities or hold cash while looking for suitable investment opportunities or
to maintain liquidity.
ILLIQUID INVESTMENTS The fund's policy is not to invest more than 10% 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 the fund has valued them.
Illiquid securities also include securities which are not publicly traded or
which cannot be readily resold because of legal or contractual restrictions, or
which are not otherwise readily marketable (including repurchase agreements
having more than seven days remaining to maturity).
The manager, 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 manager 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 the fund may be increased if qualified institutional
buyers become uninterested in purchasing these securities or the market for
these securities contracts.
FUTURES CONTRACTS Although the fund has the authority to buy and sell financial
futures contracts, it presently has no intention of entering into such
transactions. For hedging purposes only (including anticipatory hedges where the
manager seeks to anticipate an intended shift in maturity, duration or asset
allocation), the fund 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 the 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 the fund enters into a futures
contract, it will segregate assets or "cover" its position in accordance with
the 1940 Act. 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 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 the fund.
At the time the 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, the fund will maintain with
its custodian liquid assets that, when added to the amounts deposited with a
futures commission merchant or broker as margin, are equal to the market value
of the instruments underlying the contract. Alternatively, the 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 Although the fund has the authority to write
(I.E., sell) covered put and call options in order to hedge a portion of its
portfolio and/or to generate income to offset operating expenses and buy put and
call options on securities or securities indices in order to hedge against
market shifts, it presently has no intention of entering into such transactions.
Options purchased or written by the fund will be 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.
The fund may write a call or put option only if the option is "covered." A call
option on a security written by the 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 that is segregated) upon conversion or exchange of
other securities held in its portfolio. A call option on a security is also
covered if the 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 segregated liquid assets. A put option on a security written
by the fund is "covered" if the fund maintains cash or liquid assets with a
value equal to the exercise price in a segregated account, 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.
The fund will cover call options on stock indices that it writes by owning
securities whose price changes, in the opinion of the fund's 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 the 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, the 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. The 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.
The 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 the
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,
the 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, the 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 the 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.
The fund may also purchase put options to hedge its investments against a
decline in value. By purchasing a put option, the 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 the 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 the fund's security holdings being
hedged.
The 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, the 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,
the 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 the 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 the 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.
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 the fund. The 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.
FOREIGN CURRENCY HEDGING TRANSACTIONS In order to hedge against foreign currency
exchange rate risks, the fund 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 fund may also
conduct its foreign currency exchange transactions on a spot (I.E., cash) basis
at the spot rate prevailing in the foreign currency exchange market.
The 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. The fund 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 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 the 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 the 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." The 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 fund has no specific limitation on the percentage of assets it may commit to
forward contracts, subject to its stated investment goal and policies, except
that the 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. Because in connection with the 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, the fund will always have those liquid assets available
sufficient to cover any commitments under these contracts or to limit any
potential risk. In addition, when the fund sells a forward contract, it will
cover its obligation under the contract by segregating liquid assets, or by
owning securities denominated in the corresponding currency and with a market
value equal to or greater than the fund's obligation. The segregated assets 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, the 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 the fund
than if it had not engaged in such contracts.
The fund 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 the 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 the 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 the fund will be traded on U.S.
and foreign exchanges or over-the-counter.
The fund 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
the fund's portfolio securities or adversely affect the prices of securities
that the fund intends to purchase at a later date. The successful use of foreign
currency futures will usually depend on the ability of the fund's manager to
forecast currency exchange rate movements correctly. Should exchange rates move
in an unexpected manner, the fund may not achieve the anticipated benefits of
foreign currency futures or may realize losses.
CONVERTIBLE SECURITIES As with a straight fixed-income security, a convertible
security tends to increase in market value when interest rates decline and
decrease in value when interest rates rise. Like a common stock, the value of a
convertible security also tends to increase as the market value of the
underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because its value can be influenced by both interest
rate and market movements, a convertible security is not as sensitive to
interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security,
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank. The issuer of a convertible
security may be important in determining the security's true value. This is
because the holder of a convertible security will have recourse only to the
issuer.
The 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 fund 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 fund may also invest in other classes of enhanced convertible securities.
These include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities), and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all have the
following features: they are issued by the company, the common stock of which
will be received in the event the convertible preferred stock is converted;
unlike PERCS they do not have a capital appreciation limit; they seek to provide
the investor with high current income with some prospect of future capital
appreciation; they are typically issued with three or four-year maturities; they
typically have some built-in call protection for the first two to three years;
investors have the right to convert them into shares of common stock at a preset
conversion ratio or hold them until maturity; and, upon maturity, they will
necessarily convert into either cash or a specified number of shares of common
stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company whose common stock is to be acquired in the event the security
is converted or by a different issuer, such as an investment bank. These
securities may be identified by names such as ELKS (Equity Linked Securities) or
similar names. Typically they share most of the salient characteristics of an
enhanced convertible preferred stock but will be ranked as senior or
subordinated debt in the issuer's corporate structure according to the terms of
the debt indenture. There may be additional types of convertible securities not
specifically referred to herein which may be similar to those described above in
which the fund may invest, consistent with its goal and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the fund. The fund 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 the fund's ability to dispose of particular securities, when
necessary, to meet the 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 the fund to obtain market quotations based on actual
trades for purposes of valuing the fund's portfolio. The fund, however, intends
to acquire liquid securities, though there can be no assurances that this will
be achieved.
CONCENTRATION AND DIVERSIFICATION The 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, the 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). The fund 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.
PORTFOLIO TURNOVER The fund invests for long-term growth of capital and does not
intend to place emphasis upon short-term trading profits. Accordingly, the fund
expects to have a portfolio turnover rate of less than 50%.
INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50% of
the fund's outstanding shares are represented at the meeting in person or by
proxy, whichever is less.
The fund MAY NOT:
1. Invest in real estate or mortgages on real estate (although the 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 this SAI).
2. Purchase or retain securities of any company in which directors or officers
of Templeton Institutional Funds, Inc. or the fund's 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.
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 the
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 the 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.
6. Borrow money, except that the fund may borrow money from banks in an amount
not exceeding 33 1/3% of the value of its total assets (including the amount
borrowed).
7. Invest more than 5% of the value of its total assets in securities of issuers
which have been in continuous operation less than three years.
8. Invest more than 5% of its total assets in warrants, whether or not listed on
the 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.
Warrants acquired by the fund in units or attached to securities are not
included in this restriction.
9. Invest more than 25% of its total assets in a single industry.(1)
10. Participate on a joint or a joint and several basis in any trading account
in securities.
1. The SEC considers each foreign government to be a separate industry.
The fund also may 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 the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while trying to
maximize the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security no
longer meets one or more of the fund's policies or restrictions. If a percentage
restriction or limitation 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 the restriction or limitation.
If the 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.
RISKS
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Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the fund, nor can
there be any assurance that the fund's investment goal will be attained. As with
any investment in securities, the value of, and income from, an investment in
the fund can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the fund's portfolio
securities, including general economic conditions and market factors.
Additionally, investment decisions made by the manager 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 fund 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 the 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 the
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 the fund's shares. In addition, changes in
currency valuations will affect the price of the shares of the 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 fund is not intended as a
complete investment program.
FOREIGN SECURITIES RISK You 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. The 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 New York Stock Exchange (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.
EMERGING MARKETS. 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 that may restrict the
fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in many developing countries, of a capital market
structure or market-oriented economy; and (vii) the possibility that recent
favorable economic developments in some developing countries may be slowed or
reversed by unanticipated political or social events in such countries.
In addition, many countries in which the fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Investments in developing countries may involve risks of nationalization,
expropriation and confiscatory taxation. For example, 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, the fund could lose a substantial portion of any
investments it has made in the affected countries. Further, no accounting
standards exist in certain developing countries. Finally, even though the
currencies of some developing countries, such as certain Eastern European
countries may be convertible into U.S. dollars, the conversion rates may be
artificial to the actual market values and may be adverse to fund shareholders.
RUSSIAN SECURITIES. 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
the 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
the 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 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 the fund to lose its registration
through fraud, negligence or even mere oversight. While the 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 the 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 the fund from
investing in the securities of certain Russian companies deemed suitable by the
manager. Further, this also could cause a delay in the sale of Russian company
securities by the fund if a potential purchaser is deemed unsuitable, which may
expose the fund to potential loss on the investment.
CURRENCY The fund's management endeavors to buy and sell foreign currencies on
as favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when the 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 the fund from
transferring cash out of the country, 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 tax on income or other amounts, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), default in foreign government securities, political or social
instability, or diplomatic developments that could affect investments in
securities of issuers in those nations.
The fund 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 fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Further,
certain currencies may not be internationally traded.
Certain of these currencies have experienced a steady devaluation relative to
the U.S. dollar. Any devaluations in the currencies in which the fund's
portfolio securities are denominated may have a detrimental impact on the fund.
Through the fund's flexible policy, management endeavors to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where, from time to time, it places the fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove profitable
and others may not. No assurance can be given that profits, if any, will exceed
losses.
EURO On January 1, 1999, the European Economic and Monetary Union (EMU)
introduced a new single currency called the euro. By July 1, 2002, the euro,
which will be implemented in stages, will have replaced the national currencies
of the following member countries: Austria, Belgium, Finland, France, Germany,
Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.
Currently, the exchange rate of the currencies of each of these countries is
fixed to the euro. The euro trades on currency exchanges and is available for
non-cash transactions. The participating countries currently issue sovereign
debt exclusively in euro. By July 1, 2002, euro-denominated bills and coins will
replace the bills and coins of the above countries.
The new European Central Bank has control over each country's monetary policies.
Therefore, the participating countries no longer control their own monetary
policies by directing independent interest rates for their currencies. The
national governments of the participating countries, however, have retained the
authority to set tax and spending policies and public debt levels.
The change to the euro as a single currency is new and untested. It is not
possible to predict the impact of the euro on currency values or on the business
or financial condition of European countries and issuers, and issuers in other
regions, whose securities the fund may hold, or the impact, if any, on fund
performance. In the first six months of the euro's existence, the exchange rates
of the euro versus many of the world's major currencies steadily declined. In
this environment, U.S. and other foreign investors experienced erosion of their
investment returns on their euro-denominated securities. The transition and the
elimination of currency risk among EMU countries may change the economic
environment and behavior of investors, particularly in European markets.
While the implementation of the euro could have a negative effect on the fund,
the fund's manager and its affiliated service providers are taking steps they
believe are reasonably designed to address the euro issue.
INTEREST RATE RISK To the extent the fund invests in debt securities, changes in
interest rates in any country where the fund is invested will affect the value
of the fund's portfolio and, consequently, its share price. Rising interest
rates, which often occur during times of inflation or a growing economy, are
likely to cause the face value of a debt security to decrease, having a negative
effect on the value of the fund's shares. Of course, interest rates have
increased and decreased, sometimes very dramatically, in the past. These changes
are likely to occur again in the future at unpredictable times.
CREDIT RISK This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial strength
or in a security's credit rating may affect its value and, thus, impact the
value of fund shares.
LOW-RATED SECURITIES RISK Bonds which are rated C by Moody's are the lowest
rated class of bonds, and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing. Bonds rated C by
S&P are obligations on which no interest is being paid.
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 the 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 the fund to obtain accurate
market quotations for the purposes of valuing the fund's portfolio. Market
quotations are generally available on many low rated or unrated securities only
from a limited number of dealers and may not necessarily represent firm bids of
such dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of low rated debt securities,
especially in a thinly traded market. Analysis of the creditworthiness of
issuers of low rated debt securities may be more complex than for issuers of
higher rated securities, and the ability of the fund to achieve its investment
goal may, to the extent of investment in low rated debt securities, be more
dependent upon such creditworthiness analysis than would be the case if the fund
were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of low rated debt securities have been found to be less sensitive to
interest rate changes than higher rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. A projection of
an economic downturn or of a period of rising interest rates, for example, could
cause a decline in low rated debt securities prices because the advent of a
recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of low
rated debt securities defaults, the fund may incur additional expenses to seek
recovery. The fund will not invest more than 5% of its total assets in defaulted
debt securities, which may be illiquid.
MORTGAGE-BACKED SECURITIES RISK Mortgage securities differ from conventional
debt securities because principal is paid back over the life of the security
rather than at maturity. The fund may receive unscheduled prepayments of
principal prior to the security's maturity date due to voluntary prepayments,
refinancing or foreclosure on the underlying mortgage loans. To the fund this
means a loss of anticipated interest, and a portion of its principal investment
represented by any premium the fund may have paid. Mortgage prepayments
generally increase with falling interest rates and decrease with rising interest
rates. An unexpected rise in interest rates could reduce the rate of principal
prepayments on mortgage securities and extend the life of these securities. This
could cause the price of these securities and the funds share price to fall and
would make these securities more sensitive to interest rate changes. This is
called "extension risk."
SMALLER COMPANIES RISK Historically, smaller company securities have been more
volatile in price than larger company securities, especially over the
short-term. Among the reasons for the greater price volatility are the less
certain growth prospects of smaller companies, the lower degree of liquidity in
the markets for such securities, and the greater sensitivity of smaller
companies to changing economic conditions.
In addition, small companies may lack depth of management, they may be unable to
generate funds necessary for growth or development, or they may be developing or
marketing new products or services for which markets are not yet established and
may never become established.
Therefore, while smaller companies may offer greater opportunities for capital
growth than larger, more established companies, they also involve greater risks
and should be considered speculative.
DERIVATIVE SECURITIES RISK The 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 fund intends 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 the fund for
hedging purposes also depends upon the manager's ability to predict correctly
movements in the direction of the market, as to which no assurance can be given.
REPURCHASE AGREEMENT RISK The use of repurchase agreements involves certain
risks. For example, if the other party to the agreement defaults on its
obligation to repurchase the underlying security at a time when the value of the
security has declined, the fund may incur a loss upon disposition of the
security. If the other party to the agreement becomes insolvent and subject to
liquidation or reorganization under the bankruptcy code or other laws, a court
may determine that the underlying security is collateral for a loan by the fund
not within the control of the fund, and therefore the realization by the fund on
the collateral may be automatically stayed. Finally, it is possible that the
fund may not be able to substantiate its interest in the underlying security and
may be deemed an unsecured creditor of the other party to the agreement.
LEVERAGE RISK Leveraging by means of borrowing may exaggerate the effect of any
increase or decrease in the value of portfolio securities on the 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.
OFFICERS AND DIRECTORS
- -------------------------------------------------------------------------------
Templeton Institutional Funds, Inc. (Company) has a board of directors. The
board is responsible for the overall management of the fund, including general
supervision and review of the fund's investment activities. The board, in turn,
elects the officers of the fund who are responsible for administering the fund's
day-to-day operations. The board also monitors the fund to ensure no material
conflicts exist among share classes. While none is expected, the board will act
appropriately to resolve any material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the fund, and principal occupations during the
past five years are shown below.
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
DIRECTOR
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 48 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers) (until 1998).
*Nicholas F. Brady (70)
16 North Washington Street,
Easton, MD 21601
DIRECTOR
Chairman, Templeton Emerging Markets Investment Trust PLC, Templeton Latin
America Investment Trust PLC, Darby Overseas Investments, Ltd. and Darby
Emerging Markets Investments LDC (investment firms) (1994-present); Director,
Templeton Global Strategy Funds, Amerada Hess Corporation (exploration and
refining of oil and gas), C2, Inc. (operating and investment business), and H.J.
Heinz Company (processed foods and allied products); director or trustee, as the
case may be, of 19 of the investment companies in the Franklin Templeton Group
of Funds; and FORMERLY, Secretary of the United States Department of the
Treasury (1988-1993), Chairman of the Board, Dillon, Read & Co., Inc.
(investment banking) (until 1988) and U.S. Senator, New Jersey (April
1982-December 1982).
Frank J. Crothers (55)
P.O. Box N-3238,
Nassau, Bahamas
DIRECTOR
Chairman, Caribbean Electric Utility Services Corporation and Atlantic Equipment
& Power Ltd.; Vice Chairman, Caribbean Utilities Co., Ltd.; President, Provo
Power Corporation; director of various other business and non-profit
organizations; and director or trustee, as the case may be, of 11 of the
investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (67)
Park Avenue at Morris County,
P.O. Box 1945
Morristown, NJ 07962-1945
DIRECTOR
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or trustee,
as the case may be, of 50 of the investment companies in the Franklin Templeton
Group of Funds.
John Wm. Galbraith (78)
360 Central Avenue, Suite 1300,
St. Petersburg, FL 33701
DIRECTOR
President, Galbraith Properties, Inc. (personal investment company); Director
Emeritus, Gulf West Banks, Inc. (bank holding company) (1995-present); director
or trustee, as the case may be, of 18 of the investment companies in the
Franklin Templeton Group of Funds; and 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. (77)
One Progress Plaza, Suite 290,
St. Petersburg, FL 33701
DIRECTOR
Consultant, Triangle Consulting Group; Executive-in-Residence, Eckerd College
(1991-present); director or trustee, as the case may be, of 20 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Chairman and
Director, Precise Power Corporation (1990-1997), Director, Checkers Drive-In
Restaurant, Inc. (1994-1997), and Chairman of the Board and Chief Executive
Officer, Florida Progress Corporation (holding company in the energy area)
(1982-1990) and director of various of its subsidiaries.
Edith E. Holiday (48)
3239 38th Street, N.W.,
Washington, DC 20016
DIRECTOR
Director, Amerada Hess Corporation (exploration and refining of oil and gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present, H.J.
Heinz Company (processed foods and allied products) (1994-present) and RTI
International Metals, Inc. (manufacture and distribution of titanium) (July
1999-present); director or trustee, as the case may be, of 25 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Assistant to
the President of the United States and Secretary of the Cabinet (1990-1993),
General Counsel to the United States Treasury Department (1989-1990), and
Counselor to the Secretary and Assistant Secretary for Public Affairs and Public
Liaison-United States Treasury Department (1988-1989).
*Charles B. Johnson (67)
777 Mariners Island Blvd.,
San Mateo, CA 94404
VICE PRESIDENT AND DIRECTOR
Chairman of the Board, Chief Executive Officer, Member - Office of the Chairman
and Director, Franklin Resources, Inc.; Chairman of the Board and Director,
Franklin Investment Advisory Services, Inc.; Chairman of the Board, Franklin
Advisers, Inc.; Vice President, 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 49 of the investment
companies in the Franklin Templeton Group of Funds.
