FRANKLIN TEMPLETON JAPAN FUND
THIS STATEMENT OF ADDITIONAL INFORMATION DATED AUGUST 1, 1995, IS NOT A
PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF FRANKLIN
TEMPLETON JAPAN FUND DATED AUGUST 1, 1995, WHICH MAY BE OBTAINED WITHOUT CHARGE
UPON REQUEST TO THE PRINCIPAL UNDERWRITER, FRANKLIN TEMPLETON DISTRIBUTORS,
INC., 700 CENTRAL AVENUE, P.O. BOX 33030 ST. PETERSBURG, FLORIDA 33733-8030
TOLL FREE TELEPHONE: 800/DIAL BEN
TABLE OF CONTENTS
General Information and History...................... 1
Investment Objective and Policies.................... 1
-Investment Policies............................... 1
-Repurchase Agreements............................. 2
-Debt Securities................................... 2
-Convertible Securities............................ 4
-Futures Contracts................................. 4
-Options on Securities, Indices
and Futures...................................... 5
-Foreign Currency Hedging Transactions............. 8
-Investment Restrictions........................... 9
-Additional Restrictions...........................11
-Risk Factors......................................12
-Trading Policies..................................18
-Personal Securities Transactions..................18
Management of the Fund...............................18
Trustee Compensation ................................25
Principal Shareholders...............................26
Investment Management and Other
Services...........................................26
-Investment Management Agreement..................... 26
-Management Fees .................................... 27
-The Investment Manager.............................. 28
-Business Manager.................................... 28
-Custodian and Transfer Agent........................ 29
-Legal Counsel....................................... 30
-Independent Accountants............................. 30
-Reports to Shareholders............................. 30
Brokerage Allocation................................... 30
Purchase, Redemption and Pricing of
Shares............................................... 34
-Ownership and Authority Disputes.................... 35
-Tax-Deferred Retirement Plans....................... 35
-Letter of Intent.................................... 37
-Special Net Asset Value
Purchases......................................... 38
Tax Status............................................. 39
Principal Underwriter.................................. 46
Description of Shares.................................. 48
Performance Information................................ 48
Financial Statements . . . . . . . . . . . . . . ...... 51
GENERAL INFORMATION AND HISTORY
Franklin Templeton Japan Fund (the "Fund") was organized as a Delaware
business trust on October 29, 1991, and is registered under the Investment
Company Act of 1940 (the "1940 Act") as an open-end management investment
company.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT POLICIES. The investment objective and policies
of the Fund are described in the Fund's Prospectus under the
heading "General Description -- Investment Objective and
Policies."
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REPURCHASE AGREEMENTS. Repurchase agreements are contracts under which
the buyer of a security simultaneously commits to resell the security to the
seller at an agreed-upon price and date. Under a repurchase agreement, the
seller is required to maintain the value of the securities subject to the
repurchase agreement at not less than their repurchase price. The investment
manager of the Fund (Templeton Investment Counsel, Inc. ("TICI" or "Investment
Manager") will monitor the value of such securities daily to determine that the
value equals or exceeds the repurchase price. Repurchase agreements may involve
risks in the event of default or insolvency of the seller, including possible
delays or restrictions upon the Fund's ability to dispose of the underlying
securities. The Fund will enter into repurchase agreements only with parties who
meet creditworthiness standards approved by the Board of Trustees, I.E., banks
or broker-dealers which have been determined by the Fund's Investment Manager to
present no serious risk of becoming involved in bankruptcy proceedings within
the time frame contemplated by the repurchase transaction.
DEBT SECURITIES. The Fund may invest in debt securities that are rated
in any rating category by Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's") or that are unrated by any rating agency. As
an operating policy, which may be changed by the Board of Trustees without
Shareholder approval, the Fund will invest no more than 5% of its assets in debt
securities rated lower than Baa by Moody's or BBB by S&P. 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.
Bonds which are rated Baa by Moody's are considered as medium grade
obligations, I.E., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well. 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 BBB by S&P are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic
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conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for bonds in this category than in
higher rated categories. Bonds rated D by S&P are the lowest rated class of
bonds, and generally are in payment default. The D rating also will be used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
Although they may offer higher yields than do higher rated securities,
high risk, low rated debt securities (commonly referred to as "junk bonds") 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 objective may, to the extent of investment in low rated
debt securities, be more dependent upon such creditworthiness analysis than
would be the case if the Fund were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low rated debt securities have been found to be less
sensitive to interest rate changes than higher rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in low rated debt securities prices because the
advent of a recession could lessen the ability of a highly leveraged company to
make
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principal and interest payments on its debt securities. If the issuer of low
rated debt securities defaults, the Fund may incur additional expenses seeking
recovery.
The Fund may invest in yen-dominated bonds sold in Japan by
non-Japanese issuers ("Samurai bonds") and in dollar-denominated bonds sold in
the United States by non-U.S. issuers ("Yankee bonds"). As compared with bonds
issued in their countries of domicile, such bond issues normally carry a higher
interest rate but are less actively traded. The Fund will invest in Samurai or
Yankee bond issues only after taking into account consideration of quality and
liquidity, as well as yield. These bonds would be issued by governments which
are members of the Organization for Economic Cooperation and Development or have
AAA ratings.
The Fund may accrue and report interest income on high yield bonds,
such as zero coupon bonds or pay-in-kind securities, even though it receives no
cash interest until the security's maturity or payment date. In order to qualify
for beneficial tax treatment afforded regulated investment companies, and
generally to be relieved of federal tax liabilities, the Fund must distribute
substantially all of its net income and gains to Shareholders (see "Tax Status")
generally on an annual basis. The Fund may have to dispose of portfolio
securities under disadvantageous circumstances to generate cash or leverage
itself by borrowing cash in order to satisfy the distribution requirement.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities,
including convertible debt and convertible preferred stock. Convertible
securities are fixed-income securities which may be converted at a stated price
within a specific amount of time into a specified number of shares of common
stock. These securities are usually senior to common stock in a corporation's
capital structure, but usually are subordinated to non-convertible debt
securities. In general, the value of a convertible security is the higher of its
investment value (its value as a fixed-income security) and its conversion value
(the value of the underlying shares of common stock if the security is
converted). The investment value of a convertible security generally increases
when interest rates decline and generally decreases when interest rates rise.
The conversion value of a convertible security is influenced by the value of the
underlying common stock.
FUTURES CONTRACTS. The Fund may purchase and sell financial
futures contracts. Although some financial futures contracts
call for making or taking delivery of the underlying securities,
in most cases these obligations are closed out before the
settlement date. The closing of a contractual obligation is
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accomplished by purchasing or selling an identical offsetting futures contract.
Other financial futures contracts by their terms call for cash settlements.
The Fund may also buy and sell index futures contracts with respect to
any stock or bond index traded on a recognized stock exchange or board of trade.
An index futures contract is a contract to buy or sell units of an index at a
specified future date at a price agreed upon when the contract is made. The
index futures contract specifies that no delivery of the actual securities
making up the index will take place. Instead, settlement in cash must occur upon
the termination of the contract, with the settlement being the difference
between the contract price and the actual level of the index at the expiration
of the contract.
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 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, owning 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, INDICES AND FUTURES. The Fund may write covered
put and call options and purchase put and call options on securities, securities
indices and futures contracts that are traded on United States and foreign
exchanges and in the over-the-counter markets.
An option on a security or a futures contract is a contract that gives
the purchaser of the option, in return for the premium paid, the right to buy a
specified security or futures contract (in the case of a call option) or to sell
a specified security or futures contract (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.
