TEMPLETON INSTITUTIONAL FUNDS, INC.
TIFI EMERGING FIXED INCOME MARKETS SERIES ANNUAL REPORT
DECEMBER 31, 1999
<PAGE>
(BOXED)
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
INVESTING IN DEVELOPING MARKETS INVOLVES SPECIAL CONSIDERATIONS, WHICH INCLUDE
RISKS RELATED TO MARKET AND CURRENCY VOLATILITY, ADVERSE SOCIAL, ECONOMIC, AND
POLITICAL DEVELOPMENTS, AND THE RELATIVELY SMALL SIZE AND LESSER LIQUIDITY OF
THESE MARKETS. THESE SPECIAL RISK CONSIDERATIONS ARE DISCUSSED IN THE FUND'S
PROSPECTUS. THE FUND IS DESIGNED FOR THE AGGRESSIVE PORTION OF A
WELL-DIVERSIFIED PORTFOLIO.
<PAGE>
December 31, 1999
(PICTURE AND BIO OF UMRAN DEMIRORS)
Dear Shareholder:
The Templeton Institutional Funds, Inc. Emerging Fixed Income Markets Series
(the "Fund") posted a cumulative total return of 11.77% for 1999, compared to
the unmanaged JP Morgan Emerging Markets Bond Index plus ("EMBI+") cumulative
total return of 25.97%.
(Insert performance chart below)
TOTAL RETURNS AS OF 12/31/99
ONE YEAR CUMULATIVE
AVERAGE SINCE INCEPTION
ANNUAL/1/,/2/ (06/04/97)/1/,/3/
- -------------------------------------------------------------------------------
TIFI Emerging Fixed Income Markets Series 11.77% 20.65%
JP Morgan EMBI+/4/ 25.97% 12.26%
1. The Fund's manager and administrator have agreed in advance to waive their
respective fees in order to limit the total expenses of the Fund to an annual
rate of 1.25% of average net assets. If these fee waivers are insufficient to so
limit the Fund's expenses, the manager and administrator have agreed to equally
assume as their own expense certain expenses otherwise payable by the Fund.
These voluntary agreements resulted in fee waivers for the fiscal year ended
December 31, 1999. After April 30, 2000, the manager and administrator may end
this arrangement at any time. Past fee waivers by the Fund's manager and
administrator increased the Fund's total returns. Without these waivers, the
Fund's total returns would have been lower.
2. Average annual total return represents the average annual change in value of
an investment over the indicated periods.
3. Cumulative total return represents the change in value of an investment over
the indicated periods.
4. Source: JP Morgan. The Emerging Markets Bond Index Plus tracks total returns
for external currency-denominated debt instruments of the emerging markets
including Brady Bonds, loans, Eurobonds, and U.S. dollar denominated local
market instruments. It includes reinvested interest. The index is unmanaged,
does not contain cash, and does not include management or other operating
expenses. One cannot invest directly in an index, nor is an index representative
of the Fund's portfolio.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, currency volatility, and the economic, social,
and political climates of the countries where the Fund invests. Emerging markets
involve heightened risks related to the same factors, in addition to those
associated with their relatively small size and lesser liquidity. Also, as a
non-diversified series of an investment company, the Fund may invest in a
relatively small number of issuers and, as a result, be subject to greater risk
of loss with respect to its portfolio securities. You may have a gain or loss
when you sell your shares. Past performance is not predictive of future results.
You will find a complete listing of the Fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 8 of
this report.
<PAGE>
Emerging market bond prices generally rose during the year mostly as a result of
higher commodity prices and the continued rise in the U.S. equity market. The
former helped to improve export revenues and, hence, the external debt repayment
capacity of the issuer countries. The latter appeared to reduce the level of
risk aversion among investors, which increased their appetite for emerging
market bonds. During the one-year period under review, bond prices rose in most
of the emerging market countries that comprise the JP Morgan EMBI+ Index./2/
Within this index, Russia was the best performer with a total return of 165.70%
during this period. Other countries that generated positive returns during the
one year period were Brazil with a total return of 40.68%; Venezuela, up 29.86%;
and Bulgaria, which rose 27.28%. The only exception to this positive performance
was Ecuador, which fell 28.37% during the period as a result of its default on
Brady bonds and eurobonds in September.