Betty P. Krahmer (70)
2201 Kentmere Parkway,
Wilmington, DE 19806
DIRECTOR
Director or trustee of various civic associations; director or trustee, as the
case may be, of 19 of the investment companies in the Franklin Templeton Group
of Funds; and FORMERLY, Economic Analyst, U.S. government.
Gordon S. Macklin (71)
8212 Burning Tree Road,
Bethesda, MD 20817
DIRECTOR
Director, Martek Biosciences Corporation, MCI WorldCom, Inc. (information
services), MedImmune, Inc. (biotechnology), Overstock.com (internet services);
White Mountains Insurance Group, Ltd. (holding company) and Spacehab, Inc.
(aerospace services); director or trustee, as the case may be, of 47 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Chairman, White River Corporation (financial services) (until 1998), Hambrecht &
Quist Group (investment banking) (until 1992), and President, National
Association of Securities Dealers, Inc. (until 1987).
Fred R. Millsaps (71)
2665 NE 37th Drive,
Fort Lauderdale, FL 33308
DIRECTOR
Manager of personal investments (1978-present); director of various business and
nonprofit organizations; director or trustee, as the case may be, of 20 of the
investment companies in the Franklin Templeton Group of Funds; and formerly,
Chairman and Chief Executive Officer, Landmark Banking Corporation (1969-1978),
Financial Vice President, Florida Power and Light (1965-1969), and Vice
President, Federal Reserve Bank of Atlanta (1958-1965).
Constantine Dean Tseretopoulos (46)
Lyford Cay Hospital,
P.O. Box N-7776,
Nassau, Bahamas
DIRECTOR
Physician, Lyford Cay Hospital (1987-present); director of various nonprofit
organizations; director or trustee, as the case may be, of 11 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Cardiology
Fellow, University of Maryland (1985-1987) and Internal Medicine Intern, Greater
Baltimore Medical Center (1982-1985).
James R. Baio (46)
500 East Broward Blvd.,
Fort Lauderdale, FL 33394-3091
TREASURER
Certified Public Accountant; Senior Vice President, Templeton Worldwide, Inc.,
Templeton Global Investors, Inc. and Templeton Funds Trust Company; officer of
20 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Senior Tax Manager, Ernst & Young (certified public accountants)
(1977-1989).
Harmon E. Burns (55)
777 Mariners Island Blvd.,
San Mateo, CA 94404
VICE PRESIDENT
Vice Chairman, Member-Office of the Chairman and Director, Franklin Resources,
Inc.; Executive Vice President and Director, Franklin Templeton Distributors,
Inc. and Franklin Templeton Services, Inc.; Executive Vice President, Franklin
Advisers, Inc.; Director, Franklin Investment Advisory Services, Inc. and
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 52 of the investment companies in the Franklin Templeton
Group of Funds.
Martin L. Flanagan (39)
777 Mariners Island Blvd.,
San Mateo, CA 94404
VICE PRESIDENT
President, Member-Office of the President, Chief Financial Officer and Chief
Operating Officer, Franklin Resources, Inc.; Senior Vice President, Chief
Financial Officer and Director, Franklin/Templeton Investor Services, Inc.;
Senior Vice President and Chief Financial Officer; Franklin Mutual Advisers,
LLC; Executive Vice President, Chief Financial Officer and Director, Templeton
Worldwide, Inc.; Executive Vice President, Chief Operating Officer and Director,
Templeton Investment Counsel, Inc.; Executive Vice President and Chief Financial
Officer, Franklin Advisers, Inc.; Executive Vice President and Chief Financial
Officer, Franklin Advisory Services, Inc. and Franklin Investment Advisory
Services, LLC; Director, Franklin Templeton Services, Inc.; officer and/or
director of some of the other subsidiaries of Franklin Resources, Inc.; and
officer and/or director or trustee, as the case may be, of 52 of the investment
companies in the Franklin Templeton Group of Funds.
David P. Goss (52)
777 Mariners Island Blvd.,
San Mateo, CA 94404
VICE PRESIDENT
President, Chief Executive Officer and Director, Franklin Select Realty Trust,
Property Resources, Inc., Property Resources Equity Trust, Franklin Real Estate
Management, Inc. and Franklin Properties, Inc.; officer and director of some of
the other subsidiaries of Franklin Resources, Inc.; officer of 53 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Director, Franklin Real Estate Income
Fund and Franklin Advantage Real Estate Income Fund (until 1996).
Barbara J. Green (52)
777 Mariners Island Blvd.,
San Mateo, CA 94404
SECRETARY AND VICE PRESIDENT
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior Vice
President, Templeton Worldwide, Inc. and Templeton Global Investors, Inc.;
officer of some of the other subsidiaries of Franklin Resources, Inc. and of 53
of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Deputy Director, 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 (until 1986), and Judicial Clerk, U.S. District
Court (District of Massachusetts) (until 1979).
Mark G. Holowesko (40)
Lyford Cay,
Nassau, Bahamas
VICE PRESIDENT
President, Templeton Global Advisors Limited; Chief Investment Officer, Global
Equity Group; Executive Vice President and Director, Templeton Worldwide, Inc.;
officer of 19 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Investment Administrator, RoyWest Trust Corporation
(Bahamas) Limited (1984-1985).
Charles E. Johnson (43)
777 Mariners Island Blvd.,
San Mateo, CA 94404
VICE PRESIDENT
President, Member-Office of the President and Director, Franklin Resources,
Inc.; Senior Vice President, Franklin Templeton Distributors, Inc.; President
and Director, Templeton Worldwide, Inc. and Franklin Advisers, Inc.; Director,
Templeton Investment Counsel, Inc.; President, Franklin Investment Advisory
Services, Inc.; officer and/or director of some of the other subsidiaries of
Franklin Resources, Inc.; and officer and/or director or trustee, as the case
may be, of 33 of the investment companies in the Franklin Templeton Group of
Funds.
Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd.,
San Mateo, CA 94404
VICE PRESIDENT
Vice Chairman, Member-Office of the Chairman and Director, Franklin Resources,
Inc.; Executive Vice President and Director, Franklin Templeton Distributors,
Inc.; Director, Franklin Advisers, Inc., Franklin Investment Advisory Services,
Inc. and Franklin/Templeton Investor Services, Inc.; Senior Vice President,
Franklin Advisory Services, LLC; and officer and/or director or trustee, as the
case may be, of most of the other subsidiaries of Franklin Resources, Inc. and
of 52 of the investment companies in the Franklin Templeton Group of Funds.
John R. Kay (59)
500 East Broward Blvd.,
Fort Lauderdale, FL 33394-3091
VICE PRESIDENT
Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin
Templeton Distributors, Inc.; officer of 24 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Vice President and Controller,
Keystone Group, Inc.
Elizabeth M. Knoblock (45)
500 East Broward Blvd.,
Fort Lauderdale, FL 33394-3091
VICE PRESIDENT - COMPLIANCE
General Counsel, Secretary and Senior Vice President, Templeton Investment
Counsel, Inc.; Senior Vice President, Templeton Global Investors, Inc.; officer
of other subsidiaries of Franklin Resources, Inc. and of 23 of the investment
companies in the Franklin Templeton 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, Division of Investment Management, U.S. Securities and Exchange
Commission (1984-1986).
J. Mark Mobius (63)
Two Exchange Square, 39th Floor,
Suite 3905-08,
Hong Kong
VICE PRESIDENT
Portfolio Manager of various Templeton advisory affiliates; Managing Director,
Templeton Asset Management Ltd.; Executive Vice President and Director;
Templeton Global Advisors Limited; officer of eight of the investment companies
in the Franklin Templeton Group of Funds; and FORMERLY, President, International
Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund)
(1986-1987) and Director, Vickers da Costa, Hong Kong (1983-1986).
Donald F. Reed (55)
1 Adelaide Street East, Suite 2101
Toronto, Ontario Canada M5C 3B8
PRESIDENT
Executive Vice President and Director, Templeton Worldwide, Inc.; Chairman,
Chief Executive Officer and Director, Templeton Investment Counsel, Inc.;
President, Chief Executive Officer and Director, Templeton Management Limited;
officer and/or director, as the case may be, of some of the other subsidiaries
of Franklin Resources, Inc.; Co-founder and Director, International Society of
Financial Analysts; Chairman, Canadian Council of Financial Analysts; and
FORMERLY, President and Director, Reed Monahan Nicholishen Investment Counsel
(1982-1989).
Murray L. Simpson (62)
777 Mariners Island Blvd.,
San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer
and/or director of some of the subsidiaries of Franklin Resources, Inc.; officer
of 53 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin
Investment Services (Asia) Limited (until January 2000) and Director, Templeton
Asset Management, Ltd. (until 1999).
*This board member is considered an "interested person" under federal securities
laws. Mr. Brady's status as an interested person results from his business
affiliations with Franklin Resources, Inc. and Templeton Global Advisors
Limited. Mr. Brady and Franklin Resources, Inc. are both limited partners of
Darby Overseas Partners, L.P. (Darby Overseas). In addition, Darby Overseas and
Templeton Global Advisors Limited are limited partners of Darby Emerging Markets
Fund, L.P.
NOTE: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father
and uncle, respectively, of Charles E. Johnson.
The Company pays noninterested board members and Mr. Brady an annual retainer of
$12,000 and a fee of $900 per board meeting attended. Board members who serve on
the audit committee of the Company and other funds in the Franklin Templeton
Group of Funds receive a flat fee of $2,000 per committee meeting attended, a
portion of which is allocated to the Company. Members of a committee are not
compensated for any committee meeting held on the day of a board meeting.
Noninterested board members also may serve as directors or trustees of other
funds in the Franklin Templeton Group of Funds and may receive fees from these
funds for their services. The following table provides the total fees paid to
noninterested board members and Mr. Brady by the Company and by the Franklin
Templeton Group of Funds.
<TABLE>
<CAPTION>
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM THE GROUP ON WHICH
NAME COMPANY(1) ($) OF FUNDS(2) ($) EACH SERVES(3)
- ------------------- ---------------------- --------------------- ------------------
<S> <C> <C> <C>
Harris J. Ashton 16,500 365,165 48
Nicholas F. Brady 16,500 138,700 19
Frank J. Crothers 20,632 72,400 11
S. Joseph Fortunato 16,500 363,238 50
John Wm. Galbraith 17,030 144,200 18
Andrew H. Hines, Jr. 17,004 203,700 20
Edith E. Holiday 16,500 237,265 25
Betty P. Krahmer 16,500 138,700 19
Gordon S. Macklin 16,500 363,165 48
Fred R. Millsaps 17,341 201,700 20
Constantine D.
Tseretopoulos 19,611 70,400 11
</TABLE>
1. For the fiscal year ended December 31, 1999.
2. For the calendar year ended December 31, 1999.
3. 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 53 registered investment companies, with approximately 155
U.S. based funds or series.
Noninterested board members 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 fund or other funds in the
Franklin Templeton Group of Funds. Certain officers or board members who are
shareholders of Franklin Resources, Inc. may be deemed to receive indirect
remuneration by virtue of their participation, if any, in the fees paid to its
subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
- -------------------------------------------------------------------------------
MANAGER AND SERVICES PROVIDED The fund's manager is Templeton Investment
Counsel, Inc. The manager is a wholly owned subsidiary of Franklin Resources,
Inc. (Resources), a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr.
are the principal shareholders of Resources.
The manager provides investment research and portfolio management services, and
selects the securities for the fund to buy, hold or sell. The manager also
selects the brokers who execute the fund's portfolio transactions. The manager
provides periodic reports to the board, which reviews and supervises the
manager's investment activities. To protect the fund, the manager and its
officers, directors and employees are covered by fidelity insurance.
The Templeton organization has been investing globally since 1940. The manager
and its affiliates have offices in Argentina, the Bahamas, Brazil, Canada,
Peoples Republic of China, Cyprus, France, Germany, Hong Kong, India, Italy,
Japan, Korea, Luxembourg, Mauritius, the Netherlands, Poland, Russia, Singapore,
South Africa, Spain, Sweden, Switzerland, Taiwan, Turkey, United Kingdom,
Venezuela and the U.S.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of the
other funds it manages, or for its own account, that may differ from action
taken by the manager on behalf of the fund. Similarly, with respect to the fund,
the manager is not obligated to recommend, buy or sell, or to refrain from
recommending, buying or selling any security that the manager and access
persons, as defined by applicable federal securities laws, may buy or sell for
its or their own account or for the accounts of any other fund. The manager is
not obligated to refrain from investing in securities held by the fund or other
funds it manages.
The fund, its manager and principal underwriter has each adopted a code of
ethics, as required by federal securities laws. Under the code of ethics,
employees who are designated as access persons may engage in personal securities
transactions, including transactions involving securities that are being
considered for the fund or that are currently held by the fund, subject to
certain general restrictions and procedures. The personal securities
transactions of access persons of the fund, its manager and principal
underwriter will be governed by the code of ethics. The code of ethics is on
file with, and available from, the U.S. Securities and Exchange Commission
(SEC).
MANAGEMENT FEES The fund pays the manager a monthly fee equal to an annual rate
of 0.70% of the value of its average daily net assets during the year.
Each class of the fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended December 31, the fund paid the following
management fees:
MANAGEMENT FEES PAID ($)
-------------------------
1999 32,611,710
1998 30,272,145
1997 23,912,568
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the Company to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by Resources
and is an affiliate of the fund's manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The Company pays FT Services a monthly fee equal to an
annual rate of:
- - 0.15% of the fund's combined 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 $1.2 billion.
During the last three fiscal years ended December 31, the Company paid FT
Services the following administration fees:
ADMINISTRATION FEES PAID ($)
-----------------------------------
1999 3,896,265
1998 3,636,696
1997 2,903,341
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/ Templeton Investor Services,
Inc. (Investor Services) is the fund's shareholder servicing agent and acts as
the fund's transfer agent and dividend-paying agent. Investor Services is
located at 100 Fountain Parkway, St. Petersburg, FL 33716-1205. Please send all
correspondence to Investor Services to P.O. Box 33030, St. Petersburg, FL
33733-8030
For its services, Investor Services receives a fixed fee per account. The fund
also will reimburse Investor Services for certain out-of-pocket expenses, which
may include payments by Investor Services to entities, including affiliated
entities, that provide sub-shareholder services, recordkeeping and/or transfer
agency services to beneficial owners of the fund. The amount of reimbursements
for these services per benefit plan participant fund account per year will not
exceed the per account fee payable by the fund to Investor Services in
connection with maintaining shareholder accounts.
CUSTODIAN The Chase Manhattan Bank, at its principal office at MetroTech Center,
Brooklyn, NY 11245, and at the offices of its branches and agencies throughout
the world, acts as custodian of the fund's assets. As foreign custody manager,
the bank selects and monitors foreign sub-custodian banks, selects and evaluates
non-compulsory foreign depositories, and furnishes information relevant to the
selection of compulsory depositories.
AUDITOR PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, NY
10036, is the fund's independent auditor. The auditor gives an opinion on the
financial statements included in the fund's Annual Report to Shareholders and
reviews the fund's registration statement filed with the SEC.
PORTFOLIO TRANSACTIONS
- ------------------------------------------------------------------------------
The manager selects brokers and dealers to execute the fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the board may give.
When placing a portfolio transaction, the manager 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 is negotiated between
the 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 manager 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 the
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.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the 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 manager's overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to the 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 manager in carrying out its investment advisory
responsibilities. These services may not always directly benefit the fund. They
must, however, be of value to the 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 the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions to obtain additional
research services allows the manager to supplement its own research and analysis
activities and to receive the views and information of individuals and research
staffs of other securities firms. As long as it is lawful and appropriate to do
so, the manager and its affiliates may use this research and data in their
investment advisory capacities with other clients. If the fund'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, also may be
considered a factor in the selection of broker-dealers to execute the fund's
portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the 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 payable to the manager will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the fund and one or more other investment
companies or clients supervised by the 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
manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the 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 the fund, 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 last three fiscal years ended December 31, the fund paid the
following brokerage commissions:
BROKERAGE COMMISSIONS ($)
----------------------------------
1999 1,502,739
1998 3,863,065
1997 2,666,430
For the fiscal year ended December 31, 1999, Templeton Institutional Funds Inc.
- - Foreign Equity Series paid brokerage commissions of $1,742,821 from aggregate
portfolio transactions of $671,683,936 to brokers who provided research
services.
As of December 31, 1999, the fund did not own securities of its regular
broker-dealers.
DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
The fund calculates dividends and capital gains the same way for each class. The
amount of any income dividends per share will differ, however, generally due to
the difference in any distribution and service (Rule 12b-1) fees of each class.
Distributions are subject to approval by the board. The fund does not pay
"interest" or guarantee any fixed rate of return on an investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in the
form of dividends and interest on its investments. This income, less expenses
incurred in the operation of the fund, constitutes the fund's 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 receive
them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in the fund. Any net capital gains realized by the fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, to reduce or eliminate excise or income taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized on the sale of debt securities
generally are treated as ordinary losses. 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 decrease 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.
The fund may be subject to foreign withholding taxes on income from certain
foreign securities. If more than 50% of the fund's total assets at the end of
the 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
fund. If this election is made, the year-end statement you receive from the fund
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 (subject to limitations) claim a foreign tax credit for such
taxes against your U.S. federal income tax. The fund will provide you with the
information necessary to complete your individual income tax return if it makes
this election.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held fund shares for a full year, the fund may designate and distribute 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.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code. The fund has qualified as a regulated investment company for its
most recent fiscal year, and intends to continue to qualify during the current
fiscal year. As a regulated investment company, the fund generally pays no
federal income tax on the income and gains it distributes to you. The board
reserves the right not to maintain the qualification of the fund as a regulated
investment company if it determines such course of action to be beneficial to
shareholders. In such case, the 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 earnings
and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires the fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year. The fund intends to declare and pay these distributions in
December (or to pay them in January, in which case you must treat them as
received in December) but can give no assurances that its distributions will be
sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions (including redemption in kind) and
exchanges of fund shares are taxable transactions for federal and state income
tax purposes. If you redeem your fund shares, or exchange your fund shares for
shares of a different Franklin Templeton Fund, the IRS will require that you
report any gain or loss on your redemption or exchange. If you hold your shares
as a capital asset, the gain or loss that you realize will be capital gain or
loss and will be long-term or short-term, generally depending on how long you
hold your shares.
Beginning after the year 2005 (2000 for certain shareholders), gains from the
sales of fund shares held for more than five years may be subject to a reduced
tax rate.
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 the fund on those shares.