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The Fund may write a call or put option only if the option is
"covered." A call option on a security or futures contract written by the Fund
is "covered" if the Fund owns the underlying security or futures contract
covered by the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option on a security
or futures contract is also covered if the Fund holds a call on the same
security or futures contract and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Fund in cash or high
grade U.S. Government securities in a segregated account with its custodian. A
put option on a security or futures contract written by the Fund is "covered" if
the Fund maintains cash or fixed-income securities with a value equal to the
exercise price in a segregated account with its custodian, or else holds a put
on the same security or futures contract 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 securities indices that it writes
by owning securities whose price changes, in the opinion of the Fund's
Investment Manager, are expected to be similar to those of the index, or in such
other manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations. Nevertheless, where the
Fund covers a call option on a securities 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
securities 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 its gross income in the event the option expires unexercised or
is closed out at a profit. If the value of a security, index or futures contract
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,
index or futures
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contract rises, however, the Fund will realize a loss in its call option
position, which will reduce the benefit of any unrealized appreciation in its
investments. By writing a put option, the Fund assumes the risk of a decline in
the underlying security, index or futures contract. To the extent that the price
changes of the portfolio securities being hedged correlate with changes in the
value of the underlying security, index or futures contract, writing covered put
options 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, its
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, index or
futures contract and the changes in value of the Fund's security holdings being
hedged.
The Fund may purchase call options on individual securities or futures
contracts to hedge against an increase in the price of securities or futures
contracts that it 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, index or futures contract 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, it may experience losses in some cases
as a result of such inability. The value of over-the-counter options purchased
by the Fund, as well as the cover for options written by the Fund, are
considered not readily marketable and are subject to the Fund's limitation on
investments in securities that are not
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readily marketable. See "Investment Objective and Policies --
Investment Restrictions."
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. 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 or enjoy a substantial movement
against another currency, it may enter into a forward contract to sell an amount
of the former foreign currency approximating the value of some or all of its
portfolio securities denominated in such foreign currency. This second
investment practice is generally referred to as "cross-hedging." Because in
connection with the Fund's forward foreign currency transactions, an amount of
its 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 cash, cash
equivalents or high quality debt securities available in an amount sufficient to
cover any commitments under these contracts or to limit any potential risk. The
segregated account will be marked-to-market on a daily basis. While these
contracts are not presently regulated by the Commodity Futures Trading
Commission ("CFTC"), the CFTC may in the future assert authority to regulate
forward contracts. In such event, 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
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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 its
position, the Fund may forfeit the entire amount of the premium plus related
transaction costs. Options on foreign currencies to be written or purchased by
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 Investment
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.
INVESTMENT RESTRICTIONS. The Fund has imposed upon itself certain
investment restrictions which, together with its investment objective, are
fundamental policies except as otherwise indicated. No changes in the Fund's
investment objective or these investment restrictions can be made without the
approval of the Shareholders of the Fund. For this purpose, the provisions of
the 1940 Act require the affirmative vote of the lesser of either (1) 67% or
more of the Fund's Shares present at a Shareholders' meeting at which more than
50% of the outstanding Shares are present or represented by proxy or (2) more
than 50% of the outstanding Shares of the Fund.
In accordance with these restrictions, the Fund will 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); invest in
other open-end investment companies (except in
connection with a merger, consolidation, acquisition or
reorganization); invest in interests (other than
publicly issued debentures or equity stock interests)
in oil, gas or other mineral exploration or development
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programs; or purchase or sell commodity contracts (except
futures contracts as described in the Fund's Prospectus).
2. 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 (a) more than 5%
of the Fund's total assets would then be invested in
securities of any single issuer, or (b) the Fund would then
own more than 10% of the voting securities of any single
issuer.
3. Act as an underwriter; issue senior securities except as set
forth in investment restriction 6 below; or purchase on margin
or sell short, except that the Fund may make margin payments
in connection with futures, options and currency transactions.
4. Loan money, except that the Fund may (a) purchase a portion of
an issue of publicly distributed bonds, debentures, notes and
other evidences of indebtedness, (b) enter into repurchase
agreements and (c) lend its portfolio securities.
5. 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).
6. Mortgage, pledge or hypothecate its assets (except as may be
necessary in connection with permitted borrowings); provided,
however, this does not prohibit escrow, collateral or margin
arrangements in connection with its use of options, futures
contracts and options on future contracts.
7. Invest more than 25% of its total assets in a single industry.
For purposes of this restriction, (a) a foreign government is
considered to be an industry, and (b) all supra-national
entities, in the aggregate, are considered to be an industry.
8. Participate on a joint or a joint and several basis in any
trading account in securities. (See "Investment Objective and
Policies -- Trading Policies" as to transactions in the same
securities for the Fund and/or other mutual funds and clients
with the same or affiliated advisers.)
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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 2 or 7 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.
ADDITIONAL RESTRICTIONS. The Fund has adopted the following additional
restrictions which are not fundamental and which may be changed without
Shareholder approval, to the extent permitted by applicable law, regulation or
regulatory policy. Under these restrictions, the Fund may not:
1. Purchase or retain securities of any company in which Trustees
or officers of the Fund or of the Fund's Investment Manager,
individually owning more than 1/2 of 1% of the securities of
such company, in the aggregate own more than 5% of the
securities of such company.
2. 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.
3. Invest more than 5% of its net assets in warrants whether or
not listed on the New York or American Stock Exchanges, and
more than 2% of its net assets in warrants that are not listed
on those exchanges. Warrants acquired in units or attached to
securities are not included in this restriction.
4. Purchase or sell real estate limited partnership
interests.
5. Purchase or sell interests in oil, gas and mineral
leases (other than securities of companies that invest
in or sponsor such programs).
6. Invest in any company for the purpose of exercising
control or management.
7. Purchase more than 10% of a company's outstanding
voting securities.
8. Invest more than 15% of the Fund's total assets in
securities that are not readily marketable (including
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repurchase agreements maturing in more than seven days and
over-the-counter options purchased by the Fund), including no
more than 10% of its total assets in restricted securities.
Rule 144A securities are not subject to the 10% limitation on
restricted securities, although the Fund will limit its
investment in all restricted securities, including 144A
securities, to 15% of its total assets.
9. Invest more than 5% of the value of its total assets in
securities of issuers domiciled in Eastern Europe and in
non-European members of the Commonwealth of Independent
States.
Whenever any investment restriction states a maximum percentage of the
Fund's assets which may be invested in any security or other property, it is
intended that such maximum percentage limitation be determined immediately after
and as a result of the Fund's acquisition of such security or property. Assets
are calculated as described in the Fund's Prospectus under the heading "How to
Buy Shares of the Fund."
RISK FACTORS. The Fund's concentration of its investments in Japan
means the Fund will be more dependent on the investment considerations discussed
below and may be more volatile than a fund which is broadly diversified
geographically. Additional factors relating to Japan include the following.
In the past, Japan has experienced earthquakes and tidal waves of
varying degrees of severity, and the risks of such phenomena, and damage
resulting therefrom, continue to exist. Japan also has one of the world's
highest population densities. Approximately 45% of the total population of Japan
is concentrated in the metropolitan areas of Tokyo, Osaka and Nagoya.
Since the end of World War II, Japan has experienced significant
economic development and among the free industrial nations of the world is
second only to the United States in terms of gross national product ("GNP").
During the years of high economic growth in the 1960's and early 1970's, the
expansion was based on the development of heavy industries such as steel and
shipbuilding. In the 1970's Japan moved into assembly industries which employ
high levels of technology and consume relatively low quantities of resources,
and since then has become a major producer of electrical and electronic products
and automobiles. Since the mid-1980's Japan has become a major creditor nation,
with extensive trade surpluses. With the exception of periods associated with
the oil crises of 1974 and 1978, Japan has
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generally experienced very low levels of inflation. There is, of
course, no guarantee these favorable trends will continue.