Prices of many Russian eurobonds recovered as the government continued to give
priority to servicing these obligations over debt issued by the former Soviet
Union. The latter also rose in price, though to a lesser degree, on market
expectations that the government was closer to reaching an agreement with
bondholders through London Club negotiations. Investor expectations of continued
disbursement of multilateral funding also contributed to Russia's positive
performance. Brazilian bonds generally rebounded following the currency crisis
in January as a result of official external financing from the IMF and foreign
governments, as well as the implementation of economic measures designed to
stabilize fiscal accounts. The price of Venezuelan debt rose despite political
uncertainty stemming from the drafting and implementation of a new constitution.
Venezuela's outperformance was mostly due to the recovery in oil prices, the
country's main source of export revenue. Bulgarian bonds recovered following the
political settlement to the crisis in Kosovo and as a result of the country's
relatively strong fundamentals.
We continue to believe the recovery experienced by the emerging debt markets
during the first half of the year was, in large part, the result of the
International Monetary Fund's disbursement of a financial support package for
Brazil and the rise in oil prices. The Fed's easing of monetary policy last year
helped stabilize financial markets by providing liquidity, while the IMF's
support program prevented the crisis in Russia from extending to Brazil. As the
U.S. equity market continued to rally, so did emerging market debt.
Better-than-expected economic data, particularly on inflation out of the U.S.
and several emerging market countries, helped to restore investor confidence.
The recovery in oil prices assisted the emerging bond market by improving the
debt repayment capacity of oil exporting countries such as Venezuela, Mexico,
and Ecuador. Ecuador also expected to obtain financial assistance from the
International Monetary Fund and other creditors. Meanwhile, the Russian
government avoided defaulting on its Eurobonds and received IMF support in
exchange for its commitment to adhere to responsible economic policies. Russian
bonds largely rose in price on such expectations and upon the resolution of the
crisis in Yugoslavia.
- -----------------------
2 Source: JP Morgan. The Emerging Markets Bond Index Plus tracks total returns
for external currency-denominated debt instruments of the emerging markets
including Brady Bonds, loans, Eurobonds, and U.S. dollar denominated local
market instruments. It includes reinvested interest. The index is unmanaged,
does not contain cash, and does not include management or other operating
expenses. One cannot invest directly in an index, nor is an index representative
of the Fund's portfolio.
<PAGE>
During the summer, the emerging debt market softened as Fed chairman Alan
Greenspan began hinting that the Fed would raise the Federal Funds rate, which
it did at the FOMC meeting held at the end of June. The Fed then followed up
with two more increases in interest rates, thus offsetting the 75 basis point
easing after the Russian crisis in 1998. Emerging market bond prices began
rising again in September, mostly a result of the rising U.S. equity market,
improving economic fundamentals in emerging countries, and a reduction in Y2K
related concerns.
In Latin America, several issuer countries benefited from rising oil prices.
Mexico and Venezuela received the most benefit, given their volume of oil
exports and the positive impact of rising prices on fiscal revenues. Argentina's
economy suffered from a recession aggravated by the country's fixed exchange
rate, which prevents it from stimulating growth by easing monetary policy. The
reduction in economic activity resulted in lower tax revenues and a larger
budget deficit. However, the Argentine government was successful in obtaining
private sector credit to meet its payment obligations. The Brazilian economy's
performance following the currency devaluation was better than expected,
particularly given its low level of inflation. Therefore, we maintained the bulk
of the Fund's fixed income assets (41.3%) in Latin America. The Fund's largest
holdings were Argentina 11.0%, followed by Mexico 9.4%, Brazil with 5.3%, and
Peru with 4.6%. Allocations to countries with improving fundamentals such as
Argentina and Mexico were kept relatively high.
The Fund also benefited from its exposure to Eastern Europe with 20.3% of Fund
assets invested in that region. Turkey represented the Fund's largest country
allocation with 13.8%. Turkish bonds performed well as the government of Prime
Minister Ecevit obtained parliamentary approval of important economic reforms
and external financial support from the IMF. Bonds issued by the Bulgarian
government (5.7% of total assets) performed well following the resolution of the
crisis in Kosovo, given the country's relatively strong credit fundamentals.