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 buy 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 buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in the fund, and then
reinvest the sales proceeds in the fund or in another Franklin Templeton Fund
within 90 days of buying the original shares, the sales charge that would
otherwise apply to your reinvestment may be reduced or eliminated. The IRS will
require you to report any gain or loss on the redemption of your original shares
in the fund. In doing so, all or a portion of the sales charge that you paid for
your original shares in the fund will be excluded from your tax basis in the
shares sold (for the purpose of determining gain or loss upon the sale of such
shares). The portion of the sales charge excluded will equal the amount that the
sales charge is reduced on your reinvestment. Any portion of the sales charge
excluded from your tax basis in the shares sold will be added to the tax basis
of the shares you acquire from your reinvestment.
U.S. GOVERNMENT SECURITIES States grant tax-free status to dividends paid to you
from interest earned on certain U.S. government securities, subject in some
states to minimum investment or reporting requirements that must be met by the
fund. Investments in Government National Mortgage Association or Federal
National Mortgage Association securities, bankers' acceptances, commercial paper
and repurchase agreements collateralized by U.S. government securities generally
do not qualify for tax-free treatment. The rules on exclusion of this income are
different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because the fund's income is
derived primarily from investments in foreign rather than domestic securities,
generally none of its distributions will be eligible for the corporate
dividends-received deduction. None of the dividends paid by the fund for the
most recent calendar year qualified for such deduction, and it is anticipated
that none of the current year's dividends will so qualify.
INVESTMENT IN COMPLEX SECURITIES The fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the fund are
treated as ordinary income or capital gain, accelerate the recognition of income
to the fund (possibly causing the fund to sell securities to raise the cash for
necessary distributions) and/or defer the fund's ability to recognize losses,
and, in limited cases, subject the fund to U.S. federal income tax on income
from certain foreign securities. These rules may affect the amount, timing or
character of the income distributed to you by the fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- -------------------------------------------------------------------------------
The fund is a diversified series of Templeton Institutional Funds Inc.
(Company), which is an open-end management investment company, commonly called a
mutual fund. The Company was organized as a Maryland corporation on July 6,
1990, and is registered with the SEC.
The fund currently offers two classes of shares, Primary Shares and Service
Shares. The fund may offer additional classes of shares in the future. The full
title of each class is:
- - Foreign Equity Series - Primary Shares
- - Foreign Equity Series - Service Shares
Shares of each class represent proportionate interests in the fund's assets. On
matters that affect the fund as a whole, each class has the same voting and
other rights and preferences as any other class. On matters that affect only one
class, only shareholders of that class may vote. Each class votes separately on
matters affecting only that class, or expressly required to be voted on
separately by state or federal law. 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. Additional series
may be offered in the future.
The Company has noncumulative voting rights. For board member elections, 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 be called by the board to consider the removal of a
board member if requested in writing 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. A
special meeting also may be called by the board in its discretion.
As of April 3, 2000, the principal shareholders of the fund, beneficial or of
record, were:
NAME AND ADDRESS PERCENTAGE (%)
- ------------------------------------------------------------
FOREIGN EQUITY - SERVICE SHARES
Franklin Resources Inc.(1)
Corporate Accounting
Attn: Michael Corcoran
555 Airport Road Blvd., 4th Fl,
Burlingame, CA 94010 100
1. NOTE: Charles B. Johnson and Rupert H. Johnson, Jr., who are officers and/or
directors of the fund, may be considered beneficial holders of the fund shares
held by Franklin Resources, Inc. (Resources). As principal shareholders of
Resources, they may be able to control the voting of Resources' shares of the
fund.
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.
As of April 3, 2000, the officers and board members, as a group, owned of record
and beneficially less than 1% of the outstanding shares of each class. The board
members may own shares in other funds in the Franklin Templeton Group of Funds.
BUYING AND SELLING SHARES
- ------------------------------------------------------------------------------
The fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer orders
and accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity. Banks and financial institutions that
sell shares of the fund may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the fund we may impose a $10 charge against your account for each returned item.
If you buy shares through the reinvestment of dividends, the shares 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.
GROUP PURCHASES As described in the prospectus, members of a qualified group may
add the group's investments together for minimum investment purposes.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
DEALER COMPENSATION Distributors and/or its affiliates may provide financial
support to 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
and/or total assets with the Franklin Templeton Group of Funds. 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 rules of the National Association of Securities Dealers,
Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the 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 fund's 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 the fund's investment goal exist
immediately. This money will then be withdrawn from the short-term,
interest-bearing money market instruments and invested in portfolio securities
in as orderly a manner as is possible when attractive investment opportunities
arise.
The proceeds from the sale of shares of an investment company generally are not
available until the seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh 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.
REDEMPTIONS IN KIND The fund has committed itself 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 fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the U.S. Securities and Exchange
Commission (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 fund, in case of an emergency, or if the payment of such
a redemption in cash would be detrimental to the existing shareholders of the
fund. In these circumstances, the securities distributed would be valued at the
price used to compute the fund's net assets and you may incur brokerage fees in
converting the securities to cash. The fund does 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 Distribution and Taxes).
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.
GENERAL INFORMATION If dividend checks are returned to the fund marked "unable
to forward" by the postal service, we will consider this a request by you to
change your dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at net asset value until we receive new
instructions.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. The 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.
Sending redemption proceeds by wire or electronic funds transfer (ACH) is a
special service that we make available whenever possible. By offering this
service to you, the fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire or ACH is not processed as described in the prospectus.
Franklin/Templeton Investor Services, Inc. (Investor Services) may pay certain
financial institutions that maintain omnibus accounts with the fund on behalf of
numerous beneficial owners for recordkeeping operations performed with respect
to such owners. For each beneficial owner in the omnibus account, the fund may
reimburse Investor Services an amount not to exceed the per account fee that the
fund normally pays Investor Services. These financial institutions also may
charge a fee for their services directly to their clients.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. If you sell shares through your securities
dealer, it is your dealer's responsibility to transmit the order to the fund in
a timely fashion. 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. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a notice of levy.
PRICING SHARES
- -------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the net
asset value (NAV) per share plus any applicable sales charge, calculated to two
decimal places using standard rounding criteria.
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.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. Pacific
time). The fund does not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the Nasdaq National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The fund values over-the-counter portfolio securities within
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the fund
values them according to the broadest and most representative market as
determined by the manager.
The fund values portfolio securities underlying actively traded call options at
their market price as determined above. The current market value of any option
the fund holds is its last sale price on the relevant exchange before the fund
values its assets. If there are no sales that day or if the last sale price is
outside the bid and ask prices, the fund values options within the range of the
current closing bid and ask prices if the fund believes the valuation fairly
reflects the contract's market value.
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 the fund's NAV is not calculated. Thus, the calculation of the fund's NAV
does not take place contemporaneously with the determination of the prices of
many of the portfolio securities used in the calculation and, if events
materially affecting the values of these foreign securities occur, the
securities will be valued at fair value as determined by management and approved
in good faith by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the NAV
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 NAV.
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
fund may use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
- -------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares. Distributors
is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
DISTRIBUTION AND SERVICE (12B-1) FEES The fund has a distribution or "Rule
12b-1" plan for its Service Shares. Under the plan, the fund shall pay or may
reimburse Distributors or others for the expenses of activities that are
primarily intended to sell Service Shares. These expenses may include, among
others, distribution or service fees paid to securities dealers or others who
have executed a servicing agreement with the fund, Distributors or its
affiliates; a prorated portion of Distributors' overhead expenses; and the
expenses of printing prospectuses and reports used for sales purposes, and
preparing and distributing sales literature and advertisements.
Payments by the fund under the plan may not exceed 0.35% per year of average
daily net assets, payable quarterly. Expenses not reimbursed in any quarter may
be reimbursed in future quarters or years. This includes expenses not reimbursed
because they exceeded the applicable limit under the plan.
The terms and provisions of the plan relating to required reports, term, and
approval are consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under the plan, plus any other payments deemed to be made pursuant
to the plan, exceed the amount permitted to be paid under the rules of the
National Association of Securities Dealers, Inc.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plan as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plan for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
The plan has been approved in accordance with the provisions of Rule 12b-1. The
plan is renewable annually by a vote of the board, including a majority vote of
the board members who are not interested persons of the fund and who have no
direct or indirect financial interest in the operation of the plan, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such board members be done by the noninterested
members of the fund's board. The plan and any related agreement may be
terminated at any time, without penalty, by vote of a majority of the
noninterested board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with the manager or by
vote of a majority of the outstanding shares of the class. Distributors or any
dealer or other firm may also terminate their respective distribution or service
agreement at any time upon written notice.
The plan and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plan
or any related agreements shall be approved by a vote of the noninterested board
members, cast in person at a meeting called for the purpose of voting on any
such amendment.
Distributors is required to report in writing to the board at least quarterly on
the amounts and purpose of any payment made under the plan and any related
agreements, as well as to furnish the board with such other information as may
reasonably be requested in order to enable the board to make an informed
determination of whether the plan should be continued.
PERFORMANCE
- -------------------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return quotations used by the fund are based on the
standardized methods of computing performance mandated by the SEC. An
explanation of these and other methods used by the fund 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.
Before May 1, 1999, only a single class of fund shares was offered without Rule
12b-1 expenses. Returns shown are a restatement of the original class to include
the Rule 12b-1 fees applicable to Service Shares as though in effect from the
fund's inception.
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 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 initial sales
charge currently in effect.
The average annual total returns for the indicated periods ended December 31,
1999, were:
SINCE INCEPTION
1 YEAR (%) 5 YEARS (%) (10/18/90) (%)
- ------------------------------------------------------------
Service Shares 27.34 16.51 14.07
The following SEC formula was used to calculate these figures:
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 income dividends and capital gain distributions are reinvested at
net asset value. Cumulative total return, however, is based on the actual return
for a specified period rather than on the average return over the periods
indicated above. The cumulative total returns for the indicated periods ended
December 31, 1999, were:
SINCE INCEPTION
1 YEAR (%) 5 YEARS (%) (10/18/90) (%)
- -----------------------------------------------------------------
Service Shares 27.34 114.70 235.78
VOLATILITY Occasionally statistics may be used to show the fund's volatility or
risk. Measures of volatility or risk are generally used to compare the fund's
net asset value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities in
which the fund invests. A beta of more than 1.00 indicates volatility greater
than the market and a beta of less than 1.00 indicates volatility less than the
market. Another measure of volatility or risk is standard deviation. Standard
deviation is used to measure variability of net asset value or total return
around an average over a specified period of time. The idea is that greater
volatility means greater risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS Sales literature referring to the use of the fund
as a potential investment for 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 fund may include in its advertising or sales material information relating
to investment goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Franklin Resources, Inc. 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 the fund may
satisfy your investment goal, advertisements and other materials about the fund
may discuss certain measures of fund performance as reported by various
financial publications. Materials also may compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
These comparisons may include, but are not limited to, the following examples:
(i) unmanaged indices so that you may compare the 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(R) 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 the fund.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for administrative and management costs and expenses.
From time to time, the fund and the manager also may refer to the following
information:
o The 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.
o The performance of U.S. equity and debt markets relative to foreign
markets prepared or published by Morgan Stanley Capital International or a
similar financial organization.
o The capitalization of U.S. and foreign stock markets as prepared or
published by the International Finance Corporation, Morgan
Stanley Capital International or a similar financial organization.
o The geographic and industry distribution of the fund's portfolio and the
fund's top ten holdings.
o 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.
o To assist investors in understanding the different returns and risk
characteristics of various investments, the fund may show historical returns
of various investments and published indices (E.G., Ibbotson Associates,
Inc. Charts and Morgan Stanley Capital International EAFE(R) Index).
o The major industries located in various jurisdictions as published by the
Morgan Stanley Index.
o Rankings by DALBAR Surveys, Inc. with respect to mutual fund shareholder
services.
o Allegorical stories illustrating the importance of persistent long-term
investing.
o The fund's portfolio turnover rate and its ranking relative to industry
standards as published by Lipper(R) Inc. or Morningstar, Inc.
o 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.
o Comparison of the characteristics of various emerging markets, including
population, financial and economic conditions.
o Quotations from the Templeton organization's founder, Sir John Templeton,*
advocating the virtues of diversification and long-term investing.
- ------------
* Sir John Templeton sold the Templeton organization to Franklin Resources, Inc.
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 fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the fund. 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 also may compare the fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of fluctuation
of principal value, a risk generally not present in an investment in a CD issued
by a bank. CDs are frequently insured by an agency of the U.S. government. An
investment in the fund is not insured by any federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the 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 the fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
- -------------------------------------------------------------------------------
The fund 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 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
fund 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 is one of the
oldest mutual fund organizations and now services approximately 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 $229 billion in assets under management for more than 5 million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers 103 U.S. based open-end investment companies to the public. The
fund may identify itself by its Nasdaq symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the fund are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.
You will receive the fund's financial reports every six months. If you would
like to receive an interim report of the fund's portfolio holdings, please call
1-800/DIAL BEN(R).
DESCRIPTION OF BOND RATINGS
- -------------------------------------------------------------------------------
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
INVESTMENT GRADE
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 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 that 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 that 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. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
BELOW INVESTMENT GRADE
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. These 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 that are speculative to a high degree.
These 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.
STANDARD & POOR'S RATINGS GROUP (S&P(R))
INVESTMENT GRADE
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 a 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.
BELOW INVESTMENT GRADE
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 these bonds will likely have some quality and protective
characteristics, they 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 also may 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.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
PAGE
PART C
OTHER INFORMATION
ITEM 23 EXHIBITS
The following exhibits are incorporated by reference to the previously filed
documents indicated below, except as noted:
(A) ARTICLES OF INCORPORATION
( i) Articles of Incorporation /2/
( ii) Articles of Amendment dated January 11, 1993 /2/
( iii) Articles Supplementary dated January 11, 1993/2/
( iv) Articles Supplementary dated April 28, 1993/2/
( v) Articles Supplementary dated July 1, 1993/2/
( vi) Articles Supplementary dated September 30, 1993/2/
( vii) Articles Supplementary dated March 1, 1994 /1/
(viii) Articles Supplementary dated January 5, 1995/1/
( ivx) Articles Supplementary dated January 17, 1996/3/
( x) Articles Supplementary dated April 15, 1996/4/
( xi) Articles Supplementary dated December 27, 1996/4/
( xii) Articles Supplementary dated April 10, 1997/4/
( ivx) Form of Articles of Amendment/7/
( xv) Form of Articles Supplementary/7/
(B) BY-LAWS
(i) By-Laws/4/
(C) INSTRUMENT DEFINING RIGHTS OF SECURITY HOLDERS
Not Applicable
(D) INVESTMENT ADVISORY CONTRACTS
( i) Amended and Restated Investment Management Agreement
for Foreign Equity Series/2/
(ii) Amended and Restated Investment Management Agreement
for Growth Series/2/
(iii) Amended and Restated Investment Management Agreement
for Emerging Markets Series/2/
( iv) Form of Investment Management Agreement for Emerging
Fixed Income Markets Series/3/
( v) Addendum to the Investment Management Agreement for
Emerging Markets Series/5/
(E) UNDERWRITING CONTRACTS
( i) Form of Amended and Restated Distribution
Agreement/3/
( ii) Form of Dealer Agreement between Registrant and
Franklin Templeton Distributors, Inc. and Securities
Dealers dated March 1, 1998/6/
(iii) Amendment of Dealer Agreement dated May 15, 1998/6/
(F) BONUS OR PROFIT SHARING CONTRACTS
Not Applicable
PAGE
(G) CUSTODY AGREEMENTS
( i) Form of Amended and Restated Custody Agreement/3/
( ii) Amendment dated March 2, 1998 to the Custody
Agreement/6/
(iii) Amendment No. 2 dated July 23, 1998 to the Custody
Agreement/6/
(H) OTHER MATERIAL CONTRACTS
( i) Form of Amended and Restated Transfer Agent
Agreement/4/
(ii) Form of Amended and Restated Fund Administration
Agreement/3/
(I) LEGAL OPINION
(i) Opinion and Consent of Counsel/5/
(J) OTHER OPINION
( i) Consent of Independent Auditors -
PricewaterhouseCoopers LLP
(ii) Consent of Independent Auditors -
McGladrey & Pullen, LLP
(K) OMITTED FINANCIAL STATEMENTS
Not Applicable
(L) INITIAL CAPITAL AGREEMENTS
(i) Letter concerning initial capital/2/
(M) RULE 12B-1 PLANS
(i) Form of Distribution PLan/7/
(O) RULE 18F-3 PLAN
(i) Form of Multiple Class Plan/7/
(P) POWER OF ATTORNEY
(i) Powers of Attorney dated December 11, 1998/6/
(Q) CODE OF ETHICS
(i) Code of Ethics
- -------------------------------------
1 Filed with Post-Effective Amendment No. 8 to the Registration Statement on
May 1, 1995
2 Filed with Post-Effective Amendment No. 9 to the Registration Statement on
April 28, 1996
3 Filed with Post-Effective Amendment No. 10 to the Registration Statement on
February 14, 1997
4 Filed with Post-Effective Amendment No. 11 to the Registration Statement on
May 1, 1997
5 Filed with Post-Effective Amendment No. 13 to the Registration Statement on
April 30, 1998
6 Filed with Post-Effective Amendment No. 14 to the Registration Statement on
March 2, 1999
7 Filed with Post-Effective Amendment No. 15 to the Registration Statement on
April 28, 1999
PAGE
ITEM 24 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
NONE
ITEM 25. INDEMNIFICATION.
Reference is made to Articles Eight and Eleven of the Registrant's
Articles of Incorporation, incorporated by reference hereto
Post-Effective Amendment No. 9 filed on April 28, 1996.
Reference is made to Article Five of the Registrant's By-Laws,
incorporated by reference hereto Post-Effective 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 the
successful defense of any act, suit or proceeding) is asserted by such
directors, officers or controlling persons in connection with the
shares being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issues.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT
(a) Templeton Asset Management Ltd.
The officers and directors of the Registrant's manager also serve as
officers and/or directors for (1) the manager's corporate parent,
Franklin Resources, Inc., and/or (2) other investment companies in the
Franklin Templeton Group of Funds.
For additional information please see Part B and Schedules A and D of
Form ADV of the Fund's Investment Manager (SEC File 801-46997),
incorporated herein by reference, which sets forth the officers and
directors of the investment manager and information as to any
business, profession, vocation or employment of a substantial nature
engaged in by those officers and directors during the past two years.
(b) Templeton Investment Counsel, Inc.
The officers and Directors of the Registrant's manager also serve as
officers and/or directors for (1) the manager's corporate parent,
Franklin Resources, Inc., and/or (2) other investment companies in the
Franklin Templeton Group of Funds.