The Government of Japan has called for a transformation of the economy
away from its high dependency on export-led growth towards greater stimulation
of the domestic economy. In addition, there has been a move toward more economic
liberalization and discounting in the consumer sector. These shifts have already
begun to take place and may cause disruption in the Japanese economy.
Japan's economy is a market economy in which industry and commerce are
predominantly privately owned and operated. However, the Government is involved
in establishing and meeting objectives for developing the economy and improving
the standard of living of the Japanese people.
Japan has historically depended on oil for most of its energy
requirements. Almost all of its oil is imported, with the majority imported from
the Middle East. In the past, oil prices have had a major impact on the domestic
economy, but more recently Japan has worked to reduce its dependence on oil by
encouraging energy conservation and use of alternative fuels. In addition, a
restructuring of industry, with emphasis shifting from basic industries to
processing and assembly-type industries, has contributed to the reduction of oil
consumption. However, there is no guarantee this favorable trend will continue.
Overseas trade is important to Japan's economy. Japan has few natural
resources and must export to pay for its imports of these basic requirements.
Japan's principal export markets are the United States, Canada, the United
Kingdom, Germany, Australia, Korea, Taiwan, Hong Kong and the People's Republic
of China. The principal sources of its imports are the United States, South East
Asia and the Middle East. Because of the concentration of Japanese exports in
highly visible products such as automobiles, machine tools and semiconductors
and the large trade surpluses ensuing therefrom, Japan has had difficult
relations with its trading partners, particularly the United States, where the
trade imbalance is the greatest. It is possible trade sanctions or other
protectionist measures could impact Japan adversely in both the short- and
long-term.
Although under normal circumstances at least 80% of the Fund's assets
will be invested in equity securities of Japanese issuers, the Fund has the
right to purchase securities in any foreign country, developed or developing.
Investors should consider carefully the substantial risks involved in securities
of companies and governments of foreign nations, including Japan,
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which are in addition to the usual risks inherent in domestic
investments.
There may be less publicly available information about foreign
companies comparable to the reports and ratings published about companies in the
United States. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards, and auditing practices
and requirements may not be comparable to those applicable to United States
companies. Foreign markets have substantially less volume than the New York
Stock Exchange ("NYSE") and securities of some foreign companies are less liquid
and more volatile than securities of comparable United States companies. The
Tokyo Stock Exchange has a large volume of trading and the Investment Manager
believes that securities of companies traded in Japan are generally as liquid as
securities of comparable U.S. companies. Commission rates in foreign countries,
which are generally fixed rather than subject to negotiation as in the United
States, are likely to be higher. In many foreign countries there is less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the United States.
Investments in companies domiciled in developing countries may be
subject to potentially higher risks than investments in developed countries.
These risks include (i) less social, political and economic stability; (ii) the
small current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict 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 structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the absence,
until recently in certain Eastern European countries, of a capital market
structure or market-oriented economy; and (vii) the possibility that recent
favorable economic developments in Eastern Europe may be slowed or reversed by
unanticipated political or social events in such countries.
Investments in Eastern European countries may involve risks of
nationalization, expropriation and confiscatory taxation. The Communist
governments of a number of Eastern European countries expropriated large amounts
of private property in the past, in many cases without adequate compensation,
and there can be no assurance that such expropriation will not occur in the
future. In the event of such expropriation, the Fund could lose a substantial
portion of any investments it has made in the affected countries. Further, no
accounting standards exist in
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<PAGE>
Eastern European countries. Finally, even though certain Eastern
European currencies may be convertible into U.S. dollars, the
conversion rates may be artificial to the actual market values
and may be adverse to Fund Shareholders.
Investing in Russian companies involves a high degree of risk and
special considerations not typically associated with investing in the United
States securities markets, and should be considered highly speculative. Such
risks include: (1) delays in settling portfolio transactions and risk of loss
arising out of Russia's system of share registration and custody; (2) the risk
that it may be impossible or more difficult than in other countries to obtain
and/or enforce a judgment; (3) pervasiveness of corruption and crime in the
Russian economic system; (4) currency exchange rate volatility and the lack of
available currency hedging instruments; (5) higher rates of inflation (including
the risk of social unrest associated with periods of hyper-inflation); (6)
controls on foreign investment and local practices disfavoring foreign investors
and limitations on repatriation of invested capital, profits and dividends, and
on the Fund's ability to exchange local currencies for U.S. dollars; (7) the
risk that the government of Russia or other executive or legislative bodies may
decide not to continue to support the economic reform programs implemented since
the dissolution of the Soviet Union and could follow radically different
political and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, or a return to the centrally planned
economy that existed prior to the dissolution of the Soviet Union; (8) the
financial condition of Russian companies, including large amounts of
inter-company debt which may create a payments crisis on a national scale; (9)
dependency on exports and the corresponding importance of international trade;
(10) the risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation; and (11) possible
difficulty in identifying a purchaser of securities held by the Fund due to the
underdeveloped nature of the securities markets.
There is little historical data on Russian securities markets because
they are relatively new and a substantial proportion of securities transactions
in Russia are privately negotiated outside of stock exchanges. Because of the
recent formation of the securities markets as well as the underdeveloped state
of the banking and telecommunications systems, settlement, clearing and
registration of securities transactions are subject to significant risks.
Ownership of shares (except where shares are held through depositories that meet
the requirements of the 1940 Act) is defined according to entries in the
company's share register and normally evidenced by extracts from the register or
- 15 -
<PAGE>
by formal share certificates. However, there is no central registration system
for shareholders and these services are carried out by the companies themselves
or by registrars located throughout Russia. These registrars are not necessarily
subject to effective state supervision and it is possible for 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 1,000 shareholders is required by law to contract out
the maintenance of its shareholder register to an independent entity that meets
certain criteria, in practice this regulation has not always been strictly
enforced. Because of this lack of independence, management of a company may be
able to exert considerable influence over who can purchase and sell the
company's shares by illegally instructing the registrar to refuse to record
transactions in the share register. This practice may prevent the Fund from
investing in the securities of certain Russian companies deemed suitable by the
Investment 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.
The Fund 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 or withhold portions of interest and dividends at the source.
There is the possibility of expropriation, nationalization or confiscatory
taxation, withholding and other foreign taxes on income or other amounts,
foreign exchange controls (which may include suspension of the ability to
transfer currency from a given country), default in foreign government
securities, political or social instability, or diplomatic developments which
could affect investments in securities of issuers in foreign nations.
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<PAGE>
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. Through the flexible policy of the Fund, the
Investment Manager 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.
The Trustees consider at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions which
would affect the liquidity of the Fund's assets maintained with custodians in
foreign countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The Trustees also consider the
degree of risk involved through the holding of portfolio securities in domestic
and foreign securities depositories (see "Investment Management and Other
Services -- Custodian and Transfer Agent"). However, in the absence of willful
misfeasance, bad faith or gross negligence on the part of the Fund's Investment
Manager, any losses resulting from the holding of portfolio securities in
foreign countries and/or with securities depositories will be at the risk of the
Shareholders. No assurance can be given that the Trustees' appraisal of the
risks will always be correct or that such exchange control restrictions or
political acts of foreign governments will not occur.
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
futures and options for hedging may involve risks because of imperfect
correlations between movements in the prices of the futures or 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 Investment Manager's ability to predict correctly movements in the direction
of the market, as to which no assurance can be given.
- 17 -
<PAGE>
Additional risks may be involved with the Fund's special investment
techniques, including loans of portfolio securities and borrowing for investment
purposes. These risks are described under the heading "Investment Techniques" in
the Prospectus.
TRADING POLICIES. The Investment Manager and its affiliated companies
serve as investment advisers to other investment companies and private clients.