Russia represented 5.5% of total assets. Prices of Russian eurobonds recovered
as the government continued to give priority to servicing these obligations over
debt issued by the former Soviet Union. The latter also rose in price on market
expectations that the government was closer to reaching an agreement with
bondholders through London Club negotiations. Market expectations of continued
disbursement of multilateral funding also contributed to Russia's performance.
The Fund had 10.0% of its assets allocated to Southeast Asia as of December 31,
1999. This allocation was distributed equally between South Korea and Malaysia,
given the improvement in credit fundamentals of both countries.
With 100% of the Fund's assets invested in U.S. dollar-denominated bonds, the
Fund had no emerging market exchange rate exposure. Given recent market
volatility, the focus has been on liquid instruments, namely sovereign eurobonds
and Brady bonds, which represented 66.1% and 14.5%, respectively, of total
assets as of December 31, 1999. Corporate eurobonds represented 4.9%, while the
Fund's cash allocation was equivalent to 14.5%.
We believe global bond markets will continue to be influenced by rising U.S.
interest rates. Although rising rates in the U.S. are usually bad for emerging
market economies, forcing them to follow suit, we believe that, because high
interest rates already prevail in many emerging markets, the effect of high U.S.
rates could be less detrimental to emerging markets in the future. If combined
with floating exchange rates and historically low levels of inflation, this
could enable monetary authorities to reduce rates in countries such as Mexico
and Brazil. We currently expect to continue to focus on bonds from countries we
<PAGE>
believe are likely to have positive economic growth, such as Mexico, and on
those countries that we believe show improving repayment capacity. We will
attempt to position ourselves to take advantage of sovereign bonds with deep
discounts during a period when the market's pricing of sovereign risk spreads
overshoots their fair-value ranges.
Of course, investments in foreign securities involve special risks, such as
market and currency volatility, and adverse economic, social, and political
developments in the countries where the Fund is invested. Emerging markets
involve heightened risks related to the same factors in addition to risks
associated with their relatively small size and lesser liquidity. In fact, the
Mexican Bolsa Index has increased 4,121.31% in the last 15 years, but has
suffered 8 declines of more than 15% during that time. 2 While short-term
volatility can be disconcerting, declines in excess of 50% are not unusual in
emerging markets. These special risks and other considerations are discussed in
the Fund's prospectus. In addition, the Fund may also invest in lower-rated
"junk bonds", which entail greater credit risks than higher-rated bonds. These
special risks and other considerations are discussed in the Fund's prospectus.
This discussion reflects our views, opinions, and portfolio holdings as of
December 31, 1999, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the Fund's portfolio composition. Although historical performance
is no guarantee of future results, these insights may help you understand our
investment and management philosophy.
We appreciate your support, welcome your comments and look forward to serving
you in the future.
Best regards,
/s/DONALD F. REED
Donald F. Reed, CFA, CIC
President
Templeton Institutional Funds, Inc.
/s/UMRAN DEMIRORS
Umran Demirors, Ph.D.
Chief Investment Officer
Templeton Global Bond Managers
2 Source: Mexico Bolsa Index. Based on quarterly percentage price change over 15
years ended December 31, 1999. Market return is measured in U.S. dollars and
does not include reinvested dividends.