For additional information please see Part B and Schedules A and D of
Form ADV of the Fund's Investment Manager (SEC File 801-15125),
incorporated herein by reference, which sets forth the officers and
directors of the investment manager and information as to any
business, profession, vocation or employment of a substantial nature
engaged in by those officers and directors during the past two years.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Franklin Templeton Distributors, Inc. ("Distributors") also acts
as principal underwriter of shares of:
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
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 and Precious Metals 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 Trust
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 Templeton Variable Insurance Products Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
(b) The information required by this Item 27 with respect to each
director and officer of Distributors is incorporated by reference to
Part B of this Form N-1A and Schedule A of Form BD filed by
Distributors with the Securities and Exchange Commission pursuant to
the Securities Act of 1934 (SEC File No. 8-5889).
(c) Not Applicable. Registrant's principal underwriter is an
affiliated person of the Registrant.
ITEM 28. 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 thereunder are located at 500 East Broward Blvd.,
Fort Lauderdale, Florida 33394. Other 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 29. MANAGEMENT SERVICES
There are no management-related service contracts not discussed in
Part A or Part B.
ITEM 30. UNDERTAKINGS.
Not Applicable.
PAGE
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all the requirements for effectiveness of the registration statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of San Mateo and State of California on
the 28th day of April, 2000.
TEMPLETON INSTITUTIONAL FUNDS, INC.
By:/s/BARBARA J. GREEN
--------------------------------
Barbara J. Green, Secretary
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 28, 2000
- --------------------------------------------
Constantine Dean Tseretopoulos* Director April 28, 2000
- --------------------------------------------
Frank J. Crothers* Director April 28, 2000
- --------------------------------------------
Harris J. Ashton* Director April 28, 2000
- --------------------------------------------
S. Joseph Fortunato* Director April 28, 2000
- --------------------------------------------
Fred R. Millsaps* Director April 28, 2000
- --------------------------------------------
Gordon S. Macklin* Director April 28, 2000
- --------------------------------------------
Andrew H. Hines, Jr.* Director April 28, 2000
- --------------------------------------------
John Wm. Galbraith* Director April 28, 2000
- --------------------------------------------
Nicholas F. Brady* Director April 28, 2000
- --------------------------------------------
Betty P. Krahmer* Director April 28, 2000
- --------------------------------------------
Edith E. Holiday* Director April 28, 2000
- --------------------------------------------
Donald F. Reed* President (Chief April 28, 2000
Executive Officer)
- --------------------------------------------
James R. Baio* Treasurer (Chief April 28, 2000
Financial and Accounting
Officer)
</TABLE>
*By: /s/BARBARA J. GREEN
------------------
Barbara J. Green
Attorney-in-Fact
(Pursuant to Powers of Attorney previously filed)
PAGE
TEMPLETON INSTITUTIONAL FUNDS, INC.
REGISTRATION STATEMENT
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION LOCATION
<S> <C> <C>
EX-99(a)(i) Articles of Incorporation *
EX-99(a)(ii) Articles of Amendment dated January 11, 1993 *
EX-99(a)(iii) Articles Supplementary dated January 11, 1993 *
EX-99(a)(iv) Articles Supplementary dated April 28, 1993 *
EX-99(a)(v) Articles Supplementary dated July 1, 1993 *
EX-99(a)(vi) Articles Supplementary dated September 30, 1993 *
EX-99(a)(vii) Articles Supplementary dated March 1, 1994 *
EX-99(a)(vii) Articles Supplementary dated January 5, 1995 *
EX-99(a)(ivx) Articles Supplementary dated January 17, 1996 *
EX-99(a)(x) Articles Supplementary dated April 15, 1996 *
EX-99(a)(xi) Articles Supplementary dated December 27, 1996 *
EX-99(a)(xii) Articles Supplementary dated April 10, 1997 *
EX-99(a)(xiii) Articles Supplementary dated February 27, 1998 *
EX-99(a)(ivx) Form of Articles of Amendment *
EX-99(a)(xv) Form of Articles Supplementary *
EX-99(b)(i) By-Laws *
EX-99(d)(i) Amended and Restated Investment Management Agreement *
for Foreign Equity Series
EX-99(d)(ii) Amended and Restated Investment Management Agreement *
for Growth Series
EX-99(d)(iii) Amended and Restated Investment Management Agreement *
for Emerging Markets Series
EX-99(d)(iv) Form of Amended and Restated Investment Management *
Agreement for Emerging Fixed Income Markets Series
EX-99(d)(v) Addendum to the Investment Management Agreement for *
Emerging Markets Series
EX-99(e)(i) Form of Amended and Restated Distribution Agreement *
EX-99(e)(ii) Form of Dealer Agreement between Registrant and Franklin *
Templeton Distributors, Inc. and Securities Dealers dated
March 1, 1998
EX-99(e)(iii) Amendment of Dealer Agreement dated May 15, 1998 *
EX-99(g)(i) Form of Amended and Restated Custody Agreement *
EX-99(g)(ii) Amendment dated March 2, 1998 to the Custody Agreement *
EX-99(g)(iii) Amendment No. 2 dated July 23, 1998 to the Custody *
Agreement
EX-99(h)(i) Form of Amended and Restated Transfer Agent Agreement *
EX-99(h)(ii) Form of Amended and Restated Fund Administration *
Agreement
EX-99(i)(i) Opinion and Consent of Counsel *
EX-99(j)(i) Consent of Independent Auditors - PricewaterhouseCoopers LLP Attached
EX-99(j)(ii) Consent of Independent Auditors - McGladrey & Pullen, LLP Attached
EX-99(l)(i) Letter Concerning Initial Capital *
EX-99(m)(i) Form of Service Shares Distribution Plan *
EX-99(o)(i) Form of Multiple Class Plan *
EX-99(p)(i) Powers of Attorney *
EX-99(q)(i) Code of Ethics Attached
</TABLE>
* Incorporated by reference.
PRICEWATERHOUSECOOPERS LLP
CONSENT OF INDEPENDENT AUDITORS
We herby consent to the incorporation by reference in Post-Effective Amendment
No. 16 to the Registration Statement of Templeton Institutional Funds, Inc. on
Form N-1A, File No. 33-35779 of our report dated January 28, 2000, relating to
the financial statements and financial highlights, which appears in the December
31, 1999 Annual Report to Shareholders of Templeton Institutional Funds, Inc.,
which is also incorporated by reference into the Registration Statement. We also
consent to the reference of our firm under the headings "Financial Highlights"
and "Auditors".
/s/PRICEWATERHOUSECOOPERS LLP
Ft. Lauderdale, Florida
April 24, 2000
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our reports dated January 28, 1999 on the
financial statements for the year ended December 31, 1998 and financial
highlights for each of the four years in the period ended December 31, 1998 of
the Foreign Equity Series, the Emerging Markets Series and the Emerging Fixed
Income Market Series of Templeton Institutional Funds, Inc. referred to in
Post-Effective Amendment No. 16 to the Registration Statement on Form N-1A, File
No. 33-35779, as filed with the Securities and Exchange Commission.
/s/MCGLADREY & PULLEN, LLP
New York, New York
April 24, 2000
PAGE
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Templeton Institutional Funds, Inc. - Emerging Fixed Income Markets Series
We have audited the accompanying statement of changes in net assets for the year
ended December 31, 1998 and financial highlights for the year ended December 31
1998 and the period from June 4, 1997 (commencement of operations) to December
31, 1997 , of the Emerging Fixed Income Markets Series of Templeton
Institutional Funds, Inc. This financial statement and the financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on this financial statement and the financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statement and financial highlights referred to
above present fairly, in all material respects, the changes in net assets and
financial highlights of the Emerging Fixed Income Markets Series of Templeton
Institutional Funds, Inc. for the periods indicated, in conformity with
generally accepted accounting principles.
/s/MCGLADREY & PULLEN, LLP
New York, New York
January 28, 1999
PAGE
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Templeton Institutional Funds, Inc. - Foreign Equity Series
We have audited the accompanying statement of changes in net assets for the year
ended December 31, 1998 and financial highlights for each of the four years in
the period ended December 31 1998, of the Foreign Equity Series of Templeton
Institutional Funds, Inc. This financial statement and the financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on this financial statement and the financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statement and financial highlights referred to
above present fairly, in all material respects, the changes in net assets and
financial highlights of the Foreign Equity Series of Templeton Institutional
Funds, Inc. for the periods indicated, in conformity with generally accepted
accounting principles.
/s/MCGLADREY & PULLEN, LLP
New York, New York
January 28, 1999
PAGE
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Templeton Institutional Funds, Inc. - Emerging Markets Series
We have audited the accompanying statement of changes in net assets for the year
ended December 31, 1998 and financial highlights for each of the four years in
the period ended December 31 1998, of the Emerging Markets Series of Templeton
Institutional Funds, Inc. This financial statement and the financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on this financial statement and the financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statement and financial highlights referred to
above present fairly, in all material respects, the changes in net assets and
financial highlights of the Emerging Markets Series of Templeton Institutional
Funds, Inc. for the periods indicated, in conformity with generally accepted
accounting principles.
/s/MCGLADREY & PULLEN, LLP
New York, New York
January 28, 1999
THE FRANKLIN TEMPLETON GROUP
CODE OF ETHICS
AND
POLICY STATEMENT ON INSIDER TRADING
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
THE FRANKLIN TEMPLETON GROUP CODE OF ETHICS.......................................1
PART 1 - STATEMENT OF PRINCIPLES..................................................1
PART 2 - PURPOSES, AND CONSEQUENCES OF NON-COMPLIANCE.............................2
PART 3 - COMPLIANCE REQUIREMENTS FOR ALL ACCESS PERSONS...........................3
PART 4 - ADDITIONAL COMPLIANCE REQUIREMENTS APPLICABLE TO PORTFOLIO PERSONS......10
PART 5 - REPORTING REQUIREMENTS FOR ALL ACCESS PERSONS...........................13
PART 6 - PRE-CLEARANCE REQUIREMENTS..............................................17
PART 7 - PENALTIES FOR VIOLATIONS OF THE CODE....................................22
PART 8 - A REMINDER ABOUT THE FRANKLIN TEMPLETON GROUP INSIDER TRADING POLICY....23
APPENDIX A: COMPLIANCE PROCEDURES, DEFINITIONS, AND OTHER ITEMS..................24
I. RESPONSIBILITIES OF EACH DESIGNATED COMPLIANCE OFFICER.....................25
II. COMPILATION OF DEFINITIONS OF IMPORTANT TERMS..............................31
III. SECURITIES EXEMPT FROM THE PROHIBITED, REPORTING,
AND PRE-CLEARANCE PROVISIONS .............................................32
IV. LEGAL REQUIREMENT..........................................................33
APPENDIX B: FORMS AND SCHEDULES..................................................34
ACKNOWLEDGMENT FORM..............................................................35
SCHEDULE A: LEGAL AND COMPLIANCE OFFICERS AND PRECLEARANCE DESK
TELEPHONE & FAX NUMBERS.............................................36
SCHEDULE B: SECURITIES TRANSACTION REPORT........................................37
SCHEDULE C: INITIAL, ANNUAL & UPDATED DISCLOSURE OF ACCESS PERSONS
SECURITIES HOLDINGS ................................................39
SCHEDULE D: NOTIFICATION OF SECURITIES ACCOUNT OPENING..........................40
SCHEDULE E: NOTIFICATION OF DIRECT OR INDIRECT BENEFICIAL INTEREST..............41
SCHEDULE F: INITIAL, ANNUAL & UPDATED DISCLOSURE OF SECURITIES ACCOUNTS.........42
SCHEDULE G: INITIAL AND ANNUAL CERTIFICATION OF DISCRETIONARY AUTHORITY.........43
SCHEDULE H: CHECKLIST FOR INVESTMENTS IN PARTNERSHIPS AND SECURITIES
ISSUED IN PRIVATE
PLACEMENTS.......................................................................45
APPENDIX C: INVESTMENT ADVISOR AND BROKER-DEALER AND OTHER SUBSIDIARIES OF FRANKLIN
RESOURCES, INC. - FEBRUARY 2000.................................................47
THE FRANKLIN TEMPLETON GROUP POLICY STATEMENT ON INSIDER TRADING..................1
A. LEGAL REQUIREMENT...........................................................1
B. WHO IS AN INSIDER?..........................................................2
C. WHAT IS MATERIAL INFORMATION?...............................................2
D. WHAT IS NON-PUBLIC INFORMATION?.............................................2
E. BASIS FOR LIABILITY.........................................................3
F. PENALTIES FOR INSIDER TRADING...............................................3
G. INSIDER TRADING PROCEDURES..................................................4
</TABLE>
THE FRANKLIN TEMPLETON GROUP CODE OF ETHICS
Franklin Resources, Inc. and all of its subsidiaries, and the funds in the
Franklin Templeton Group of Funds (the "Funds") (collectively, the "Franklin
Templeton Group") will follow this Code of Ethics (the "Code") and Policy
Statement on Insider Trading (the "Insider Trading Policy"). Additionally, the
subsidiaries listed in Appendix C of this Code, together with Franklin
Resources, Inc., the Funds, the Fund's investment advisers and principal
underwriter, have adopted the Code and Insider Trading Policy.
PART 1 - STATEMENT OF PRINCIPLES
The Franklin Templeton Group's policy is that the interests of shareholders
and clients are paramount and come before the interests of any director, officer
or employee of the Franklin Templeton Group.1
Personal investing activities of ALL directors, officers and employees of
the Franklin Templeton Group should be conducted in a manner to avoid actual OR
potential conflicts of interest with the Franklin Templeton Group, Fund
shareholders, and other clients of any Franklin Templeton adviser.
Directors, officers and employees of the Franklin Templeton Group shall use
their positions with the Franklin Templeton Group, and any investment
opportunities they learn of because of their positions with the Franklin
Templeton Group, in a manner consistent with their fiduciary duties for the
benefit of Fund shareholders, and clients.
PART 2 - PURPOSES, AND CONSEQUENCES OF NON-COMPLIANCE
It is important that you read and understand this document, because its
overall purpose is to help all of us comply with the law and to preserve and
protect the outstanding reputation of the Franklin Templeton Group. This
document was adopted to comply with Securities and Exchange Commission rules
under the Investment Company Act of 1940 ("1940 Act"), the Investment Advisers
Act of 1940 ("Advisers Act"), the Insider Trading and Securities Fraud
Enforcement Act of 1988 ("ITSFEA"), industry practice and the recommendations
contained in the ICI's REPORT OF THE ADVISORY GROUP ON PERSONAL INVESTING. Any
violation of the Code or Insider Trading Policy, including engaging in a
prohibited transaction or failing to file required reports, may result in
disciplinary action, and, when appropriate, termination of employment and/or
referral to appropriate governmental agencies.
PART 3 - COMPLIANCE REQUIREMENTS FOR ALL ACCESS PERSONS
3.1 WHO IS COVERED BY THE CODE AND HOW DOES IT WORK?
The principles contained in the Code must be observed by ALL directors,
officers and employees2 of the Franklin Templeton Group. However, there are
different categories of restrictions on personal investing activities. The
category in which you have been placed generally depends on your job function,
although unique circumstances may result in you being placed in a different
category.
The Code covers the following categories of employees who are described below:
(1) ACCESS PERSONS: Access Persons are those employees who have "ACCESS TO
INFORMATION" concerning recommendations made to a Fund or client with
regard to the purchase or sale of a security. Examples of "ACCESS TO
INFORMATION" would include having access to trading systems, portfolio
accounting systems, research data bases or settlement information. Access
Persons would typically include employees, including Management Trainees,
in the following departments:
o fund accounting;
o investment operations;
o information services & technology;
o product management;
o legal and legal compliance
o and anyone else designated by the Director of Compliance
In addition, you are an Access Person if you are any of the following:
o an officer or and directors of funds;
o an officer or director of an investment advisor or broker-dealer
subsidiary in the Franklin Templeton Group;
o a person that controls those entities; and
o any Franklin Resources' Proprietary Account ("Proprietary Account")3
(2) PORTFOLIO PERSONS: Portfolio Persons are a subset of Access Persons and are
those employees of the Franklin Templeton Group, who, in connection with
his or her regular functions or duties, makes or participates in the
decision to purchase or sell a security by a Fund in the Franklin Templeton
Group, or any other client or if his or her functions relate to the making
of any recommendations about those purchases or sales. Portfolio Persons
include:
o portfolio managers;
o research analysts;
o traders;
o employees serving in equivalent capacities (such as Management Trainees);
o employees supervising the activities of Portfolio Persons; and
o anyone else designated by the Director of Compliance
(3) NON-ACCESS PERSONS: If you are an employee in the Franklin Templeton Group
AND you do not fit into any of the above categories, you are a Non-Access
Person. Because you do not normally receive confidential information about
Fund portfolios, you are subject only to the prohibited transaction
provisions described in 3.4 of this Code and the Franklin Resources, Inc.'s
Standards of Business Conduct contained in the Employee Handbook.
Please contact the Legal Compliance Department if you are unsure as to what
category you fall in or whether you should be considered to be an Access Person
or Portfolio Person.
The Code works by prohibiting some transactions and requiring pre-clearance
and reporting of most others. NON-ACCESS PERSONS do not have to pre-clear their
security transactions, and, in most cases, do not have to report their
transactions. "INDEPENDENT DIRECTORS" need not report any securities transaction
unless you knew, or should have known that, during the 15-day period before or
after the transaction, the security was purchased or sold or considered for
purchase or sale by a Fund or Franklin Resources for a Fund. (See Section 5.2.B
below.) HOWEVER, PERSONAL INVESTING ACTIVITIES OF ALL EMPLOYEES AND INDEPENDENT
DIRECTORS ARE TO BE CONDUCTED IN COMPLIANCE WITH THE PROHIBITED TRANSACTIONS
PROVISIONS CONTAINED IN 3.4 BELOW. If you have any questions regarding your
personal securities activity, contact the Legal Compliance Department.
3.2 WHAT ACCOUNTS AND TRANSACTIONS ARE COVERED?
The Code covers all of your personal securities accounts and transactions,
as well as transactions by any of Franklin Resource's Proprietary Accounts. It
also covers all securities and accounts in which you have "beneficial
ownership." 4 A transaction by or for the account of your spouse, or any other
family member living in your home is considered to be the same as a transaction
by you. Also, a transaction for any account in which you have any economic
interest (other than the account of an unrelated client for which advisory fees
are received) and have or share investment control is generally considered the
same as a transaction by you. For example, if you invest in a corporation that
invests in securities and you have or share control over its investments, that
corporation's securities transactions are considered yours.