Accordingly, the respective portfolios of these funds and clients may contain
many or some of the same securities. When any two or more of these funds or
clients are engaged simultaneously in the purchase or sale of the same security,
the transactions are placed for execution in a manner designed to be equitable
to each party. The larger size of the transaction may affect the price of the
security and/or the quantity which may be bought or sold for each party. If the
transaction is large enough, brokerage commissions in certain countries may be
negotiated below those otherwise chargeable.
Sale or purchase of securities, without payment of brokerage
commissions, fees (except customary transfer fees) or other remuneration in
connection therewith, may be effected between any of these funds, or between
funds and private clients, under procedures adopted pursuant to Rule 17a-7 under
the 1940 Act.
PERSONAL SECURITIES TRANSACTIONS. Access persons of the Franklin
Templeton Group, as defined in SEC Rule 17(j) under the 1940 Act, who are
employees of Franklin Resources, Inc. or their subsidiaries, are permitted to
engage in personal securities transactions subject to the following general
restrictions and procedures: (1) the trade must receive advance clearance from a
Compliance Officer and must be completed within 24 hours after this clearance;
(2) copies of all brokerage confirmations must be sent to the Compliance Officer
and within 10 days after the end of each calendar quarter, a report of all
securities transactions must be provided to the Compliance Officer; (3) in
addition to items (1) and (2), access persons involved in preparing and making
investment decisions must file annual reports of their securities holdings each
January and also inform the Compliance Officer (or other designated personnel)
if they own a security that is being considered for a fund or other client
transactions or if they are recommending a security in which they have an
ownership interest for purchases or sale by a fund or other client.
MANAGEMENT OF THE FUND
The name, address, principal occupation during the past five years and
other information with respect to each of the Trustees and Principal Executive
Officers of the Fund are as follows:
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<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
HARRIS J. ASHTON Chairman of the Board, president, and
Metro Center chief executive officer of General Host
1 Station Place Corporation (nursery and craft centers);
Stamford, Connecticut and a director of RBC Holdings
Trustee (U.S.A.) Inc. (a bank holding company) and
Bar-S Foods. Age 63.
NICHOLAS F. BRADY* Chairman of Templeton Emerging Markets
The Bullitt House Investment Trust PLC; chairman of
102 East Dover Street Templeton Latin America
Easton, Maryland Investment Trust PLC; chairman of Darby
Trustee Overseas Investments, Ltd. (an investment
firm) (1994-present); director of the
Amerada Hess Corporation, Capital Cities/
ABC, Inc., Christiana Companies, and the
H. J. Heinz Company; Secretary of the
United States Department of the Treasury
(1988-January 1993); and chairman of the
board of Dillion, Read & Co. Inc.
(investment banking) prior
thereto. Age 65.
F. BRUCE CLARKE Retired; formerly, credit adviser,
19 Vista View Blvd. National Bank of Canada, Toronto. Age 85.
Thornhill, Ontario
Trustee
HASSO-G VON DIERGARDT-NAGLO Farmer; and president of
R.R. 3 Clairhaven Investments, Ltd. and other
Stouffville, Ontario private investment companies.
Trustee Age 79.
MARTIN L. FLANAGAN* Senior vice president, treasurer and
777 Mariners Island Blvd. chief financial officer of
San Mateo, California Franklin Resources, Inc.;
Trustee and Vice President directors and executive vice
president of Templeton Investment Counsel,
Inc.; director, president and chief
executive officer of Templeton Global
Investors, Inc.; president or vice
president of various Templeton
Funds; director or trustee of six
Templeton Funds; accountant, Arthur Andersen
& Company (1982-1983); and a member of the
International Society of Financial Analysts
and the American Institute of Certified
Public Accountants. Age 35.
- 19 -
<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
S. JOSEPH FORTUNATO Member of the law firm of Pitney,
200 Campus Drive Hardin, Kipp & Szuch; and a director
Florham Park, New Jersey of General Host Corporation.
Trustee Age 63.
JOHN Wm. GALBRAITH President of Galbraith Properties, Inc.
360 Central Avenue (personal investment company); director
Suite 1300 of Gulfwest Banks, Inc. (bank holding
St. Petersburg, Florida company) (1995-present) and
Trustee Mercantile Bank (1991-present); vice chair-
man of Templeton, Galbraith & Hansberger
Ltd.(1986-1992); and chairman of Templeton
Funds Management, Inc. (1974-1991). Age 73.
ANDREW H. HINES, JR. Consultant for the Triangle
150 2nd Avenue N. Consulting Group; chairman of the
St. Petersburg, Florida board and chief executive
Trustee officer of Florida Progress Corporation
(1982-February 1990) and director of various
of its subsidiaries; chairman and director
of Precise Power Corporation; executive-in-
residence of Eckerd College (1991-present);
and a director of Checkers Drive-In
Restaurants, Inc. Age 72.
CHARLES B. JOHNSON* President, chief executive officer, and
777 Mariners Island Blvd. director of Franklin
San Mateo, California Resources, Inc.; chairman of
Chairman of the Board and the board and director of
and Vice President Franklin Advisers, Inc. and
Franklin Templeton Distributors, Inc.;
director of Franklin Administrative
Services, Inc., General Host Corporation,
and Templeton Global Investors, Inc.; and
officer and director, trustee or managing
general partner, as the case may be, of
most other subsidiaries of Franklin and of
55 of the investment companies in the
Franklin Templeton Group. Age 62.
CHARLES E. JOHNSON* Senior vice president and director
777 Mariners Island Blvd. of Franklin Resources, Inc.;
San Mateo, California senior vice president of
Trustee and President Franklin Templeton
Distributors, Inc.; president and director
of Franklin Institutional Service
Corporation and Templeton Worldwide, Inc.;
chairman of
- 20 -
<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
the board of Templeton Investment Counsel,
Inc.; vice president and/or director, as the
case may be, for some of the subsidiaries of
Franklin Resources, Inc.; and an officer
and/or director or trustee, as the case may
be, of 24 of the investment companies in the
Franklin Templeton Group. Age 39.
BETTY P. KRAHMER Director or trustee of various civic
2201 Kentmere Parkway associations; formerly,
Wilmington, Delaware economic analyst, U.S.
Trustee Government. Age 65.
GORDON S. MACKLIN Chairman of White River Corporation
8212 Burning Tree Road (information services); director of Fund
Bethesda, Maryland America Enterprises Holdings, Inc. Lockheed
Trustee Martin Corporation, MCI Communications
Corporation, Fusion Systems Corporation,
Infovest Corporation, and Medimmune, Inc.;
formerly, chairman of Hambrecht and Quist
Group; director of H&Q Healthcare
Investors; and president of the National
Association of Securities Dealers, Inc.
Age 67.
FRED R. MILLSAPS Manager of personal investments (1978
2665 N.E. 37th Drive -present); chairman and chief
Fort Lauderdale, Florida executive officer of Landmark
Trustee Banking Corporation (1969-1978); financial
vice president of Florida Power and Light
(1965-1969); vice president of The Federal
Reserve Bank of Atlanta (1958-1965); and a
director of various other business and
nonprofit organizations. Age 66.
MARK G. HOLOWESKO President and director of Templeton,
Lyford Cay Galbraith & Hansberger Ltd.; director
Nassau, Bahamas of global equity research for Templeton
Vice President Worldwide, Inc.; president or vice
president of the Templeton Funds; formerly,
investment administrator with Roy West Trust
Corporation (Bahamas) Limited (1984-1985).
Age 35.
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<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
WILLIAM HOWARD Vice president of Templeton Investment
500 East Broward Blvd. Counsel, Inc.; formerly,
Fort Lauderdale, Florida portfolio manager and analyst,
Vice President Tennessee Consolidated
Retirement System (1986-1993). Age 37.