<PAGE>
INSERT THE FOLLOWING CHARTS ON PAGES 2 AND 3 AS INDICATED
Page 2, left side callout
GEOGRAPHIC DISTRIBUTION ON 12/31/99- pie chart
(FIXED INCOME ASSETS AS A PERCENTAGE OF TOTAL NET ASSETS)
Asia 23.9%
Europe 20.3%
Latin America 41.3%
FUND ASSET ALLOCATION ON 12/31/99- pie chart
Short-Term Investments and Other Net Assets 14.5%
Fixed Income 85.5%
Page 3, right side callout
Insert shaded box-
10 LARGEST POSITIONS ON 12/31/99
(Percent of Total Net Assets)
United Mexican States, 8.625%, 3/12/08 9.4%
Republic of Turkey, Reg S, 10.00%, 9/19/07 9.2%
Republic of Argentina, 9.75%, 9/19/27 6.5%
Republic of Bulgaria, FRN, 5.875%, 7/28/11 5.6%
Republic of Brazil, 14.50%, 10/15/09 5.3%
Minfin of Russia, Reg S, 10.00%, 6/26/07 5.1%
Republic of Korea, 8.875%, 4/15/08 5.0%
Government of Malaysia, 8.75%, 6/01/09 5.0%
Cellco Finance NV, 144A, 12.75%, 8/01/05 4.9%
Republic of Turkey, 144A, 10.00%, 9/19/07 4.6%
<PAGE>
INSERT GRAPH:
TOTAL RETURN INDEX COMPARISON/1/
$5,000,000 INVESTMENT: 06/04/97-12/31/99
Since
Inception
One-Year (06/04/97)
---------------------------------------
Average Annual Total Return/1/,/2/ 11.77% 7.57%
Cumulative Total Return/1/,/3/ 11.77% 20.65%
1. The Fund's Manager and administrator have agreed in advance to waive their
respective fees in order to limit the total expenses of the Fund to an annual
rate of 1.25% of average net assets. I f these fee waivers are insufficient to
so limit the Fund's expenses, the manager and administrator have agreed to
equally assume as their own expense certain expenses otherwise payable by the
Fund. These voluntary agreements resulted in fee waivers for the fiscal year
ended December 31, 1999. After April 30, 2000, the manager and administrator may
end this arrangement at any time. Past fee waivers by the Fund's manager and
administrator increased the Fund's total returns. Without these waivers, the
Fund's total returns would have been lower.
2. Average annual total return represents the average annual change in value of
an investment over the indicated periods.
3. Cumulative total return represents the change in value of an investment over
the indicated periods.
4. Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index, nor is an index representative of the Fund's portfolio.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, currency volatility, and the economic, social,
and political climates of the countries where the Fund invests. Emerging markets
involve heightened risks related to the same factors, in addition to those
associated with their relatively small size and lesser liquidity. Also, as a
non-diversified series of an investment company, the Fund may invest in a
relatively small number of issuers and, as a result, be subject to greater risk
of loss with respect to its portfolio securities. You may have a gain or loss
when you sell your shares. Past performance is not predictive of future results.
FOR THE MOST CURRENT PORTFOLIO INFORMATION, PLEASE CALL 1-800-362-6243.
<PAGE>
TIFI-Emerging Fixed JP Morgan Emerging
Income Market Series Markets Plus
6/4/97 $5,000,000 $5,000,000.00
6/30/97 $5,005,000 $5,099,666.67
7/31/97 $5,250,000 $5,311,302.83
8/31/97 $5,165,000 $5,289,526.49
9/30/97 $5,360,000 $5,451,386.00
10/31/97 $5,260,000 $4,823,386.33
11/30/97 $5,460,000 $5,052,497.18
12/31/97 $5,620,979 $5,226,303.09
1/31/98 $5,647,822 $5,215,850.48
2/28/98 $5,739,089 $5,365,023.80
3/31/98 $5,823,984 $5,498,612.90
4/30/98 $5,834,931 $5,511,809.57
5/31/98 $5,703,563 $5,323,856.86
6/30/98 $5,605,037 $5,169,997.40
7/31/98 $5,703,563 $5,193,262.39
8/31/98 $4,138,094 $3,709,547.32
9/30/98 $4,794,934 $4,072,341.05
10/31/98 $5,189,038 $4,335,821.52
11/30/98 $5,446,301 $4,591,201.40
12/31/98 $5,403,395 $4,476,421.37
1/31/99 $5,371,980 $4,309,982.15
2/28/99 $5,296,584 $4,371,996.24
3/31/99 $5,541,622 $4,702,738.46
4/30/99 $5,880,905 $5,023,790.36
5/31/99 $5,585,603 $4,737,620.94
6/30/99 $5,704,980 $4,949,502.99
7/31/99 $5,692,414 $4,846,791.85
8/31/99 $5,560,471 $4,840,009.35
9/30/99 $5,629,584 $5,008,933.13
10/31/99 $5,730,112 $5,201,758.37
11/30/99 $5,830,641 $5,349,364.66
12/31/99 $6,032,277 $5,638,764.16
Periods ended 12/31/99
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1999++ 1998 1997+
-----------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year $ 8.59 $10.47 $10.00
---------------------------------------
Income from investment operations:
Net investment income .77 .84 .44
Net realized and unrealized gains (losses) .22 (1.27) .79
---------------------------------------
Total from investment operations .99 (.43) 1.23
---------------------------------------
Less distributions from:
Net investment income (.76) (.86) (.44)
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 * 11.77% (3.98)% 12.42%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $2,103 $1,881 $2,249
Ratios to average net assets:
Expenses 1.25% 1.25% 1.25%**
Expenses, excluding waiver and
payments by affiliate 2.62% 3.74% 6.40%**
Net investment income 8.57% 8.55% 7.26%**
Portfolio turnover rate 297.46% 525.94% 172.62%
</TABLE>
* Total return is not annualized.