However, you are not deemed to have a pecuniary interest in any securities
held by a partnership, corporation, trust or similar entity unless you control,
or share control of such entity, or have, or share control over its investments.
For example, securities transactions of a trust or foundation in which you do
not have an economic interest (i.e., you are not the trustor or beneficiary) but
of which you are a trustee are not considered yours unless you have voting or
investment control of its assets. Accordingly, each time the words "you" or
"your" are used in this document, they apply not only to your personal
transactions and accounts, but also to all transactions and accounts in which
you have any direct or indirect beneficial interest. If it is not clear whether
a particular account or transaction is covered, ask a Preclearance Officer for
guidance.
3.3 WHAT SECURITIES ARE EXEMPT FROM THE CODE OF ETHICS?
You do not need to pre-clear OR report transactions of the following
securities:
(1) securities that are direct obligations of the U. S. Government (i.e.,
issued or guaranteed by the U.S. Government, such as Treasury bills, notes
and bonds, including U.S. Savings Bonds and derivatives thereof);
(2) high quality short-term instruments, including but not limited to bankers'
acceptances, bank certificates of deposit, commercial paper and repurchase
agreements;
(3) shares of registered open-end investment companies ("mutual funds"); and
(4) commodity futures, currencies, currency forwards and derivatives thereof.
Such transactions are also exempt from: (i) the prohibited transaction
provisions contained in Part 3.4 such as front-running; (ii) the additional
compliance requirements applicable to portfolio persons contained in Part 4; and
(iii) the applicable reporting requirements contained in Part 5.
3.4 PROHIBITED TRANSACTIONS FOR ALL ACCESS PERSONS
A. "INTENT" IS IMPORTANT
Certain transactions described below have been determined by the courts and
the SEC to be prohibited by law. The Code reiterates that these types of
transactions are a violation of the Statement of Principals and are prohibited.
Preclearance, which is a cornerstone of our compliance efforts, cannot detect
transactions which are dependent upon INTENT, or which by their nature, occur
before any order has been placed for a fund or client. A Preclearance Officer,
who is there to assist you with compliance with the Code, CANNOT guarantee any
transaction or transactions comply with the Code or the law. The fact that your
transaction receives preclearance, shows evidence of good faith, but depending
upon all the facts, may not provide a full and complete defense to any
accusation of violation of the Code or of the law. For example, if you executed
a transaction for which you received approval, or if the transaction was exempt
from preclearance (e.g., a transaction for 100 shares or less), would not
preclude a subsequent finding that front-running or scalping occurred because
such activity are dependent upon your intent. Intent cannot be detected during
preclearance, but only after a review of all the facts.
In the final analysis, compliance remains the responsibility of EACH
individual effecting personal securities transactions.
B. FRONT-RUNNING: TRADING AHEAD OF A FUND OR CLIENT
You cannot front-run any trade of a Fund or client. The term "front-run"
means knowingly trading before a contemplated transaction by a Fund or client of
any Franklin Templeton adviser, whether or not your trade and the Fund's or
client's trade take place in the same market. Thus, you may not:
(1) purchase a security if you intend, or know of Franklin Templeton Group's
intention, to purchase that security or a related security on behalf of a
Fund or client, or
(2) sell a security if you intend, or know of Franklin Templeton Group's
intention, to sell that security or a related security on behalf of a Fund
or client.
C. SCALPING.
You cannot purchase a security (or its economic equivalent) with the
intention of recommending that the security be purchased for a Fund, or client,
or sell short a security (or its economic equivalent) with the intention of
recommending that the security be sold for a Fund or client. Scalping is
prohibited whether or not you realize a profit from such transaction.
D. TRADING PARALLEL TO A FUND OR CLIENT
You cannot buy a security if you know that the same or a related security
is being bought contemporaneously by a Fund or client, or sell a security if you
know that the same or a related security is being sold contemporaneously by a
Fund or client.
E. TRADING AGAINST A FUND OR CLIENT
You cannot:
(1) buy a security if you know that a Fund or client is selling the same or a
related security, or has sold the security, until seven (7) calendar days
after the Fund's or client's order has either been executed or withdrawn,
or
(2) sell a security if you know that a Fund or client is buying the same or a
related security, or has bought the security until seven (7) calendar days
after the Fund's or client's order has either been executed or withdrawn.
Refer to Section I.A., "Pre-Clearance Standards," of Appendix A of the Code
for more details regarding the preclearance of personal securities transactions.
F. USING PROPRIETARY INFORMATION FOR PERSONAL TRANSACTIONS
You cannot buy or sell a security based on Proprietary Information 5
without disclosing the information and receiving written authorization. If you
wish to purchase or sell a security about which you obtained such information,
you must report all of the information you obtained regarding the security to
the Appropriate Analyst(s)6, or to the Director of Compliance for dissemination
to the Appropriate Analyst(s).
You will be permitted to purchase or sell such security if the Appropriate
Analyst(s) confirms to the Preclearance Desk that there is no intention to
engage in a transaction regarding the security within seven (7) calendar days on
behalf of an Associated Client7 and you subsequently preclear such security in
accordance with Part 6 below.
G. CERTAIN TRANSACTIONS IN SECURITIES OF FRANKLIN RESOURCES, INC., AND
AFFILIATED CLOSED-END FUNDS, AND REAL ESTATE INVESTMENT TRUSTS
If you are an employee of Franklin Resources, Inc. or any of its
affiliates, including the Franklin Templeton Group, you cannot effect a short
sale of the securities, including "short sales against the box" of Franklin
Resources, Inc., or any of the Franklin or Templeton closed-end funds, Franklin
real estate investment trusts or any other security issued by Franklin
Resources, Inc. or its affiliates. This prohibition would also apply to
effecting economically equivalent transactions, including, but not limited to
sales of any option to buy (i.e., a call option) or purchases of any option to
sell (i.e., a put option) and "swap" transactions or other derivatives. Officers
and directors of the Franklin Templeton Group who may be covered by Section 16
of the Securities Exchange Act of 1934, are reminded that their obligations
under that section are in addition to their obligations under this Code.
PART 4 - ADDITIONAL COMPLIANCE REQUIREMENTS APPLICABLE TO PORTFOLIO PERSONS8
4.1 REQUIREMENT TO DISCLOSE INTEREST AND METHOD OF DISCLOSURE
As a Portfolio Person, you must promptly disclose your direct or indirect
beneficial interest in a security whenever you learn that the security is under
consideration for purchase or sale by an Associated Client in the Franklin
Templeton Group and you;
(1) Have or share investment control of the Associated Client;
(2) Make any recommendation or participate in the determination of which
recommendation shall be made on behalf of the Associated Client; or
(3) Have functions or duties that relate to the determination of which
recommendation shall be made to the Associated Client.
In such instances, you must initially disclose that beneficial interest
orally to the primary portfolio manager (or other Appropriate Analyst) of the
Associated Client(s) considering the security, the Director of Research and
Trading or the Director of Compliance. Following that oral disclosure, you must
send a written acknowledgment of that interest on Schedule E (or on a form
containing substantially similar information) to the primary portfolio manager
(or other Appropriate Analyst), with a copy to the Legal Compliance Department.
4.2 SHORT SALES OF SECURITIES
You cannot sell short ANY security held by your Associated Clients,
including "short sales against the box". Additionally, Portfolio Persons
associated with the Templeton Group of Funds and clients cannot sell short any
security on the Templeton "Bargain List". This prohibition would also apply to
effecting economically equivalent transactions, including, but not limited to,
sales of uncovered call options, purchases of put options while not owning the
underlying security and short sales of bonds that are convertible into equity
positions.
4.3 SHORT SWING TRADING
Portfolio Persons cannot profit from the purchase and sale or sale and
purchase within sixty calendar days of any security, including derivatives.
Portfolio Persons are responsible for transactions that may occur in margin and
option accounts and all such transactions must comply with this restriction.9
This restriction does NOT apply to:
(1) trading within a shorter period if you do not realize a profit and if
you do not violate any other provisions of this Code; AND
(2) profiting on the purchase and sale or sale and purchase within sixty
calendar days of the following securities:
o securities that are direct obligations of the U.S. Government,
such as Treasury bills, notes and bonds, and U.S. Savings Bonds
and derivatives thereof;
o high quality short-term instruments ("money market instruments")
including but not limited to (i) bankers' acceptances, (ii) U.S.
bank certificates of deposit; (iii) commercial paper; and (iv)
repurchase agreements;
o shares of registered open-end investment companies; and
o commodity futures, currencies, currency forwards and derivatives
thereof.
Calculation of profits during the 60 calendar day holding period generally
will be based on "last-in, first-out" ("LIFO"). Portfolio Persons may elect to
calculate their 60 calendar day profits on either a LIFO or FIFO ("first-in,
first-out") basis when there has not been any activity in such security by their
Associated Clients during the previous 60 calendar days.
4.4 SERVICE AS A DIRECTOR
As a Portfolio Person, you cannot serve as a director, trustee, or in a
similar capacity for any company (excluding not-for-profit companies, charitable
groups, and eleemosynary organizations) unless you receive approval from the
Chief Executive Officer of the principal investment adviser to the Fund(s) of
which you are a Portfolio Person and he/she determines that your service is
consistent with the interests of the Fund(s) and its shareholders.
4.5 SECURITIES SOLD IN A PUBLIC OFFERING
Portfolio Persons cannot buy securities in any initial public offering, or
a secondary offering by an issuer, INCLUDING initial public offerings of
securities made by closed-end funds and real estate investment trusts advised by
the Franklin Templeton Group. Purchases of open-end mutual funds are excluded
from this prohibition.
4.6 INTERESTS IN PARTNERSHIPS AND SECURITIES ISSUED IN PRIVATE PLACEMENTS
Portfolio Persons cannot acquire limited partnership interests or other
securities in private placements unless they:
(1) complete the Private Placement Checklist (Schedule H);
(2) provide supporting documentation (e.g., a copy of the offering
memorandum); and
(3) obtain approval of the appropriate Chief Investment Officer; and
(4) submit all documents to the Legal Compliance Department Approval will
only be granted after the Director of Compliance consults with an
executive officer of Franklin Resources, Inc.
PART 5 - REPORTING REQUIREMENTS FOR ALL ACCESS PERSONS
5.1 REPORTING OF BENEFICIAL OWNERSHIP AND SECURITIES TRANSACTIONS
Compliance with the following personal securities transaction reporting
procedures is essential to enable us to meet our responsibilities to Funds and
other clients and to comply with regulatory requirements. You are expected to
comply with both the letter and spirit of these requirements, including
completing and filing all reports required under the Code in a timely manner.
5.2 INITIAL HOLDINGS AND BROKERAGE ACCOUNT REPORTS
A. ALL ACCESS PERSONS (EXCEPT INDEPENDENT DIRECTORS) Every employee (new or
transfer) of the Franklin Templeton Group who becomes an Access Person, must
file:
(1) An Acknowledgement Form;
(2) Schedule C: Initial, Annual & Updated Disclosure of Securities Holdings;
and
(3) Schedule F: Initial, Annual & Updated Disclosure of Securities Accounts
The Acknowledgement Form, Schedule C and Schedule F MUST be completed and
returned to the Legal Compliance Department within 10 CALENDAR DAYS of the date
the employee becomes an access person.
5.3 QUARTERLY TRANSACTION REPORTS
A. ALL ACCESS PERSONS (EXCEPT INDEPENDENT DIRECTORS)
You MUST report ALL securities transactions by; (i) providing the Legal
Compliance Department with copies of ALL broker's confirmations and statements
within 10 calendar days after the end of the calendar quarter (which may be sent
under separate cover by the broker) showing ALL transactions and holdings in
securities AND (ii) certifying by January 30th of each year that you have
disclosed all such brokerage accounts on Schedule F to the Legal Compliance
Department. The brokerage statements and confirmations must include all
transactions in securities in which you have, or by reason of the transaction
acquire any direct or indirect beneficial ownership, including transactions in a
discretionary account and transactions for any account in which you have any
economic interest AND have or share investment control. Also, if you acquire
securities by any other method which is not being reported to the Legal
Compliance Department by a duplicate confirmation statement at or near the time
of the acquisition, you must report that acquisition to the Legal Compliance
Department on Schedule B within 10 calendar days after you are notified of the
acquisition. Such acquisitions include, among other things, securities acquired
by gift, inheritance, vesting,10 stock splits, merger or reorganization of the
issuer of the security.
You must file these documents with the Legal Compliance Department not
later than 10 calendar days after the end of each quarter, but you need not show
or report transactions for any account over which you had no direct or indirect
influence or control.11 Failure to timely report transactions is a violation of
Rule 17j-1 as well as the Code, and may be reported to the Fund's Board of
Directors and may also result, among other things, in denial of future personal
security transaction requests.
B. INDEPENDENT DIRECTORS
If you are a director of the Franklin Templeton Group but you are not an
"interested person" of the Fund, you are not required to file transaction
reports unless you knew or should have known that, during the 15-day period
before or after a transaction, the security was purchased or sold, or considered
for purchase or sale, by a Fund or by Franklin Resources on behalf of a Fund.
5.4 ANNUAL REPORTS - ALL ACCESS PERSONS
A. SECURITIES ACCOUNTS REPORTS (EXCEPT INDEPENDENT DIRECTORS)
As an access person, you must file a report of all personal securities
accounts on Schedule F, with the Legal Compliance Department, annually by
January 30th. You must report the name and description of each securities
account in which you have a direct or indirect beneficial interest, including
securities accounts of a spouse and minor children. You must also report any
account in which you have any economic interest AND have or share investment
control (e.g., trusts, foundations, etc.) other than an account for a Fund in,
or a client of, the Franklin Templeton Group.
B. SECURITIES HOLDINGS REPORTS (EXCEPT INDEPENDENT DIRECTORS)
You must file a report of personal securities holdings on Schedule C, with
the Legal Compliance Department, by January 30th of each year. This report
should include ALL of your securities holdings, including any security acquired
by a transaction, gift, inheritance, vesting, merger or reorganization of the
issuer of the security, in which you have any direct or indirect beneficial
ownership, including securities holdings in a discretionary account and for any
account in which you have any economic interest AND have or share investment
control. Your securities holding information must be current as of a date no
more than 30 days before the report is submitted. You may attach copies of
year-end brokerage statements to the Schedule C in lieu of listing each security
position on the schedule.
C. CERTIFICATION OF COMPLIANCE WITH THE CODE OF ETHICS (INCLUDING INDEPENDENT
DIRECTORS)
All access persons, including independent directors, will be asked to
certify that they will comply with the FRANKLIN TEMPLETON GROUP'S CODE OF ETHICS
AND POLICY STATEMENT ON INSIDER TRADING by filing the Acknowledgment Form with
the Legal Compliance Department within 10 business days of receipt of the Code.
Thereafter, you will be asked to certify that you have complied with the Code
during the preceding year by filing a similar Acknowledgment Form by January 30
of each year.
5.5 BROKERAGE ACCOUNTS AND CONFIRMATIONS OF SECURITIES TRANSACTIONS (EXCEPT
INDEPENDENT DIRECTORS)
If you are an access person , in the Franklin Templeton Group, before or at
a time contemporaneous with opening a brokerage account with a registered
broker-dealer, or a bank, or placing an initial order for the purchase or sale
of securities with that broker-dealer or bank, you must:
(1) notify the Legal Compliance Department, in writing, by completing Schedule
D or by providing substantially similar information; and
(2) notify the institution with which the account is opened, in writing, of
your association with the Franklin Templeton Group.
The Compliance Department will request the institution in writing to send
to it duplicate copies of confirmations and statements for all transactions
effected in the account simultaneously with their mailing to you.
If you have an existing account on the effective date of this Code or upon
becoming an access person, you must comply within 10 days with conditions (1)
and (2) above.
PART 6 - PRE-CLEARANCE REQUIREMENTS
6.1 PRIOR APPROVAL OF SECURITIES TRANSACTIONS
A. LENGTH OF APPROVAL
Unless you are covered by Paragraph D below, you cannot buy or sell any
security, without first contacting a Preclearance Officer by fax, phone, or
e-mail and obtaining his or her approval. A clearance is good until the close of
the business day following the day clearance is granted but may be extended in
special circumstances, shortened or rescinded, as explained in Appendix A.
B. SECURITIES NOT REQUIRING PRECLEARANCE
The securities enumerated below do not require preclearance under the Code.
However, all other provisions of the Code apply, including, but not limited to:
(i) the prohibited transaction provisions contained in Part 3.4 such as
front-running; (ii) the additional compliance requirements applicable to
portfolio persons contained in Part 4, (iii) the applicable reporting
requirements contained in Part 5; and (iv) insider trading prohibitions.
You need NOT pre-clear transactions in the following securities:
(1) MUTUAL FUNDS. Transactions in shares of any registered open-end mutual
fund;
(2) FRANKLIN RESOURCES, INC., AND ITS AFFILIATES. Purchases and sales of
securities of Franklin Resources, Inc., closed-end funds of the Franklin
Templeton Group, or real estate investment trusts advised by Franklin
Properties Inc., as these securities cannot be purchased on behalf of our
advisory clients.12
(3) SMALL QUANTITIES. Transactions that do not result in purchases or sales of
more than 100 shares of any one security, regardless of where it is traded,
in any 30 day period. HOWEVER, YOU MAY NOT EXECUTE ANY TRANSACTION,
REGARDLESS OF QUANTITY, IF YOU LEARN THAT THE FUNDS ARE ACTIVE IN THE
SECURITY. IT WILL BE PRESUMED THAT YOU HAVE KNOWLEDGE OF FUND ACTIVITY IN
THE SECURITY IF, AMONG OTHER THINGS, YOU ARE DENIED APPROVAL TO GO FORWARD
WITH A TRANSACTION REQUEST. Transactions made pursuant to dividend
reinvestment plans ("DRIPs") do not require preclearance regardless of
quantity or Fund activity.
(4) GOVERNMENT OBLIGATIONS. Transactions in securities issued or guaranteed by
the governments of the United States, Canada, the United Kingdom, France,
Germany, Switzerland, Italy and Japan, or their agencies or
instrumentalities, or derivatives thereof;
(5) PAYROLL DEDUCTION PLANS. Securities purchased by an employee's spouse
pursuant to a payroll deduction program, provided the Compliance Department
has been previously notified in writing by the access person that the
spouse will be participating in the payroll deduction program.