JOHN R. KAY Vice president of the Templeton Funds;
500 East Broward Blvd. vice president and treasurer
Fort Lauderdale, Florida of Templeton Global Investors,
Vice President Inc. and Templeton Worldwide, Inc.;
assistant vice president of Franklin
Templeton Distributors, Inc.; formerly,
vice president and controller of the
Keystone Group, Inc.Age 55.
JAMES R. BAIO Certified public accountant; treasurer of
500 East Broward Blvd. the Templeton Funds; senior
Fort Lauderdale, Florida vice president of Templeton
Treasurer Worldwide, Inc., Templeton Global Investors,
Inc., and Templeton Funds Trust Company;
formerly, senior tax manager of Ernst &
Young (certified public accountants)
(1977-1989).
Age 40.
THOMAS M. MISTELE Senior vice president of Templeton
700 Central Avenue Global Investors, Inc.; vice president
St. Petersburg, Florida of Franklin Templeton
Secretary Distributors, Inc.; secretary of the
Templeton Funds; formerly, attorney, Dechert
Price & Rhoads (1985-1988) and Freehill,
Hollingdale & Page (1988); and judicial
clerk, U.S. District Court (Eastern District
of Virginia) (1984-1985). Age 42.
JACK L. COLLINS Assistant treasurer of the Templeton Funds;
700 Central Avenue assistant vice president of Franklin
St. Petersburg, Florida Templeton Investor Services,
Assistant Treasurer Inc.; formerly, partner, Grant
Thornton, independent public accountants.
Age 66.
JEFFREY L. STEELE Partner, Dechert Price & Rhoads. Age 49.
1500 K Street, N.W.
Washington, D.C.
Assistant Secretary
--------------------------
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<PAGE>
* These are Trustees who are "interested persons" of the Fund
as that term is defined in the 1940 Act. Mr. Brady and
Franklin Resources, Inc. are limited partners of Darby
Overseas Partners, L.P. ("Darby Overseas"). Mr. Brady
established Darby Overseas in February, 1994, and is
Chairman and a shareholder of the corporate general partner
of Darby Overseas. In addition, Darby Overseas and
Templeton, Galbraith & Hansberger, Ltd. are limited partners
of Darby Emerging Markets Fund, L.P.
There are no family relationships between any of the Trustees, except
that Mr. Charles B. Johnson is the father of Mr.
Charles E. Johnson.
TRUSTEE COMPENSATION
All of the Fund's Officers and Trustees also hold positions with other
investment companies in the Franklin Templeton Group. No compensation is paid by
the Fund to any officer or Trustee who is an officer, trustee or employee of the
Investment Manager or its affiliates. Each Templeton Fund pays its independent
directors and trustees and Mr. Brady an annual retainer and/or fees for
attendance at Board and Committee meetings, the amount of which is based on the
level of assets in each fund. Accordingly, the Fund currently pays the
independent Trustees and Mr. Brady an annual retainer of $100. The independent
Trustees and Mr. Brady are reimbursed for any expenses incurred in attending
meetings, paid pro rata by each Franklin Templeton Fund in which they serve. No
pension or retirement benefits are accrued as part of Fund expenses.
The following table shows the total compensation paid to the Trustees
by the Fund and by all investment companies in the Franklin Templeton Group:
<TABLE>
<CAPTION>
Number of Total Compensation
Name Aggregate Franklin Templeton from all Funds in
of Compensation Fund Boards on which Franklin Templeton
TRUSTEE FROM THE TRUST* TRUSTEE SERVES GROUP**
------- --------------- -------------------- --------------
<S> <C> <C> <C>
Harris J. Ashton $550 54 $319,925
Nicholas F. Brady 500 23 86,124
F. Bruce Clarke 550 19 95,275
Hasso-G von Diergardt-Naglo 550 19 75,275
S. Joseph Fortunato 550 56 336,065
- 23 -
<PAGE>
John Wm. Galbraith 0 22 0
Andrew H. Hines, Jr. 550 23 106,125
Betty P. Krahmer 550 23 75,275
Gordon S. Macklin 550 51 303,685
Fred R. Millsaps 550 23 106,125
</TABLE>
---------------
* For the fiscal year ended March 31, 1995.
** For the calendar year ended December 31, 1994.
PRINCIPAL SHAREHOLDERS
As of June 30, 1995, there were 176,023 Shares of the Fund outstanding,
of which no Shares were owned beneficially by any of the Trustees or Officers of
the Fund. As of June 30, 1995, to the knowledge of management, no person owned
beneficially or of record 5% or more of the outstanding Shares of the Fund,
except Templeton Global Investors, Inc., 500 East Broward Blvd., Suite 2100,
Fort Lauderdale, Florida 33394 owned 50,410 Shares (28% of the outstanding
Shares), Merrill Lynch Pierce Fenner & Smith, 4800 Deer Lake Drive East, 3rd
Floor, Jacksonville, Florida 32246 owned of record 68,101 Shares (38% of the
outstanding Shares), and Prudential Securities, FBO Larry Levin, 1509 Dolington
Road, Yardley, Pennsylvania 19067 owned 13,090 Shares (7% of the outstanding
Shares).
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGEMENT AGREEMENT. The Investment Manager of the Fund is
Templeton Investment Counsel, Inc., a Florida corporation with offices located
at Broward Financial Centre, Fort Lauderdale, Florida 33394-3091. The Investment
Management Agreement, dated July 28, 1994, was approved by Templeton Global
Investors, Inc., as soel Shareholder of the Fund, on June 30, 1994, and was last
approved by the Board of Trustees, including a majority of the Trustees who were
not parties to the Agreement or interested persons of any such party, at a
meeting on May 25, 1995 and will run through July 31, 1996. The Investment
Management Agreement will continue from year to year thereafter, subject to
approval annually by the Board of Trustees or by vote of a majority of the
outstanding Shares of the Fund (as defined in the 1940 Act) and also, in either
event, with the approval of a majority of those Trustees who are not parties to
the Agreement or interested persons of any such party in person at a meeting
called for the purpose of voting on such approval.
The Investment Management Agreement requires the Fund's Investment
Manager to manage the investment and reinvestment of the Fund's assets. The
Investment Manager is not required to
- 24 -
<PAGE>
furnish any personnel, overhead items or facilities for the Fund, including
daily pricing or trading desk facilities, although such expenses are paid by
investment advisers of some other investment companies.
The Investment Management Agreement provides that the Fund's Investment
Manager will select brokers and dealers for execution of the Fund's portfolio
transactions consistent with the Fund's brokerage policies (see "Brokerage
Allocation"). Although the services provided by broker-dealers in accordance
with the brokerage policies incidentally may help reduce the expenses of or
otherwise benefit the Investment Manager and other investment advisory clients
of the Investment Manager and of its affiliates, as well as the Fund, the value
of such services is indeterminable and the Investment Manager's fee is not
reduced by any offset arrangement by reason thereof.
When the Investment Manager of the Fund determines to buy or sell the
same security for the Fund that the Investment Manager or one or more of its
affiliates has selected for one or more of its other clients or for clients of
its affiliates, the orders for all such securities transactions are placed for
execution by methods determined by the Investment Manager, with approval by the
Board of Trustees, to be impartial and fair, in order to seek good results for
all parties. See "Investment Objective and Policies -- Trading Policies."
Records of securities transactions of persons who know when orders are placed by
the Fund are available for inspection at least four times annually by the
Compliance Officer of the Fund so that the non-interested Trustees (as defined
in the 1940 Act) can be satisfied that the procedures are generally fair and
equitable to all parties.