** Annualized.
+ For the period June 4, 1997 (commencement of operations) to December 31, 1997
++ Based on average weighted shares outstanding.
See Notes to Financial Statements.
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999
Principal
Amount* Value
- -------------------------------------------------------------------------------
LONG TERM SECURITIES 85.5%
ARGENTINA 11.0%
Republic of Argentina:
8.75%, 5/09/02 $100,000 $ 94,850
9.75%, 9/19/27 150,000 136,125
----------
230,975
----------
BRAZIL 5.3%
Republic of Brazil, 14.50%, 10/15/09 100,000 111,000
----------
BULGARIA 5.7%
Republic of Bulgaria FRN, 5.875%, 7/28/11 150,000 118,782
----------
COLOMBIA 2.2%
Republic of Colombia, 9.75%, 4/23/09 50,000 46,750
----------
MALAYSIA 5.0%
Government of Malaysia 8.75%, 6/01/09 100,000 105,050
----------
MEXICO 9.4%
United Mexican States, 8.625%, 3/12/08 200,000 197,000
---------
NETHERLANDS 4.9%
Cellco Finance NV, 144A 12.75%, 8/01/05 100,000 103,625
----------
PANAMA 4.6%
Republic of Panama, 9.375%, 4/01/29 100,000 96,400
----------
PERU 4.6%
Republic of Peru, FRN, 4.50%, 3/07/17 140,000 96,950
---------
POLAND 4.2%
Republic of Poland, FRN, 6.00%, 10/27/14 100,000 88,250
---------
RUSSIA 5.5%
Minfin of Russia, Reg S, 10.00%, 6/26/07 175,000 106,750
Vnesheconombank, FRN, 6.906%, 12/15/15 49,940 8,867
---------
115,617
---------
SOUTH KOREA 5.0
Republic of Korea, 8.875%, 4/15/08 100,000 105,500
---------
TURKEY 13.8%
Republic of Turkey,
144A, 10.00%, 9/19/07 100,000 97,075
Reg S, 10.00%, 9/19/07 200,000 194,150
---------
291,225
---------
VENEZUELA 4.3%
Republic of Venezuela, 9.25%, 9/15/27 135,000 89,775
---------
TOTAL LONG TERM SECURITIES (COST $1,833,522) 1,796,899
---------
SHORT TERM INVESTMENT (COST $174,519) 8.3%
U.S. Treasury Bill, 4.95%, 1/20/00 175,000 174,586
---------
TOTAL INVESTMENTS (COST $2,008,041)93.8% 1,971,485
OTHER ASSETS, LESS LIABILITIES 6.2% 131,341
---------
TOTAL NET ASSETS 100.0% $2,102,826
==========
*Securities denominated in U.S. dollars.