(6) EMPLOYER STOCK OPTION PROGRAMS. Transactions involving the exercise and/or
purchase by an access person or an access person's spouse of securities
pursuant to a program sponsored by a corporation employing the access
person or spouse.
(7) PRO RATA DISTRIBUTIONS. Purchases effected by the exercise of rights issued
pro rata to all holders of a class of securities or the sale of rights so
received.
(8) TENDER OFFERS. Transactions in securities pursuant to a bona fide tender
offer made for any and all such securities to all similarly situated
shareholders in conjunction with mergers, acquisitions, reorganizations
and/or similar corporate actions. However, tenders pursuant to offers for
less than all outstanding securities of a class of securities of an issuer
must be precleared.
(9) NOT ELIGIBLE FOR FUNDS AND CLIENTS. Transactions in any securities that are
prohibited investments for all Funds and clients advised by the entity
employing the access person.
(10) NO INVESTMENT CONTROL. Transactions effected for an account or entity over
which you do not have or share investment control (i.e., an account where
someone else exercises complete investment control).
(11) NO BENEFICIAL OWNERSHIP. Transactions in which you do not acquire or
dispose of direct or indirect beneficial ownership (i.e., an account where
in you have no financial interest).
Although an access person's securities transaction may be exempt from
pre-clearing, such transactions must comply with the prohibited transaction
provisions of Section 3.4 above. Additionally, you may not trade any securities
as to which you have "inside information" (see attached THE FRANKLIN TEMPLETON
GROUP POLICY STATEMENT ON INSIDER Trading). If you have any questions, contact a
Preclearance Officer before engaging in the transaction. If you have any doubt
whether you have or might acquire direct or indirect beneficial ownership or
have or share investment control over an account or entity in a particular
transaction, or whether a transaction involves a security covered by the Code,
you should consult with a Preclearance Officer before engaging in the
transaction.
C. DISCRETIONARY ACCOUNTS
You need not pre-clear transactions in any discretionary account for which
a registered broker-dealer, a registered investment adviser, or other investment
manager acting in a similar fiduciary capacity, which is not affiliated with the
Franklin Templeton Group, exercises sole investment discretion, if the following
conditions are met:13
(1) The terms of each account relationship ("Agreement") must be in writing and
filed with a Preclearance Officer prior to any transactions.
(2) Any amendment to each Agreement must be filed with aPreclearance Officer
prior to its effective date.
(3) The Portfolio Person certifies to the Compliance Department at the time
such account relationship commences, and annually thereafter, as contained
in Schedule G of the Code that such Portfolio Person does not have direct
or indirect influence or control over the account, other than the right to
terminate the account.
(4) Additionally, any discretionary account that you open or maintain with a
registered broker-dealer, a registered investment adviser, or other
investment manager acting in a similar fiduciary capacity must provide
duplicate copies of confirmations and statements for all transactions
effected in the account simultaneously with their delivery to you., If your
discretionary account acquires securities which are not reported to a
Preclearance Officer by a duplicate confirmation, such transaction must be
reported to a Preclearance Officer on Schedule B within 10 days after you
are notified of the acquisition.14
However, if you make ANY request that the discretionary account manager
enter into or refrain from a specific transaction or class of transactions, you
must first consult with aPreclearance Officer and obtain approval prior to
making such request.
D. DIRECTORS WHO ARE NOT ADVISORY PERSONS OR ADVISORY REPRESENTATIVES
You need not pre-clear any securities if:
(1) You are a director of a Fund in the Franklin Templeton Group and a
director of the fund's advisor;
(2) You are not an "advisory person"15 of a Fund in the Franklin Templeton
Group; and
(3) You are not an employee of any Fund,
or
(1) You are a director of a Fund in the Franklin Templeton Group;
(2) You are not an "advisory representative"16 of Franklin Resources or
any subsidiary; and
(3) You are not an employee of any Fund,
unless you know or should know that, during the 15-day period before the
transaction, the security was purchased or sold, or considered for purchase or
sale, by a Fund or by Franklin Resources on behalf of a Fund or other client.
Directors qualifying under this paragraph are required to comply with all
applicable provisions of the Code including reporting their initial holdings and
brokerage accounts in accordance with 5.2, personal securities transactions and
accounts in accordance with 5.3 and 5.5, and annual reports in accordance with
5.4 of the Code.
PART 7 - PENALTIES FOR VIOLATIONS OF THE CODE
The Code is designed to assure compliance with applicable law and to
maintain shareholder confidence in the Franklin Templeton Group.
In adopting this Code, it is the intention of the Boards of
Directors/Trustees, to attempt to achieve 100% compliance with all requirements
of the Code - but it is recognized that this may not be possible. Incidental
failures to comply with the Code are not necessarily a violation of the law or
the Franklin Templeton Group's Statement of Principles. Such isolated or
inadvertent violations of the Code not resulting in a violation of law or the
Statement of Principles will be referred to the Director of Compliance and/or
management personnel, and disciplinary action commensurate with the violation,
if warranted, will be imposed.
However, if you violate any of the enumerated prohibited transactions
contained in Parts 3 and 4 of the Code, you will be expected to give up ANY
profits realized from these transactions to Franklin Resources for the benefit
of the affected Funds or other clients. If Franklin Resources cannot determine
which Fund(s) or client(s) were affected, the proceeds will be donated to a
charity chosen by Franklin Resources. Failure to disgorge profits when requested
may result in additional disciplinary action, including termination of
employment.
Further, a pattern of violations that individually do not violate the law
or Statement of Principles, but which taken together demonstrate a lack of
respect for the Code of Ethics, may result in disciplinary action including
termination of employment. A violation of the Code resulting in a violation of
the law will be severely sanctioned, with disciplinary action including, but not
limited to, referral of the matter to the board of directors of the affected
Fund, termination of employment or referral of the matter to the appropriate
regulatory agency for civil and/or criminal investigation.
PART 8 - A REMINDER ABOUT THE FRANKLIN TEMPLETON GROUP INSIDER TRADING POLICY
The Code of Ethics is primarily concerned with transactions in securities
held or to be acquired by any of the Funds or Franklin Resources' clients,
regardless of whether those transactions are based on inside information or
actually harm a Fund or a client.
The Insider Trading Policy (attached to this document) deals with the
problem of insider trading in securities that could result in harm to a Fund, a
client, or members of the public, and applies to all directors, officers and
employees of any entity in the Franklin Templeton Group. Although the
requirements of the Code and the Insider Trading Policy are similar, you must
comply with both.
APPENDIX A: COMPLIANCE PROCEDURES, DEFINITIONS, AND OTHER ITEMS
This appendix sets forth the additional responsibilities and obligations of
Compliance Officers, and the Legal/Administration and Legal/Compliance
Departments, under the Franklin Templeton Group Code of Ethics and Policy
Statement on Insider Trading.
I. RESPONSIBILITIES OF EACH DESIGNATED COMPLIANCE OFFICER
A. PRE-CLEARANCE STANDARDS
1. GENERAL PRINCIPLES
The Director of Compliance, or a Preclearance Officer, shall only permit an
access person to go forward with a proposed security17 transaction if he or she
determines that, considering all of the facts and circumstances, the transaction
does not violate the provisions of Rule 17j-1, or of this Code and there is no
likelihood of harm to a client.
2. ASSOCIATED CLIENTS
Unless there are special circumstances that make it appropriate to
disapprove a personal securities transaction request, a Preclearance Officer
shall consider only those securities transactions of the "Associated Clients" of
the access person, including open and executed orders and recommendations, in
determining whether to approve such a request. "Associated Clients" are those
Funds or clients whose trading information would be available to the access
person during the course of his or her regular functions or duties. Currently,
there are three groups of Associated Clients: (i) the Franklin Mutual Series
Funds and clients advised by Franklin Mutual Advisers, LLC ("Mutual Clients");
(ii) the Franklin Group of Funds and the clients advised by the various Franklin
investment advisers ("Franklin Clients"); and (iii) the Templeton Group of Funds
and the clients advised by the various Templeton investment advisers ("Templeton
Clients"). Thus, persons who have access to the trading information of Mutual
Clients generally will be precleared solely against the securities transactions
of the Mutual Clients, including open and executed orders and recommendations.
Similarly, persons who have access to the trading information of Franklin
Clients or Templeton Clients generally will be precleared solely against the
securities transactions of Franklin Clients or Templeton Clients, as
appropriate.
Certain officers of Franklin Resources, as well as legal, compliance, fund
accounting, investment operations and other personnel who generally have access
to trading information of the funds and clients of the Franklin Templeton Group
during the course of their regular functions and duties, will have their
personal securities transactions precleared against executed transactions, open
orders and recommendations of the entire Franklin Templeton Group.
3. SPECIFIC STANDARDS
(a) SECURITIES TRANSACTIONS BY FUNDS OR CLIENTS
No clearance shall be given for any transaction in any security on any day
during which an Associated Client of the access person has executed a buy or
sell order in that security, until seven (7) calendar days after the order has
been executed. Notwithstanding a transaction in the previous seven days,
clearance may be granted to sell if the security has been disposed of by all
Associated Clients.
(b) SECURITIES UNDER CONSIDERATION
OPEN ORDERS
No clearance shall be given for any transaction in any security on any day
which an Associated Client of the access person has a pending buy or sell order
for such security, until seven (7) calendar days after the order has been
executed.
RECOMMENDATIONS
No clearance shall be given for any transaction in any security on any day
on which a recommendation for such security was made by a Portfolio Person,
until seven (7) calendar days after the recommendation was made and no orders
have subsequently been executed or are pending.
(c) PRIVATE PLACEMENTS
In considering requests by Portfolio Personnel for approval of limited
partnerships and other private placement securities transactions, the Director
of Compliance shall consult with an executive officer of Franklin Resources,
Inc. In deciding whether to approve the transaction, the Director of Compliance
and the executive officer shall take into account, among other factors, whether
the investment opportunity should be reserved for a Fund or other client, and
whether the investment opportunity is being offered to the Portfolio Person by
virtue of his or her position with the Franklin Templeton Group. If the
Portfolio Person receives clearance for the transaction, an investment in the
same issuer may only be made for a Fund or client if an executive officer of
Franklin Resources, Inc., who has been informed of the Portfolio Person's
pre-existing investment and who has no interest in the issuer, approves the
transaction.
(d) DURATION OF CLEARANCE
If a Preclearance Officer approves a proposed securities transaction, the
order for the transaction must be placed and effected by the close of the next
business day following the day approval was granted. The Director of Compliance
may, in his or her discretion, extend the clearance period up to seven calendar
days, beginning on the date of the approval, for a securities transaction of any
access person who demonstrates that special circumstances make the extended
clearance period necessary and appropriate.18 The Director of Compliance may, in
his or her discretion, after consultation with a member of senior management for
Franklin Resources, Inc., renew the approval for a particular transaction for up
to an additional seven calendar days upon a similar showing of special
circumstances by the access person. The Director of Compliance may shorten or
rescind any approval or renewal of approval under this paragraph if he or she
determines it is appropriate to do so.
B. WAIVERS BY THE DIRECTOR OF COMPLIANCE
The Director of Compliance may, in his or her discretion, after
consultation with an executive officer of Franklin Resources, Inc., waive
compliance by any access person with the provisions of the Code, if he or she
finds that such a waiver:
(1) is necessary to alleviate undue hardship or in view of unforeseen
circumstances or is otherwise appropriate under all the relevant facts
and circumstances;
(2) will not be inconsistent with the purposes and objectives of the Code;
(3) will not adversely affect the interests of advisory clients of the
Franklin Templeton Group, the interests of the Franklin Templeton
Group or its affiliates; and
(4) will not result in a transaction or conduct that would violate
provisions of applicable laws or regulations.
Any waiver shall be in writing, shall contain a statement of the basis for
it, and a copy shall be promptly sent by the Director of Compliance to the
General Counsel of Franklin Resources, Inc.
C. CONTINUING RESPONSIBILITIES OF THE LEGAL COMPLIANCE DEPARTMENT
A Preclearance Officer shall make a record of all requests for
pre-clearance regarding the purchase or sale of a security, including the date
of the request, the name of the access person, the details of the proposed
transaction, and whether the request was approved or denied. APreclearance
Officer shall keep a record of any waivers given, including the reasons for each
exception and a description of any potentially conflicting Fund or client
transactions.
A Preclearance Officer shall also collect the signed initial
acknowledgments of receipt and the annual acknowledgments from each access
person of receipt of a copy of the Code and Insider Trading Policy, as well as
reports, as applicable, on Schedules B, C, D, E and F of the Code. In addition,
a Preclearance Officer shall request copies of all confirmations, and other
information with respect to an account opened and maintained with the
broker-dealer by any access person of the Franklin Templeton Group. A
Preclearance Officer shall preserve those acknowledgments and reports, the
records of consultations and waivers, and the confirmations, and other
information for the period required by applicable regulation.
A Preclearance Officer shall review brokerage transaction confirmations,
account statements, Schedules B, C, D, E, F and Private Placement Checklists of
Access Persons for compliance with the Code. The reviews shall include, but are
not limited to;
(1) Comparison of brokerage confirmations, Schedule Bs, and/or brokerage
statements to preclearance request worksheets or, if a private
placement, the Private Placement Checklist;
(2) Comparison of brokerage statements and/or Schedule Fs to current
securities holding information;
(3) Comparison of Schedule C to current securities account information;
(4) Conducting periodic "back-testing" of access person transactions,
Schedule Es and/or Schedule Gs in comparison to fund and client
transactions;
A Preclearance Officer shall evidence review by initialing and dating the
appropriate document. Any apparent violations of the Code detected by a
Preclearance Officer during his or her review shall be promptly brought to the
attention of the Director of Compliance.
D. PERIODIC RESPONSIBILITIES OF THE LEGAL COMPLIANCE DEPARTMENT
The Legal Compliance Department shall consult with the General Counsel and
the Human Resources Department, as the case may be, to assure that:
(1) Adequate reviews and audits are conducted to monitor compliance with
the reporting, pre-clearance, prohibited transaction and other
requirements of the Code.
(2) Adequate reviews and audits are conducted to monitor compliance with
the reporting, pre-clearance, prohibited transaction and other
requirements of the Code.
(3) All access persons and new employees of the Franklin Templeton Group
are adequately informed and receive appropriate education and training
as to their duties and obligations under the Code.
(4) There are adequate educational, informational and monitoring efforts
to ensure that reasonable steps are taken to prevent and detect
unlawful insider trading by access persons and to control access to
inside information.
(5) Written compliance reports are submitted to the Board of Directors of
Franklin Resources, Inc., and the Board of each relevant Fund at least
annually. Such reports will describe any issues arising under the Code
or procedures since the last report, including, but not limited to,
information about material violations of the Code or procedures and
sanctions imposed in response to the material violations.
(6) The Legal Compliance Department will certify at least annually to the
Fund's board of directors that the Franklin Templeton Group has
adopted procedures reasonably necessary to prevent Access Persons from
violating the Code, and
(7) Appropriate records are kept for the periods required by law.
E. APPROVAL BY FUND'S BOARD OF DIRECTORS
(1) Basis for Approval
The Board of Directors/Trustees must base its approval of the Code on
a determination that the Code contains provisions reasonably necessary to
prevent access persons from engaging in any conduct prohibited by rule
17j-1.
(2) New Funds
At the time a new fund is organized, the Legal Compliance Department will
provide the Fund's board of directors, a certification that the investment
adviser and principal underwriter have adopted procedures reasonably necessary
to prevent Access Persons from violating the Code. Such certification will state
that the Code contains provisions reasonably necessary to prevent Access Persons
from violating the Code.
(3) Material Changes to the Code of Ethics
The Legal Compliance Department will provide the Fund's board of directors
a written description of all material changes to the Code no later than six
months after adoption of the material change by the Franklin Templeton Group.
II. COMPILATION OF DEFINITIONS OF IMPORTANT TERMS
For purposes of the Code of Ethics and Insider Trading Policy, the terms
below have the following meanings:
1934 ACT - The Securities Exchange Act of 1934, as amended.
1940 ACT - The Investment Company Act of 1940, as amended.
ACCESS PERSON - Each director, trustee, general partner or officer, and any
other person that directly or indirectly controls (within the meaning of
Section 2(a)(9) of the 1940 Act) the Franklin Templeton Group or a person,
including an Advisory Representative, who has access to information
concerning recommendations made to a Fund or client with regard to the
purchase or sale of a security.
ADVISORY REPRESENTATIVE - Any officer or director of Franklin Resources; any
employee who makes any recommendation, who participates in the
determination of which recommendation shall be made, or whose functions or
duties relate to the determination of which recommendation shall be made;
any employee who, in connection with his or her duties, obtains any
information concerning which securities are being recommended prior to the
effective dissemination of such recommendations or of the information
concerning such recommendations; and any of the following persons who
obtain information concerning securities recommendations being made by
Franklin Resources prior to the effective dissemination of such
recommendations or of the information concerning such recommendations: (i)
any person in a control relationship to Franklin Resources, (ii) any
affiliated person of such controlling person, and (iii) any affiliated
person of such affiliated person.
AFFILIATED PERSON - same meaning as Section 2(a)(3) of the Investment Company
Act of 1940. An "affiliated person" of an investment company includes
directors, officers, employees, and the investment adviser. In addition, it
includes any person owning 5% of the company's voting securities, any
person in which the investment company owns 5% or more of the voting
securities, and any person directly or indirectly controlling, controlled
by, or under common control with the company.
APPROPRIATE ANALYST - With respect to any access person, any securities analyst
or portfolio manager making investment recommendations or investing funds
on behalf of an Associated Client and who may be reasonably expected to
recommend or consider the purchase or sale of a security.
ASSOCIATED CLIENT - A Fund or client whose trading information would be
available to the access person during the course of his or her regular
functions or duties.
BENEFICIAL OWNERSHIP - Has the same meaning as in Rule 16a-1(a)(2) under the
1934 Act. Generally, a person has a beneficial ownership in a security if
he or she, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise, has or shares a direct or
indirect pecuniary interest in the security. There is a presumption of a
pecuniary interest in a security held or acquired by a member of a person's
immediate family sharing the same household.
FUNDS - Investment companies in the Franklin Templeton Group of Funds.
HELD OR TO BE ACQUIRED - A security is "held or to be acquired" if within the
most recent 15 days it (i) is or has been held by a Fund, or (ii) is being
or has been considered by a Fund or its investment adviser for purchase by
the Fund.