The Investment Management Agreement provides that the Fund's Investment
Manager shall have no liability to the Fund, or any Shareholder of the Fund for
any error of judgment, mistake of law, or any loss arising out of any investment
or other act or omission in the performance by the Investment Manager of its
duties under the Agreement, except liability resulting from willful misfeasance,
bad faith or gross negligence on the Investment Manager's part or reckless
disregard of its duties under the Agreement. The Investment Management Agreement
will terminate automatically in the event of its assignment, and may be
terminated by the Fund any time without payment of any penalty on 60 days'
written notice, with the approval of a majority of the Trustees in office at the
time or by vote of a majority of the outstanding voting securities of the Fund
(as defined in the 1940 Act).
MANAGEMENT FEES. For its services, the Fund pays the
Investment Manager a monthly fee equal on an annual basis to
- 25 -
<PAGE>
0.75% of its average daily net assets. During the period July 28, 1994
(commencement of operations) through March 31, 1995, the Investment Manager
received from the Fund fees of $4,738.
The Investment Manager will comply with any applicable state
regulations which may require it to make reimbursements to the Fund in the event
that the Fund's aggregate operating expenses, including the advisory fee, but
generally excluding interest, taxes, brokerage commissions and extraordinary
expenses, are in excess of specific applicable limitations. The strictest rule
currently applicable to the Fund is 2.5% of the first $30,000,000 of net assets,
2% of the next $70,000,000 of net assets and 1.5% of the remainder.
THE INVESTMENT MANAGER. The Investment Manager is an
indirect wholly owned subsidiary of Franklin Resources, Inc.
("Franklin"), a publicly traded company whose shares are listed
on the NYSE. Charles B. Johnson (a Trustee and officer of the
Fund), Rupert H. Johnson, Jr. and R. Martin Wiskemann are
principal shareholders of Franklin and own, respectively,
approximately 20%, 16% and 9.2% of its outstanding shares.
Messrs. Charles B. Johnson and Rupert H. Johnson, Jr. are
brothers.
BUSINESS MANAGER. Templeton Global Investors, Inc. performs
certain administrative functions as Business Manager for the
Fund, including:
o providing office space, telephone, office equipment and
supplies for the Fund;
o paying compensation of the Fund's officers for services
rendered as such;
o authorizing expenditures and approving bills for
payment on behalf of the Fund;
o supervising preparation of annual and semiannual reports to
Shareholders, notices of dividends, capital gain distributions
and tax credits, and attending to correspondence and other
special communications with individual Shareholders;
o daily pricing of the Fund's investment portfolio and preparing
and supervising publication of daily quotations of the bid and
asked prices of the Fund's Shares, earnings reports and other
financial data;
o monitoring relationships with organizations serving the
Fund, including the custodian and printers;
- 26 -
<PAGE>
o providing trading desk facilities for the Fund;
o supervising compliance by the Fund with recordkeeping
requirements under the 1940 Act and regulations thereunder,
with state regulatory requirements, maintaining books and
records for the Fund (other than those maintained by the
custodian and transfer agent), and preparing and filing tax
reports other than the Fund's income tax returns;
o monitoring the qualifications of tax-deferred
retirement plans providing for investment in Shares of
the Fund; and
o providing executive, clerical and secretarial help
needed to carry out these responsibilities.
For its services, the Business Manager receives a monthly fee equal on
an annual basis to 0.15% of the first $200,000,000 of the Fund's average daily
net assets, reduced to 0.135% annually of the Fund's net assets in excess of
$200,000,000, further reduced to 0.1% annually of such net assets in excess of
$700,000,000, and further reduced to 0.075% annually of such net assets in
excess of $1,200,000,000. Since the Business Manager's fee covers services often
provided by investment advisers to other funds, the Fund's combined expenses for
advisory and administrative services together may be higher than those of some
other investment companies. During the period July 28, 1994 through March 31,
1995, the Fund paid business management fees of $941.
The Business Manager is relieved of liability to the Fund for any act
or omission in the course of its performance under the Business Management
Agreement, in the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of its duties and obligations under the Agreement. The
Business Management Agreement may be terminated by the Fund at any time on 60
days' written notice without payment of penalty, provided that such termination
by the Fund shall be directed or approved by vote of a majority of the Trustees
of the Fund in office at the time or by vote of a majority of the outstanding
voting securities of the Fund, and shall terminate automatically and immediately
in the event of its assignment.
Templeton Global Investors, Inc. is a wholly owned
subsidiary of Franklin.
CUSTODIAN AND TRANSFER AGENT. The Chase Manhattan Bank,
N.A. serves as Custodian of the Fund's assets, which are
maintained at the Custodian's principal office, MetroTech
- 27 -
<PAGE>
Center, Brooklyn, New York 11245, and at the offices of its branches and
agencies throughout the world. The Custodian has entered into agreements with
foreign sub-custodians approved by the Trustees pursuant to Rule 17f-5 under the
1940 Act. The Custodian, its branches and sub-custodians generally domestically,
and frequently abroad, do not actually hold certificates for the securities in
their custody, but instead have book records with domestic and foreign
securities depositories, which in turn have book records with the transfer
agents of the issuers of the securities. Compensation for the services of the
Custodian is based on a schedule of charges agreed on from time to time.
Franklin Templeton Investor Services, Inc. serves as the Fund's
Transfer Agent. Services performed by the Transfer Agent include processing
purchase, transfer and redemption orders; making dividend payments, capital gain
distributions and reinvestments; and handling routine communications with
Shareholders. The Transfer Agent receives from the Fund an annual fee of $13.74
per Shareholder account plus out-of-pocket expenses. These fees are adjusted
each year to reflect changes in the Department of Labor Consumer Price Index.
LEGAL COUNSEL. Dechert Price & Rhoads, 1500 K Street, N.W.,
Washington, D.C. 20005, is legal counsel for the Fund with regard
to matters of U.S. law.
INDEPENDENT ACCOUNTANTS. The firm of McGladrey & Pullen, LLP, 555 Fifth
Avenue, New York, New York 10017, serves as independent accountants for the
Fund. Its audit services comprise examination of the Fund's financial statements
and review of the Fund's filings with the Securities and Exchange Commission
("SEC") and the Internal Revenue Service ("IRS").
REPORTS TO SHAREHOLDERS. The Fund's fiscal year ends on March 31.
Shareholders are provided at least semiannually with reports showing the Fund's
portfolio and other information, including an annual report with financial
statements audited by the independent accountants. Shareholders who would like
to receive an interim quarterly report may phone Fund Information at 1-800-DIAL
BEN.
BROKERAGE ALLOCATION
The Investment Management Agreement provides that the Investment
Manager is responsible for selecting members of securities exchanges, brokers
and dealers (such members, brokers and dealers being hereinafter referred to as
"brokers") for the execution of the Fund's portfolio transactions and, when
applicable, the negotiation of commissions in connection
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therewith. All decisions and placements are made in accordance
with the following principles:
1. Purchase and sale orders are usually placed with
brokers who are selected by the Fund's Investment
Manager as able to achieve "best execution" of such
orders. "Best execution" means prompt and reliable
execution at the most favorable securities price,
taking into account the other provisions hereinafter
set forth. The determination of what may constitute
best execution and price in the execution of a
securities transaction by a broker involves a number of
considerations, including, without limitation, the
overall direct net economic result to the Fund
(involving both price paid or received and any
commissions and other costs paid), the efficiency with
which the transaction is effected, the ability to
effect the transaction at all where a large block is
involved, availability of the broker to stand ready to
execute possibly difficult transactions in the future,
and the financial strength and stability of the broker.
Such considerations are judgmental and are weighed by
the Investment Manager in determining the overall
reasonableness of brokerage commissions.
2. In selecting brokers for portfolio transactions, the
Investment Manager takes into account its past experience as
to brokers qualified to achieve "best execution," including
brokers who specialize in any foreign securities held by the
Fund.