See Notes to Financial Statements
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1999
Assets:
Investments in securities, at value (cost $2,008,041) $1,971,485
Cash 66,928
Receivables:
Interest 43,365
From affiliates 48,458
----------
Total assets 2,130,236
----------
Liabilities:
Accrued expenses 27,410
----------
Net assets, at value $2,102,826
==========
Net assets consist of:
Undistributed net investment income $ 371
Net unrealized depreciation (36,556)
Accumulated net realized loss (215,970)
Capital shares 2,354,981
----------
Net assets, at value $2,102,826
==========
Net asset value per share ($2,102,826/238,332 shares outstanding) $8.82
=====
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED December 31, 1999
Investment Income $192,289
---------
Expenses:
Management fees (Note 3) $ 13,710
Administrative fees (Note 3) 1,639
Report to shareholders 4,500
Registration and filing fees 3,400
Professional fees 26,720
Directors' fees and expenses 1,276
---------
Total expenses 51,245
Expenses waived/paid by affiliate (Note 3) (26,845)
--------
Net expenses 24,400
--------
Net investment income 167,889
--------
Realized and unrealized gains (losses):
Net realized loss from:
Investments (104,504)
Foreign currency transactions (16)
---------
Net realized loss (104,520)
Net unrealized appreciation on investments 158,099
---------
Net realized and unrealized gain 53,579
---------
Net increase in net assets resulting from operations $221,468
=========
SEE NOTES TO FINANCIAL STATEMENT
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
for the years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 167,889 $ 184,860
Net realized loss from investments and
foreign currency transactions (104,520) (28,751)
Net unrealized appreciation (depreciation) on
investments 158,099 (251,468)
----------------------------------
Net increase (decrease) in net assets
resulting from operations 221,468 (95,359)
Distributions to shareholders from:
Net investment income (167,297) (186,928)
Tax return of capital - (7,339)
Net realized gains - (122,344)
Capital share transactions (Note 2): 167,297 44,023
----------------------------------
Net increase (decrease) in net assets 221,468 (367,947)
Net assets:
Beginning of year 1,881,358 2,249,305
----------------------------------
End of year $2,102,826 $1,881,358
==================================
Undistributed net investment income included in net assets:
End of year $ 371 -
==================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Emerging Fixed Income Markets Series (the Fund) is a separate, non-diversified
series of Templeton Institutional Funds, Inc. (the Company), which is an
open-end investment company registered under the Investment Company Act of 1940.
The Fund seeks high total return consisting of current income and capital
appreciation. 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 following summarizes the Fund's significant
accounting policies.
A. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Directors.
B. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date. When
the Fund purchases or sells foreign securities it will customarily enter into a
foreign exchange contract to minimize foreign exchange risk from the trade date
to the settlement date of such transactions.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of interest and foreign withholding taxes, and the U.S. dollar equivalent of the
amounts actually received or paid. Net unrealized foreign exchange gains and
losses arise from changes in foreign exchange rates on foreign denominated
assets and liabilities other than investments in securities held at the end of
the reporting period.
C. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Distributions to shareholders are recorded on the ex-dividend date.
Common expenses incurred by the Company are allocated among the funds comprising
the Company based on the ratio of net assets of each fund to the combined net
assets. Other expenses are charged to each fund on a specific identification
basis.
D. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. CAPITAL STOCK
At December 31, 1999, there were 1.14 million shares authorized ($0.01 par
value), of which 140 million have been classified as Fund shares. Transactions
in the Fund's shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998
-------------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- ----------------- -------------- ---------------
<S> <C> <C> <C> <C>
Shares issued on reinvestment of distributions 19,385 $167,297 4,201 $44,023
-------------- ----------------- -------------- ---------------
Net increase 19,385 $167,297 4,201 $44,023
-------------- ----------------- -------------- ---------------
</TABLE>
Templeton Global Investors, Inc., a subsidiary of Franklin Resources, is the
record owner of 100% of the Fund shares as of December 31, 1999.
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Company are also officers or directors of Templeton
Investment Counsel, Inc. (TICI), Franklin Templeton Services, Inc. (FT
Services), Franklin/Templeton Distributors, Inc. (Distributors), and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Fund's
investment manager, administrative manager, principal underwriter and transfer
agent, respectively.