PORTFOLIO PERSON - Any employee of the Franklin Templeton Group, who, in
connection with his or her regular functions or duties, makes or
participates in the decision to purchase or sell a security by a Fund in
the Franklin Templeton Group, or any other client or if his or her
functions relate to the making of any recommendations about those purchases
or sales. Portfolio Persons include portfolio managers, research analysts,
traders, persons serving in equivalent capacities (such as Management
Trainees), persons supervising the activities of Portfolio Persons, and
anyone else designated by the Director of Compliance
PROPRIETARY ACCOUNTS - Any corporate account or other account including, but not
limited to, a limited partnership, a corporate hedge fund, a limited
liability company or any other pooled investment vehicle in which Franklin
Resources or its affiliates, owns 5 percent or more of the outstanding
capital or is entitled to 25% or more of the profits or losses in the
account (excluding any asset based investment management fees based on
average periodic net assets in accounts). SECURITY - Any stock, note, bond,
evidence of indebtedness, participation or interest in any profit-sharing
plan or limited or general partnership, investment contract, certificate of
deposit for a security, fractional undivided interest in oil or gas or
other mineral rights, any put, call, straddle, option, or privilege on any
security (including a certificate of deposit), guarantee of, or warrant or
right to subscribe for or purchase any of the foregoing, and in general any
interest or instrument commonly known as a security, except commodity
futures, currency and currency forwards. For the purpose of this Code,
"security" does not include: (1) Direct obligations of the Government of
the United States; (2) Bankers' acceptances, bank certificates of deposit,
commercial paper and high quality short-term debt instruments, including
repurchase agreements; and (3) Shares issued by open-end funds.
SEE Section III of Appendix A for a summary of different requirements for
different types of securities.
III. SECURITIES EXEMPT FROM THE PROHIBITED , REPORTING, AND PRE-CLEARANCE
PROVISIONS
A. PROHIBITED TRANSACTIONS
Securities that are EXEMPT from the prohibited transaction provisions of
Section 3.4 include:
(1) securities that are direct obligations of the U.S. Government, such as
Treasury bills, notes and bonds, and U.S. Savings Bonds and
derivatives thereof;
(2) high quality short-term instruments ("money market instruments")
including but not limited to (i) bankers' acceptances, (ii) U.S. bank
certificates of deposit; (iii) commercial paper; and (iv) repurchase
agreements;
(3) shares of registered open-end investment companies;
(4) commodity futures, currencies, currency forwards and derivatives
thereof;
(5) securities that are prohibited investments for all Funds and clients
advised by the entity employing the access person; and
(6) transactions in securities issued or guaranteed by the governments or
their agencies or instrumentalities of Canada, the United Kingdom,
France, Germany, Switzerland, Italy and Japan and derivatives thereof.
B. REPORTING AND PRECLEARANCE
Securities that are EXEMPT from both the reporting requirements of Section
5 and preclearance requirements of Section 6 of the Code include:
(1) securities that are direct obligations of the U.S. Government, such as
Treasury bills, notes and bonds, and U.S. Savings Bonds and
derivatives thereof;
(2) high quality short-term instruments ("money market instruments")
including but not limited to (i) bankers' acceptances, (ii) U.S. bank
certificates of deposit; (iii) commercial paper; and (iv) repurchase
agreements;
(3) shares of registered open-end investment companies; and
(4) commodity futures, currencies, currency forwards and derivatives
thereof.
IV. LEGAL REQUIREMENT
Rule 17j-1 under the Investment Company Act of 1940 ("1940 Act") makes it
unlawful for any affiliated person of the Franklin Templeton Group in connection
with the purchase or sale of a security, including any option to purchase or
sell, and any security convertible into or exchangeable for, any security that
is "held or to be acquired" by a Fund in the Franklin Templeton Group:
A. To employ any device, scheme or artifice to defraud a Fund;
B. To make to a Fund any untrue statement of a material fact or omit to state
to a Fund a material fact necessary in order to make the statements made,
in light of the circumstances under which they are made, not misleading;
C. To engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon a Fund; or
D. To engage in any manipulative practice with respect to a Fund.
A security is "held or to be acquired" if within the most recent 15 days it
(i) is or has been held by a Fund, or (ii) is being or has been considered by a
Fund or its investment adviser for purchase by the Fund. .
APPENDIX B: FORMS AND SCHEDULES
ACKNOWLEDGMENT FORM
CODE OF ETHICS AND POLICY STATEMENT ON INSIDER TRADING
To: DIRECTOR OF COMPLIANCE, LEGAL COMPLIANCE DEPARTMENT
I hereby acknowledge receipt of a copy of the Franklin Templeton Group's CODE OF
ETHICS AND POLICY STATEMENT ON INSIDER TRADING, AMENDED AND RESTATED, FEBRUARY
2000, which I have read and understand. I will comply fully with all provisions
of the Code and the Insider Trading Policy to the extent they apply to me during
the period of my employment. Additionally, I authorize any broker-dealer, bank
or investment adviser with whom I have securities accounts and accounts in which
I have beneficial ownership, to provide brokerage confirmations and statements
as required for compliance with the Code. I further understand and acknowledge
that any violation of the Code or Insider Trading Policy, including engaging in
a prohibited transaction or failure to file reports as required (see Schedules
B, C, D, E, F and G), may subject me to disciplinary action, including
termination of employment.
___________________________________________________________________________
SIGNATURE:
___________________________________________________________________________
PRINT NAME:
___________________________________________________________________________
TITLE:
___________________________________________________________________________
DEPARTMENT:
___________________________________________________________________________
LOCATION:
___________________________________________________________________________
DATE ACKNOWLEDGMENT WAS SIGNED:
___________________________________________________________________________
RETURN TO: LEGAL COMPLIANCE DEPARTMENT, 2000 ALAMEDA DE LAS PULGAS - FLOOR 2.
SCHEDULE A: LEGAL AND COMPLIANCE OFFICERS AND PRECLEARANCE DESK TELEPHONE & FAX
NUMBERS 19
LEGAL OFFICER
MURRAY SIMPSON
EXECUTIVE VICE PRESIDENT & GENERAL COUNSEL
FRANKLIN RESOURCES, INC.
901 MARINERS ISLAND BLVD.
7TH FLOOR
SAN MATEO, CA 94404
(650) 525 -7331
COMPLIANCE OFFICERS
___________________________________________________________________________
Director of Compliance PRECLEARANCE OFFICERS
James M. Davis Stephanie Harwood
Franklin Resources, Inc. Wally Enrico
2000 Alameda de las Pulgas, Suite Legal Compliance Department
200F 2000 Alameda de las Pulgas,
San Mateo, CA 94403 Suite 200E
(650) 312-2832 San Mateo, CA 94403
(650) 312-3693 (telephone)
(650) 312-5646 (facsimile)
Preclear, Legal (internal
e-mail address)
[email protected] (external e-mail
address)
___________________________________________________________________________
SCHEDULE B: SECURITIES TRANSACTION REPORT
This report of personal securities transactions NOT reported by duplicate
confirmations and brokerage statements pursuant to Section 5.3 of the Code is
required pursuant to Rule 204-2(a) of the Investment Advisers Act of 1940 or
Rule 17j-1(c) of the Investment Company Act of 1940. The report must be
completed and submitted to the Compliance Department no later than 10 calendar
days after the end of the calendar quarter.. Refer to Section 5.3 of the Code of
Ethics for further instructions.
<TABLE>
<CAPTION>
________________________________________________________________________________________________________________________
Trade Buy, sell Security Description, including Type of Quantity or Price Broker-Dealer Date Preclearance
Date or Other interest rate and maturity Security Principal or Bank obtained from
(if appropriate) (Stock, Amount Compliance Dept.
Bond, Option,
etc.)
________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________
THE REPORT OR RECORDING OF ANY TRANSACTION ABOVE SHALL NOT BE CONSTRUED AS AN
ADMISSION THAT I HAVE ANY DIRECT OR INDIRECT OWNERSHIP IN THE SECURITIES.
______________________________ _________________________ ___________________ ___________________
(PRINT NAME) (SIGNATURE) (DATE) (QUARTER ENDING)
</TABLE>
RETURN TO: LEGAL COMPLIANCE DEPARTMENT, 2000 ALAMEDA DE LAS PULGAS, SUITE 200E,
SAN MATEO, CA 94403
SCHEDULE C: INITIAL, ANNUAL & UPDATED DISCLOSURE OF ACCESS PERSONS SECURITIES
HOLDINGS This report shall set forth the security name or description and
security class of each security holding in which you have a direct or indirect
beneficial interest, including holdings by a spouse, minor children, trusts,
foundations, and any account for which trading authority has been delegated to
you, other than authority to trade for a Fund in or a client of the Franklin
Templeton Group.. In lieu of listing each security position below, you may
instead attach copies of brokerage statements, sign below and return Schedule C
and brokerage statements to the Legal Compliance Department within 10 days if an
initial report or by January 30th of each year if an annual report. Refer to
Sections 5.2.A and 5.4.A of the Code for additional filing instructions.
<TABLE>
<CAPTION>
_______________________________________________________________________________________
Security Description Type of Security Quantity or
including interest rate (Stocks, Bond Principal Name of Broker- Account
and maturity (if appropriate) Option, etc.) Amount Dealer or Bank Number
_______________________________________________________________________________________
<S> <C> <C> <C> <C>
_______________________________________________________________________________________
_______________________________________________________________________________________
_______________________________________________________________________________________
_______________________________________________________________________________________
_______________________________________________________________________________________
_______________________________________________________________________________________
[ ] I DID NOT HAVE ANY PERSONAL SECURITIES HOLDINGS FOR YEAR ENDED _____________
[ ] I HAVE ATTACHED STATEMENTS CONTAINING ALL MY PERSONAL SECURITIES HOLDINGS FOR THE
YEAR ENDED ______
TO THE BEST OF MY KNOWLEDGE I HAVE DISCLOSED ALL OF MY SECURITIES ACCOUNTS
AND/OR INVESTMENTS IN WHICH I HAVE A DIRECT OR INDIRECT BENEFICIAL INTEREST,
INCLUDING SECURITY ACCOUNTS OF A SPOUSE, MINOR CHILDREN, TRUSTS, FOUNDATIONS,
AND ANY ACCOUNT FOR WHICH TRADING AUTHORITY HAS BEEN DELEGATED AN UNAFFILIATED
PARTY.
_______________________ ___________________ __________________ _______________ ____________
PRINT NAME SIGNATURE DATE YEAR ENDED
</TABLE>
* Securities that are EXEMPT from being reported on Schedule C include: (i)
securities that are direct obligations of the U.S. Government, such as Treasury
bills, notes and bonds, and U.S. Savings Bonds and derivatives thereof; (ii)
high quality short-term instruments ("money market instruments") including but
not limited to bankers' acceptances, U.S. bank certificates of deposit;
commercial paper; and repurchase agreements; (iii) shares of registered open-end
investment companies; and (iv) commodity futures, currencies, currency forwards
and derivatives thereof.
SCHEDULE D: NOTIFICATION OF SECURITIES ACCOUNT OPENING
DATE: __________________________________
TO: Preclearance Desk
Legal Compliance Department
2000 Alameda de las Pulgas, Suite 200E
San Mateo, CA 94403
(650) 312-3693
FAX: (650) 312-5646
FROM: NAME: ____________________________
DEPARTMENT:_______________________
LOCATION:_________________________
EXTENSION:________________________
ARE YOU A REG. REPRESENTATIVE? YES[ ] NO[ ]
ARE YOU AN ACCESS PERSON? YES[ ] NO[ ]
This is to advise you that I will be opening or have opened a securities account
with the following firm:
PLEASE FILL OUT COMPLETELY TO EXPEDITE PROCESSING
NAME ON ACCOUNT: ____________________________________________________________
(If other than employee, please state relationship i.e.,
spouse, son, daughter, trust, etc.)
ACCT # OR SSN #:_____________________________________________________________
NAME OF FIRM:________________________________________________________________
ATTN:________________________________________________________________________
ADDRESS OF FIRM:_____________________________________________________________
CITY/STATE/ZIP:______________________________________________________________
* All Franklin registered representatives and Access Persons, PRIOR TO OPENING A
BROKERAGE ACCOUNT OR PLACING AN INITIAL ORDER, are required to notify the Legal
Compliance Department and the executing broker-dealer in writing. This includes
accounts in which the registered representative or access person has or will
have a financial interest (e.g., a spouse's account) or discretionary authority
(e.g., a trust account for a minor child).
Upon receipt of the NOTIFICATION OF SECURITIES ACCOUNT OPENING form, the Legal
Compliance Department will contact the broker-dealer identified above and
request that it receive duplicate confirmations and statements of your brokerage
account.
SCHEDULE E: NOTIFICATION OF DIRECT OR INDIRECT BENEFICIAL INTEREST If you have
any beneficial ownership in a security and you recommend to the Appropriate
Analyst that the security be considered for purchase or sale by an Associated
Client, or if you carry out a purchase or sale of that security for an
Associated Client, you must disclose your beneficial ownership to the Legal
Compliance Department and the Appropriate Analyst in writing on Schedule E (or
an equivalent form containing similar information) before the purchase or sale,
or before or simultaneously with the recommendation.
<TABLE>
<CAPTION>
____________________________________________________________________________________________________________________________________
Method of Primary
Ownership Acquisition Date and Method Learned Portfolio Manager
Type (Direct Year (Purch/Gift/ that Security Under or Appropriate Name of Person Date of Verbal
Security Description or Indirect) Acquired Other) Consideration by Funds Analyst Notified Notification
____________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
____________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
</TABLE>
________________________ ___________________________ __________________
(PRINT NAME) (SIGNATURE) (DATE)
RETURN TO: LEGAL COMPLIANCE DEPARTMENT, 2000 ALAMEDA DE LAS PULGAS, SUITE 200E,
SAN MATEO, CA 94403
SCHEDULE F: INITIAL, ANNUAL & UPDATED DISCLOSURE OF SECURITIES ACCOUNTS
This report shall set forth the name and description of each securities
account in which you have a direct or indirect beneficial interest, including
securities accounts of a spouse, minor children, trusts, foundations, and any
account for which trading authority has been delegated to you, other than
authority to trade for a Fund in, or a client of, the Franklin Templeton Group.
In lieu of listing each securities account below, you may instead attach copies
of the brokerage statements, sign below and return Schedule F and brokerage
statements to the Compliance Department.
<TABLE>
<CAPTION>
____________________________________________________________________________________________________________________________
NAME(S) ON ACCOUNT NAME OF BROKERAGE FIRM, ADDRESS OF BROKERAGE FIRM, BANK OR ACCOUNT NAME OF ACCOUNT
(REGISTRATION SHOWN ON BANK OR INVESTMENT INVEST. ADVISER NUMBER EXECUTIVE/REPRESENTATIVE
STATEMENT) ADVISER (STREET, CITY , STATE AND ZIP CODE)
____________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C>
____________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________
</TABLE>
TO THE BEST OF MY KNOWLEDGE I HAVE DISCLOSED ALL OF MY SECURITIES ACCOUNTS IN
WHICH I HAVE A DIRECT OR INDIRECT BENEFICIAL INTEREST, INCLUDING SECURITY
ACCOUNTS OF A SPOUSE, MINOR CHILDREN, TRUSTS, FOUNDATIONS, AND ANY ACCOUNT FOR
WHICH TRADING AUTHORITY HAS BEEN DELEGATED TO ME.
______________________ ____________________ ___________________ ___________
PRINT NAME SIGNATURE DATE YEAR ENDED
RETURN TO: LEGAL COMPLIANCE DEPARTMENT, 2000 ALAMEDA DE LAS PULGAS, SUITE 200E,
SAN MATEO, CA 94403
SCHEDULE G: INITIAL AND ANNUAL CERTIFICATION OF DISCRETIONARY AUTHORITY
This report shall set forth the account name or description in which you have a
direct or indirect beneficial interest, including holdings by a spouse, minor
children, trusts, foundations, and as to which trading authority has been
delegated by you to an unaffiliated registered broker-dealer, registered
investment adviser, or other investment manager acting in a similar fiduciary
capacity, who exercises sole investment discretion.
<TABLE>
<CAPTION>
___________________________________________________________________________________________________________________
TYPE OF OWNERSHIP
NAME/DESCRIPTION OF BROKERAGE FIRM, DIRECT OWNERSHIP ACCOUNT NUMBER
NAME(S) AS SHOWN ON ACCOUNT OR BANK, INVESTMENT ADVISER OR INVESTMENT (DO) (IF APPLICABLE)
INVESTMENT INDIRECT
OWNERSHIP (IO)
___________________________________________________________________________________________________________________
<S> <C> <C> <C>
___________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________
</TABLE>
TO THE BEST OF MY KNOWLEDGE I HAVE DISCLOSED ALL OF MY SECURITIES ACCOUNTS
AND/OR INVESTMENTS IN WHICH I HAVE A DIRECT OR INDIRECT BENEFICIAL INTEREST,
INCLUDING SECURITY ACCOUNTS OF A SPOUSE, MINOR CHILDREN, TRUSTS, FOUNDATIONS,
AND ANY ACCOUNT FOR WHICH TRADING AUTHORITY HAS BEEN DELEGATED AN UNAFFILIATED
PARTY. FURTHER, I CERTIFY THAT I DO NOT HAVE ANY DIRECT OR INDIRECT INFLUENCE OR
CONTROL OVER THE ACCOUNTS LISTED ABOVE.
____________________ ___________________ _________________ __________________
PRINT NAME SIGNATURE DATE YEAR ENDED
RETURN TO: LEGAL COMPLIANCE DEPARTMENT, 2000 ALAMEDA DE LAS PULGAS, SUITE 200E,
SAN MATEO, CA 94403
SCHEDULE H: CHECKLIST FOR INVESTMENTS IN PARTNERSHIPS AND SECURITIES ISSUED IN
PRIVATE PLACEMENTS
GENERAL INSTRUCTIONS: In considering requests by Access Persons for approval of
limited partnerships and other private placement securities transactions, the
Director of Compliance shall consult with an executive officer of Franklin
Resources, Inc. In deciding whether to approve the transaction, the Director of
Compliance and the executive officer shall take into account, among other
factors, whether the investment opportunity should be reserved for a Fund or
other client, and whether the investment opportunity is being offered to the
access person by virtue of his or her position with the Franklin Templeton
Group. IF THE ACCESS PERSON RECEIVES CLEARANCE FOR THE TRANSACTION, AN
INVESTMENT IN THE SAME ISSUER MAY ONLY BE MADE FOR A FUND OR CLIENT IF AN
EXECUTIVE OFFICER OF FRANKLIN RESOURCES, INC., WHO HAS BEEN INFORMED OF THE
ACCESS PERSON'S PRE-EXISTING INVESTMENT AND WHO HAS NO INTEREST IN THE ISSUER,
APPROVES THE TRANSACTION.