3. The Investment Manager is authorized to allocate
brokerage business to brokers who have provided
brokerage and research services, as such services are
defined in Section 28(e) of the Securities Exchange Act
of 1934 (the "1934 Act"), for the Fund and/or other
accounts, if any, for which the Investment Manager
exercises investment discretion (as defined in Section
3(a)(35) of the 1934 Act) and, as to transactions to
which fixed minimum commission rates are not
applicable, to cause the Fund to pay a commission for
effecting a securities transaction in excess of the
amount another broker would have charged for effecting
that transaction, if the Investment Manager in making
the selection in question determines in good faith that
such amount of commission is reasonable in relation to
the value of the brokerage and research services
provided by such broker, viewed in terms of either that
particular transaction or the Investment Manager's
overall responsibilities with respect to the Fund and
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<PAGE>
the other accounts, if any, as to which it exercises
investment discretion. In reaching such determination, the
Investment Manager is not required to place or attempt to
place a specific dollar value on the research or execution
services of a broker or on the portion of any commission
reflecting either of said services. In demonstrating that such
determinations were made in good faith, the Investment Manager
shall be prepared to show that all commissions were allocated
and paid for purposes contemplated by the Fund's brokerage
policy; that the research services provide lawful and
appropriate assistance to the Investment Manager in the
performance of its investment decision-making
responsibilities; and that the commissions paid were within a
reasonable range. The determination that commissions were
within a reasonable range shall be based on any available
information as to the level of commissions known to be charged
by other brokers on comparable transactions, but there shall
be taken into account the Fund's policies that (i) obtaining a
low commission is deemed secondary to obtaining a favorable
securities price, since it is recognized that usually it is
more beneficial to the Fund to obtain a favorable price than
to pay the lowest commission; and (ii) the quality,
comprehensiveness and frequency of research studies which are
provided for the Investment Manager are useful to the
Investment Manager in performing its advisory services under
the Investment Management Agreement with the Fund. Research
services provided by brokers to the Investment Manager are
considered to be in addition to, and not in lieu of, services
required to be performed by the Investment Manager under its
Investment Management Agreement with the Fund. Research
furnished by brokers through whom the Fund effects securities
transactions may be used by the Investment Manager for any of
its accounts, and not all such research may be used by the
Investment Manager for the Fund. When execution of portfolio
transactions is allocated to brokers trading on exchanges with
fixed brokerage commission rates, account may be taken of
various services provided by the broker, including quotations
outside the United States for daily pricing of foreign
securities held in the Fund's portfolio.
4. Purchases and sales of portfolio securities within the United
States other than on a securities exchange are executed with
primary market makers acting as principal, except where, in
the judgment of the Investment Manager, better prices and
execution may be obtained on a commission basis or from other
sources.
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<PAGE>
5. Sales of the Fund's Shares (which shall be deemed to
include also shares of other companies registered under
the 1940 Act which have either the same investment
adviser or an investment adviser affiliated with the
Investment Manager) made by a broker are one factor
among others to be taken into account in deciding to
allocate portfolio transactions (including agency
transactions, principal transactions, purchases in
underwritings or tenders in response to tender offers)
for the account of the Fund to that broker; provided
that the broker shall furnish "best execution," as
defined in paragraph 1 above, and that such allocation
shall be within the scope of the Fund's other policies
as stated above; and provided further, that in every
allocation made to a broker in which the sale of Shares
is taken into account there shall be no increase in the
amount of the commissions or other compensation paid to
such broker beyond a reasonable commission or other
compensation determined, as set forth in paragraph 3
above, on the basis of best execution alone or best
execution plus research services, without taking
account of or placing any value upon such sale of
Shares.
Brokerage commissions for transactions in securities listed on the
Tokyo Stock Exchange and other Japanese securities exchanges are fixed and are
calculated based on the following table.
The following percentage points shall be applied to the purchase and
sales proceeds of each trade in stocks, warrants and subscription rights.* Other
fixed rates apply to transactions in bonds (convertible and non-convertible) and
bonds with warrants.
AMOUNT OF PURCHASE/ COST AS A PERCENTAGE OF
SALES PROCEEDS TRADE PROCEEDS
One million yen or less 1.150%
Over(Y) 1 million -(Y) 5 million 0.900% +(Y) 2,500
Over(Y) 5 million -(Y)10 million 0.700% +(Y)12,500
Over(Y)10 million -(Y)30 million 0.575% +(Y)25,000
Over(Y)30 million -(Y)50 million 0.375% +(Y)85,000
Over(Y)50 million -(Y)100 million 0.225% +(Y)160,000
Over(Y)100 million -(Y)300 million 0.200% +(Y)185,000
Over(Y)300 million -(Y)500 million 0.125% +(Y)410,000
Over(Y)500 million -(Y) 1 billion 0.100% +(Y)535,000
Over(Y) 1 billion Stocks: negotiable
(minimum (Y)1,535,000)
Others: 0.075% + (Y)785,000
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<PAGE>
* Minimum amount of brokerage commission required is 2,500 yen
for every trade.
Under the current regulations of the Tokyo Stock Exchange and the
Japanese Ministry of Finance, member and non-member firms of Japanese exchanges
are required to charge full commissions to all customers other than banks and
certain financial institutions, but members and licensed non-member firms may
confirm transactions to banks and financial institution affiliates located
outside Japan with institutional discounts on brokerage commissions. The Fund
shall avail itself of institutional discounts, if the transactions are executed
through such banks and financial institutions. Currently, the Fund is entitled
to receive such discount and the amount of brokerage commission is 80% of the
full commission. There can be no assurance that the Fund will continue to
realize the benefit of discounts from fixed commissions.
Insofar as known to management, no Trustee or officer of the Fund, nor
the Investment Manager or Principal Underwriter or any person affiliated with
either of them, has any material direct or indirect interest in any broker
employed by or on behalf of the Fund. Franklin Templeton Distributors, Inc., the
Fund's Principal Underwriter, is a registered broker-dealer, but it does not
intend to execute any purchase or sale transactions for the Fund's portfolio or
to participate in any commissions on any such transactions. During the period
July 28, 1994 (commencement of operations) through March 31, 1995, the Fund paid
brokerage commissions of $6,000. All portfolio transactions are allocated to
broker-dealers only when their prices and execution, in the judgment of the
Investment Manager, are equal to the best available within the scope of the
Fund's policies. There is no fixed method used in determining which
broker-dealers receive which order or how many orders.
PURCHASE, REDEMPTION AND PRICING OF SHARES
The Fund's Prospectus describes the manner in which the
Fund's Shares may be purchased and redeemed. See "How to Buy
Shares of the Fund" and "How to Sell Shares of the Fund."
Net asset value per Share is determined as of the scheduled closing of
the NYSE (generally 4:00 p.m., New York time), every Monday through Friday
(exclusive of national business holidays). The Fund's offices will be closed,
and net asset value will not be calculated, on those days on which the NYSE is
closed, which currently are: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
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<PAGE>
Trading in securities on European and Far Eastern securities exchanges
and over-the-counter markets is normally completed well before the close of
business in New York on each day on which the NYSE is open. Trading of European
or Far Eastern securities generally, or in a particular country or countries,
may not take place on every New York business day. Furthermore, trading takes
place in various foreign markets on days which are not business days in New York
and on which the Fund's net asset value is not calculated. The Fund calculates
net asset value per Share, and therefore effects sales, redemptions and
repurchases of its Shares, as of the close of the NYSE once on each day on which
that Exchange is open. Such calculation does not take place contemporaneously
with the determination of the prices of many of the portfolio securities used in
such calculation and if events occur which materially affect the value of those
foreign securities, they will be valued at fair market value as determined by
the management and approved in good faith by the Board of Trustees.