The Fund pays an investment management fee to TICI of 0.70% per year of the
average daily net assets of the Fund. The Fund pays its allocated share of an
administrative fee to FT Services based on the Company's aggregate average daily
net assets as follows:
ANNUALIZED FEE
RATE AVERAGE DAILY NET ASSETS
---------------- -------------------------------------------------------
0.15% First $200 million
0.135% Over $200 million, up to and including $700 million
0.10% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
TICI and FT Services have agreed in advance to limit total expenses of the Fund
to an annual rate of 1.25% of average daily net assets through April 30, 2000,
as noted in the Statement of Operations.
4. INCOME TAXES
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
At December 31, 1999, the net unrealized depreciation based on the cost of
investments for income tax purposes of $2,008,424 was as follows:
Unrealized appreciation $ 26,226
Unrealized depreciation (63,165)
------------
Net unrealized depreciation $(36,939)
============
At December 31, 1999, the Fund had tax basis capital losses of $215,586 which
may be carried over to offset future capital gains. Such losses expire December
31, 2007.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1999 aggregated $4,911,342 and $4,850,399 respectively
<PAGE>
6. CREDIT FACILITY
Certain Franklin Templeton Funds, including Emerging Fixed Income Markets Series
Fund, are participants in a $750 million senior unsecured credit agreement for
temporary borrowing purposes. The termination date of the agreement is March 1,
2000. Interest is calculated on the Fund's borrowings at market rates. At
December 31, 1999, the Fund had not utilized this credit facility.
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of
Templeton Institutional Funds, Inc. - Emerging Fixed Income Markets Series
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Emerging Fixed Income Markets
Series of Templeton Institutional Funds, Inc. at December 31, 1999, and the
results of its operations, the changes in its net assets and the financial
highlights for the year then ended, in conformity with accounting principles
generally accepted in the United States. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at December 31, 1999 by
correspondence with the custodian, provides a reasonable basis for the opinion
expressed above. The financial statements for the year ended December 31, 1998,
including the financial highlights for each of the periods prior to December 31,
1999 were audited by other independent accountants whose report dated January
28, 1999 expressed an unqualified opinion on those financial statements.
/s/PRICEWATERHOUSECOOPERS LLP
Ft. Lauderdale, Florida
January 28, 2000
<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING FIXED INCOME MARKETS SERIES
CHANGE IN INDEPENDENT AUDITOR
On August 13, 1999, McGladrey & Pullen, LLP (McGladrey) resigned as independent
auditors of the Fund. McGladrey resigned pursuant to their agreement to sell
their investment company practice to PricewaterhouseCoopers LLP (PwC). The
McGladrey partners and professionals previously serving the Fund, have joined
PwC and performed the December 31, 1999 audit.
None of the reports of McGladrey on the financial statements of the Fund,
including those of the past two fiscal years have ever contained an adverse
opinion or a disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope or accounting principles.
During the period McGladrey served the Fund, including the two most recent
fiscal years and subsequent interim period, there were no disagreements with
McGladrey on any matter of accounting principle or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of McGladrey would have caused it to make
reference to the subject matter of disagreement in connection with its report.
On October 21, 1999, the Fund, with the approval of its Board of Directors and
its Audit Committee, engaged PwC as its independent auditors.
<PAGE>
(BACK COVER)
This report must be preceded or accompanied by the current prospectus of the
Templeton Institutional Funds, Inc. Emerging Fixed Income Markets Series, which
contains more complete information, including risk factors, charges, and
expenses. Like any investment in securities, the value of the Fund's portfolio
will be subject to the risk of loss from market, currency, economic, political,
and other factors, as well as investment decisions by the manager, which will
not always be profitable or wise. The Fund and its investors are not protected
from such losses by the manager. Therefore, investors who cannot accept this
risk should not invest in shares of the Fund.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded, and accessed. These calls can be
determined by the presence of a regular beeping tone.
Principal Underwriter:
FRANKLIN TEMPLETON
DISTRIBUTORS, INC.
100 Fountain Parkway
P.O. Box 33030
St. Petersburg, Florida 33733-8030
INSTITUTIONAL SERVICES: 1-800-321-8563
FUND INFORMATION: 1-800-362-6243
ZT453 A 02/00
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