IN ORDER TO PROCESS YOUR REQUEST, PLEASE PROVIDE THE FOLLOWING INFORMATION:
______________________________
1) Name/Description of proposed investment: [______________________________]
__________________________________
2) Proposed Investment Amount: [__________________________________]
3) Please attach pages of the offering memorandum (or other documents)
summarizing the investment opportunity, including:
a) Name of the partnership/hedge fund/issuer;
b) Name of the general partner, location & telephone number;
c) Summary of the offering; including the total amount the offering/issuer;
d) Percentage your investment will represent of the total offering;
e) Plan of distribution; and
f) Investment objective and strategy,
PLEASE RESPOND TO THE FOLLOWING QUESTIONS:
4) Was this investment opportunity presented to you in your capacity as a
portfolio manager, trader or research analyst? If no, please explain the
relationship, if any, you have to the issuer or principals of the issuer.
5) Is this investment opportunity suitable for any fund/client that you
advise? If yes, why isn't the investment being made on behalf of the
fund/client? If no, why isn't the investment opportunity suitable for the
fund/clients?
6) Do any of the fund/clients that you advise presently hold securities of the
issuer of this proposed investment (e.g., common stock, preferred stock,
corporate debt, loan participations, partnership interests, etc)? If yes,
please provide the names of the funds/clients and security description.
7) Do you presently have or will you have any managerial role with the
company/issuer as a result of your investment? If yes, please explain in
detail your responsibilities, including any compensation you will receive.
8) Will you have any investment control or input to the investment decision
making process?
9) If applicable, will you receive reports of portfolio holdings? If yes, when
and how frequently will these be provided?
Reminder: Personal securities transactions that do not generate brokerage
confirmations must be reported to the Legal Compliance Department on Schedule B
within 10 calendar days after you are notified.
______________________________
Name of Access Person
_______________________________ ________________
Access Person Signature Date
Approved by: _______________________________________ ________________
Chief Investment Officer Signature Date
________________________________________________________________________________
Legal Compliance Use Only
________________________________________________________________________________
Date Received: ________________________________________
Date Entered in Lotus Notes: ______________________________________
Date Forwarded FRI Executive Officer: _________________________________
Precleared: [ ] [ ] (attach E-Mail) Date: __________________________
Date Entered in APII: __________________________
________________________________________________________________________________
APPENDIX C: INVESTMENT ADVISOR AND BROKER-DEALER AND OTHER SUBSIDIARIES OF
FRANKLIN RESOURCES, INC. - FEBRUARY 2000
<TABLE>
<CAPTION>
__________________________________________________________________________________________
<S> <C> <C> <C>
Franklin Advisers, Inc. IA Templeton Management Limited IA
(Canada)
__________________________________________________________________________________________
Franklin Advisory Services, LLC. IA Templeton Franklin Investment IA/BD
Services, Inc.
__________________________________________________________________________________________
Franklin Investment Advisory IA Templeton Investment Counsel, Inc. IA
Services, Inc.
__________________________________________________________________________________________
Franklin Management, Inc. IA Templeton Asset Management, Ltd. IA/FIA
__________________________________________________________________________________________
Franklin Mutual Advisers, LLC IA Templeton Investment Management Co. FIA
Ltd. (Japan)
__________________________________________________________________________________________
Franklin Properties, Inc. REA Closed Joint-Stock Company FIA
Templeton (Russia)
__________________________________________________________________________________________
Franklin Templeton Distributors, IA/BD Templeton Unit Trust Management FBD
Inc. Ltd. (UK)
__________________________________________________________________________________________
Franklin Asset Management IA Orion Fund Management Ltd. FIA
(Proprietary) Ltd.
__________________________________________________________________________________________
Templeton (Switzerland), Inc. FBD Templeton Global Advisors Ltd. IA
(Bahamas)
__________________________________________________________________________________________
Templeton Franklin Investment FBD Templeton Asset Management (India) FIA/FBD
Services (Asia) Ltd. Pvt. Ltd.
__________________________________________________________________________________________
`Templeton Investment Management IA/FIA Templeton Italia SIM S.p.A. (Italy) FBD
Limited (UK)
__________________________________________________________________________________________
Templeton Global Strategic Services FBD Templeton Global Strategic Services FBD
S.A. (Luxembourg) (Deutschland) GmbH (Germany)
__________________________________________________________________________________________
Templeton Investment Management FIA Templeton Funds Annuity Company INS
(Australia) Ltd.
__________________________________________________________________________________________
Franklin Templeton Investment TA
Services, Inc.
__________________________________________________________________________________________
Franklin Templeton Services, Inc. BM
__________________________________________________________________________________________
</TABLE>
Codes:
IA: US registered investment adviser
BD: US registered broker-dealer
FIA: Foreign equivalent investment adviser
FBD: Foreign equivalent broker-dealer
TA: US registered transfer agent
BM: Business manager to the funds
REA: Real estate adviser
INS: Insurance company
THE FRANKLIN TEMPLETON GROUP POLICY STATEMENT ON INSIDER TRADING
A. LEGAL REQUIREMENT
Pursuant to the Insider Trading and Securities Fraud Enforcement Act of
1988, it is the policy of the Franklin Templeton Group to forbid any officer,
director, employee, consultant acting in a similar capacity, or other person
associated with the Franklin Templeton Group from trading, either personally or
on behalf of clients, including all client assets managed by the entities in the
Franklin Templeton Group, on material non-public information or communicating
material non-public information to others in violation of the law. This conduct
is frequently referred to as "insider trading." The Franklin Templeton Group's
Policy Statement on Insider Trading applies to every officer, director, employee
or other person associated with the Franklin Templeton Group and extends to
activities within and outside their duties with the Franklin Templeton Group.
Every officer, director and employee must read and retain this policy statement.
Any questions regarding the Franklin Templeton Group's Policy Statement on
Insider Trading or the Compliance Procedures should be referred to the Legal
Department.
The term "insider trading" is not defined in the federal securities laws,
but generally is used to refer to the use of material non-public information to
trade in securities (whether or not one is an "insider") or to communications of
material non-public information to others.
While the law concerning insider trading is not static, it is generally
understood that the law prohibits:
(1) trading by an insider, while in possession of material non-public
information; or
(2) trading by a non-insider, while in possession of material non-public
information, where the information either was disclosed to the
non-insider in violation of an insider's duty to keep it confidential
or was misappropriated; or
(3) communicating material non-public information to others.
The elements of insider trading and the penalties for such unlawful conduct
are discussed below. If, after reviewing this policy statement, you have any
questions, you should consult the Legal Department.
POLICY STATEMENT ON INSIDER TRADING
B. WHO IS AN INSIDER?
The concept of "insider" is broad. It includes officers, directors and
employees of a company. In addition, a person can be a "temporary insider" if he
or she enters into a special confidential relationship in the conduct of a
company's affairs and as a result is given access to information solely for the
company's purposes. A temporary insider can include, among others, a company's
outside attorneys, accountants, consultants, bank lending officers, and the
employees of such organizations. In addition, an investment adviser may become a
temporary insider of a company it advises or for which it performs other
services. According to the U.S. Supreme Court, the company must expect the
outsider to keep the disclosed non-public information confidential and the
relationship must at least imply such a duty before the outsider will be
considered an insider.
C. WHAT IS MATERIAL INFORMATION?
Trading on inside information is not a basis for liability unless the
information is material. "Material information" generally is defined as
information for which there is a substantial likelihood that a reasonable
investor would consider it important in making his or her investment decisions,
or information that is reasonably certain to have a substantial effect on the
price of the company's securities. Information that officers, directors and
employees should consider material includes, but is not limited to: dividend
changes, earnings estimates, changes in previously released earnings estimates,
significant merger or acquisition proposals or agreements, major litigation,
liquidation problems, and extraordinary management developments.
Material information does not have to relate to a company's business. For
example, in CARPENTER V. U.S., 108 U.S. 316 (1987), the Supreme Court considered
as material certain information about the contents of a forthcoming newspaper
column that was expected to affect the market price of a security. In that case,
a WALL STREET JOURNAL reporter was found criminally liable for disclosing to
others the dates that reports on various companies would appear in the WALL
STREET JOURNAL and whether those reports would be favorable or not.
D. WHAT IS NON-PUBLIC INFORMATION?
Information is non-public until it has been effectively communicated to the
marketplace. One must be able to point to some fact to show that the information
is generally public. For example, information found in a report filed with the
Securities and Exchange Commission ("SEC"), or appearing in Dow Jones, Reuters
Economic Services, THE WALL STREET JOURNAL or other publications of general
circulation would be considered public.
E. BASIS FOR LIABILITY
1. FIDUCIARY DUTY THEORY
In 1980, the Supreme Court found that there is no general duty to disclose
before trading on material non-public information, but that such a duty arises
only where there is a fiduciary relationship. That is, there must be a
relationship between the parties to the transaction such that one party has a
right to expect that the other party will not disclose any material non-public
information or refrain from trading. CHIARELLA V. U.S., 445 U.S. 22 (1980).
In DIRKS V. SEC, 463 U.S. 646 (1983), the Supreme Court stated alternate
theories under which non-insiders can acquire the fiduciary duties of insiders.
They can enter into a confidential relationship with the company through which
they gain information (E.G., attorneys, accountants), or they can acquire a
fiduciary duty to the company's shareholders as "tippees" if they are aware or
should have been aware that they have been given confidential information by an
insider who has violated his fiduciary duty to the company's shareholders.
However, in the "tippee" situation, a breach of duty occurs only if the
insider personally benefits, directly or indirectly, from the disclosure. The
benefit does not have to be pecuniary but can be a gift, a reputational benefit
that will translate into future earnings, or even evidence of a relationship
that suggests a quid pro quo.
2. MISAPPROPRIATION THEORY
Another basis for insider trading liability is the "misappropriation"
theory, under which liability is established when trading occurs on material
non-public information that was stolen or misappropriated from any other person.
In U.S. V. CARPENTER, SUPRA, the Court found, in 1987, a columnist defrauded THE
WALL STREET JOURNAL when he stole information from the WALL STREET JOURNAL and
used it for trading in the securities markets. It should be noted that the
misappropriation theory can be used to reach a variety of individuals not
previously thought to be encompassed under the fiduciary duty theory.
F. PENALTIES FOR INSIDER TRADING
Penalties for trading on or communicating material non-public information
are severe, both for individuals involved in such unlawful conduct and their
employers. A person can be subject to some or all of the penalties below even if
he or she does not personally benefit from the violation. Penalties include:
o civil injunctions;
o treble damages;
o disgorgement of profits;
o jail sentences;
o fines for the person who committed the violation of up to three times
the profit gained or loss avoided, whether or not the person actually
benefited; and
o fines for the employer or other controlling person of up to the greater
of $1,000,000 or three times the amount of the profit gained or loss
avoided.
In addition, any violation of this policy statement can result in serious
sanctions by the Franklin Templeton Group, including dismissal of any person
involved.
G. INSIDER TRADING PROCEDURES
Each access person, Compliance Officer, the Risk Management Department, and
the Legal Department, as the case may be, shall comply with the following
procedures.
1. IDENTIFYING INSIDE INFORMATION
Before trading for yourself or others, including investment companies or
private accounts managed by the Franklin Templeton Group, in the securities of a
company about which you may have potential inside information, ask yourself the
following questions:
o Is the information material?
o Is this information that an investor would consider important in
making his or her investment decisions?
o Is this information that would substantially affect the market price
of the securities if generally disclosed?
o Is the information non-public?
o To whom has this information been provided?
o Has the information been effectively communicated to the marketplace
(e.g., published in REUTERS, THE WALL STREET JOURNAL or other
publications of general circulation)?
If, after consideration of these questions, you believe that the information may
be material and non-public, or if you have questions as to whether the
information is material and non-public, you should take the following steps:
(i) Report the matter immediately to the designated Compliance Officer, or if
he or she is not available, to the Legal Department.
(ii) Do not purchase or sell the securities on behalf of yourself or others,
including investment companies or private accounts managed by the Franklin
Templeton Group.
(iii) Do not communicate the information inside or outside the Franklin
Templeton Group, other than to the Compliance Officer or the Legal
Department.
(iv) The Compliance Officer shall immediately contact the Legal Department for
advice concerning any possible material, non-public information.
(v) After the Legal Department has reviewed the issue and consulted with the
Compliance Officer, you will be instructed either to continue the
prohibitions against trading and communication noted in (ii) and (iii), or
you will be allowed to trade and communicate the information.
(vi) In the event the information in your possession is determined by the Legal
Department or the Compliance Officer to be material and non-public, it may
not be communicated to anyone, including persons within the Franklin
Templeton Group, except as provided in (i) above. In addition, care should
be taken so that the information is secure. For example, files containing
the information should be sealed and access to computer files containing
material non-public information should be restricted to the extent
practicable.
2. RESTRICTING ACCESS TO OTHER SENSITIVE INFORMATION
All Franklin Templeton Group personnel also are reminded of the need to be
careful to protect from disclosure other types of sensitive information that
they may obtain or have access to as a result of their employment or association
with the Franklin Templeton Group.
(I) GENERAL ACCESS CONTROL PROCEDURES
The Franklin Templeton Group has established a process by which access to
company files that may contain sensitive or non-public information such as the
Bargain List and the Source of Funds List is carefully limited. Since most of
the Franklin Templeton Group files which contain sensitive information are
stored in computers, personal identification numbers, passwords and/or code
access numbers are distributed to Franklin Templeton Group computer access
persons only. This activity is monitored on an ongoing basis. In addition,
access to certain areas likely to contain sensitive information is normally
restricted by access codes.
________
1 "Director" includes trustee.
2 The term "employee or employees" includes management trainees, as well as
regular employees of the Franklin Templeton Group.
3 SEE Appendix A. II., for definition of "Proprietary Accounts."
4 Generally, a person has "beneficial ownership" in a security if he or she,
directly or indirectly, through any contract, arrangement, understanding,
relationship or otherwise, has or shares a direct or indirect pecuniary
interest in the security. There is a presumption of a pecuniary interest in
a security held or acquired by a member of a person's immediate family
sharing the same household.
5 Proprietary Information: Information that is obtained or developed during
the ordinary course of employment with the Franklin Templeton Group,
whether by you or someone else, and is not available to persons outside the
Franklin Templeton Group. Examples of such Proprietary Information include,
among other things, internal research reports, research materials supplied
to the Franklin Templeton Group by vendors and broker-dealers not generally
available to the public, minutes of departmental/research meetings and
conference calls, and communications with company officers (including
confidentiality agreements). Examples of non-Proprietary Information
include mass media publications (e.g., The Wall Street Journal, Forbes, and
Fortune), certain specialized publications available to the public (e.g.,
Morningstar, Value Line, Standard and Poors), and research reports
available to the general public.
6 The Director of Compliance is designated on Schedule A. The "Appropriate
Analyst" means any securities analyst or portfolio manager, other than you,
making recommendations or investing funds on behalf of any associated
client, who may be reasonably expected to recommend or consider the
purchase or sale of the security in question.
7 Associated Client: A Fund or client whose trading information would be
available to the access person during the course of his or her regular
functions or duties.
8 You are a "Portfolio Person" if you are an employee of the Franklin
Templeton Group, and, in connection with your regular functions or duties,
make or participate in the decision to purchase or sell a security by a
Fund in the Franklin Templeton Group, or any other client or if your
functions relate to the making of any recommendations about those purchases
or sales. Portfolio Persons include portfolio managers, research analysts,
traders, persons serving in equivalent capacities (such as Management
Trainees), persons supervising the activities of Portfolio Persons, and
anyone else so designated by the Compliance Officer.
9 This restriction applies equally to transactions occurring in margin and
option accounts which may not be due to direct actions by the Portfolio
Person. For example, a stock held less than 60 days that is sold to meet a
margin call or the underlying stock of a covered call option held less than
60 days that is called away, would be a violation of this restriction if
these transactions resulted in a profit for the Portfolio Person.
10 You are not required to separately report the vesting of shares or options
of Franklin Resources, Inc., received pursuant to a deferred compensation
plan as such information is already maintained.
11 See Sections 3.2 and 4.6 of the Code. Also, confirmations and statements of
transactions in open-end mutual funds, including mutual funds sponsored by
the Franklin Templeton Group are not required. See Section 3.3 above for a
list of other securities that need not be reported. If you have any
beneficial ownership in a discretionary account, transactions in that
account are treated as yours and must be reported by the manager of that
account (see Section 6.1.C below).
12 Officers, directors and certain other key management personnel who perform
significant policy-making functions of Franklin Resources, Inc., the
closed-end funds, and/or real estate investment trusts may have ownership
reporting requirements in addition to these reporting requirements. Contact
the Legal Compliance Department for additional information. SEE also the
"Insider Trading Policy" attached.
13 Please note that these conditions apply to any discretionary account in
existence prior to the effective date of this Code or prior to your
becoming an access person. Also, the conditions apply to transactions in
any discretionary account, including pre-existing accounts, in which you
have any direct or indirect beneficial ownership, even if it is not in your
name.
14 Any pre-existing agreement must be promptly amended to comply with this
condition. The required reports may be made in the form of an account
statement if they are filed by the applicable deadline.
15 An "advisory person" of a registered investment company or an investment
adviser is any employee, who in connection with his or her regular
functions or duties, makes, participates in, or obtains information
regarding the purchase or sale of a security by an advisory client , or
whose functions relate to the making of any recommendations with respect to
such purchases or sales. Advisory person also includes any natural person
in a control relationship to such company or investment adviser who obtains
information concerning recommendations made to such company with regard to
the purchase or sale of a security.
16 Generally, an "advisory representative" is any person who makes any
recommendation, who participates in the determination of which
recommendation shall be made, or whose functions or duties relate to the
determination of which recommendation shall be made, or who, in connection
with his duties, obtains any information concerning which securities are
being recommended prior to the effective dissemination of such
recommendations or of the information concerning such recommendations. See
Section II of Appendix A for the legal definition of "Advisory
Representative."
17 Security includes any option to purchase or sell, and any security that is
exchangeable for or convertible into, any security that is held or to be
acquired by a fund.
18 Special circumstances include but are not limited to, for example,
differences in time zones, delays due to travel, and the unusual size of
proposed trades or limit orders. Limit orders must expire within the
applicable clearance period.
19 As of February 2000