The Board of Trustees may establish procedures under which the Fund may
suspend the determination of net asset value for the whole or any part of any
period during which (1) the NYSE is closed other than for customary weekend and
holiday closings, (2) trading on the NYSE is restricted, (3) an emergency exists
as a result of which disposal of securities owned by the Fund is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (4) for such other period as the SEC may by
order permit for the protection of the holders of the Fund's Shares.
OWNERSHIP AND AUTHORITY DISPUTES. In the event of disputes involving
multiple claims of ownership or authority to control a Shareholder's account,
the Fund has the right (but has no obligation) to: (1) freeze the account and
require the written agreement of all persons deemed by the Fund to have a
potential property interest in the account, prior to executing instructions
regarding the account; or (2) interplead disputed funds or accounts with a court
of competent jurisdiction. Moreover, the Fund may surrender ownership of all or
a portion of an account to the IRS in response to a Notice of Levy.
In addition to the special purchase plans described in the Prospectus,
the following special purchase plans also are available.
TAX-DEFERRED RETIREMENT PLANS. The Fund offers its
Shareholders the opportunity to participate in the following
types of retirement plans:
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o For individuals whether or not covered by other
qualified plans;
o For simplified employee pensions;
o For employees of tax-exempt organizations; and
o For corporations, self-employed individuals and
partnerships.
Capital gains and income received by the foregoing plans generally are
exempt from taxation until distribution from the plans. Investors considering
participation in any such plan should review specific tax laws relating thereto
and should consult their attorneys or tax advisers with respect to the
establishment and maintenance of any such plan. Additional information,
including the fees and charges with respect to all of these plans, is available
upon request to the Principal Underwriter. No distribution under a retirement
plan will be made until Franklin Templeton Funds Trust Company ("FTTC") receives
the participant's election on IRS Form W-4P (available on request from FTTC),
and such other documentation as it deems necessary, as to whether or not U.S.
income tax is to be withheld from such distribution.
INDIVIDUAL RETIREMENT ACCOUNT (IRA). All individuals (whether or not
covered by qualified private or governmental retirement plans) may purchase
Shares of the Fund pursuant to an IRA. However, contributions to an IRA by an
individual who is covered by a qualified private or governmental plan may not be
tax-deductible depending on the individual's income. Custodial services for IRAs
are available through FTTC. Disclosure statements summarizing certain aspects of
IRAs are furnished to all persons investing in such accounts, in accordance with
IRS regulations.
SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRA). For employers who wish to
establish a simplified form of employee retirement program investing in Shares
of the Fund, there are available Simplified Employee Pensions invested in IRA
Plans. Details and materials relating to these plans will be furnished upon
request to the Principal Underwriter.
RETIREMENT PLAN FOR EMPLOYEES OF TAX-EXEMPT ORGANIZATIONS (403(B)).
Employees of public school systems and certain types of charitable organizations
may enter into a deferred compensation arrangement for the purchase of Shares of
the Fund without being taxed currently on the investment. Contributions which
are made by the employer through salary reduction are excludable from the gross
income of the employee. Such deferred
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<PAGE>
compensation plans, which are intended to qualify under Section 403(b) of the
Internal Revenue Code of 1986, as amended (the "Code"), are available through
the Principal Underwriter.
Custodial services are provided by FTTC.
QUALIFIED PLAN FOR CORPORATIONS, SELF-EMPLOYED INDIVIDUALS AND
PARTNERSHIPS. For employers who wish to purchase Shares of the Fund in
conjunction with employee retirement plans, there is a prototype master plan
which has been approved by the IRS. A "Section 401(k) plan" is also available.
FTTC furnishes custodial services for these plans. For further details,
including custodian fees and plan administration services, see the master plan
and related material which is available from the Principal Underwriter.
LETTER OF INTENT. Purchasers who intend to invest $50,000 or more in
Shares of the Fund or Class I Shares of any other fund in the Franklin Group of
Funds and the Templeton Family of Funds, except Templeton Capital Accumulator
Fund, Inc., Templeton Variable Annuity Fund, Templeton Variable Products Series
Fund, Franklin Valuemark Funds and Franklin Government Securities Trust (the
"Franklin Templeton Funds"), within 13 months (whether in one lump sum or in
installments, the first of which may not be less than 5% of the total intended
amount and each subsequent installment not less than $25 unless the investor is
a qualifying employee benefit plan (the "Benefit Plan"), including automatic
investment and payroll deduction plans), and to beneficially hold the total
amount of such Shares fully paid for and outstanding simultaneously for at least
one full business day before the expiration of that period, should execute a
Letter of Intent ("LOI") on the form provided in the Shareholder Application in
the Fund's Prospectus. Payment for not less than 5% of the total intended amount
must accompany the executed LOI unless the investor is a Benefit Plan. Except
for purchases of Shares by a Benefit Plan, those Shares purchased with the first
5% of the intended amount stated in the LOI will be held as "Escrowed Shares"
for as long as the LOI remains unfulfilled. Although the Escrowed Shares are
registered in the investor's name, his full ownership of them is conditional
upon fulfillment of the LOI. No Escrowed Shares can be redeemed by the investor
for any purpose until the LOI is fulfilled or terminated. If the LOI is
terminated for any reason other than fulfillment, the Transfer Agent will redeem
that portion of the Escrowed Shares required and apply the proceeds to pay any
adjustment that may be appropriate to the sales commission on all Shares
(including the Escrowed Shares) already purchased under the LOI and apply any
unused balance to the investor's account. The LOI is not a binding obligation to
purchase any amount of Shares, but its execution will result in the purchaser
paying a lower sales charge at the appropriate quantity purchase level. A
purchase
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<PAGE>
not originally made pursuant to an LOI may be included under a subsequent LOI
executed within 90 days of such purchase. In this case, an adjustment will be
made at the end of 13 months from the effective date of the LOI at the net asset
value per Share then in effect, unless the investor makes an earlier written
request to the Principal Underwriter upon fulfilling the purchase of Shares
under the LOI. In addition, the aggregate value of any Shares purchased prior to
the 90-day period referred to above may be applied to purchases under a current
LOI in fulfilling the total intended purchases under the LOI. However, no
adjustment of sales charges previously paid on purchases prior to the 90-day
period will be made.
If an LOI is executed on behalf of a benefit plan (such plans are
described under "How to Buy Shares of the Fund -- Net Asset Value Purchases" in
the Prospectus), the level and any reduction in sales charge for these employee
benefit plans will be based on actual plan participation and the projected
investments in the Franklin Templeton Funds under the LOI. Benefit Plans are not
subject to the requirement to reserve 5% of the total intended purchase, or to
any penalty as a result of the early termination of a plan, nor are Benefit
Plans entitled to receive retroactive adjustments in price for investments made
before executing LOIs.
SPECIAL NET ASSET VALUE PURCHASES. As discussed in the Prospectus under
"How to Buy Shares of the Fund -- Net Asset Value Purchases," certain categories
of investors may purchase Shares of the Fund at net asset value (without a
front-end or contingent deferred sales charge). Franklin Templeton Distributors,
Inc. ("FTD") or one of its affiliates may make payments, out of its own
resources, to securities dealers who initiate and are responsible for such
purchases, as indicated below. FTD may make these payments in the form of
contingent advance payments, which may require reimbursement from the securities
dealers with respect to certain redemptions made within 12 months of the
calendar month following purchase, as well as other conditions, all of which may
be imposed by an agreement between FTD, or its affiliates, and the securities
dealer.
The following amounts will be paid by FTD or one of its affiliates, out
of its own resources, to securities dealers who initiate and are responsible for
(i) purchases of most equity and fixed-income Franklin Templeton Funds made at
net asset value by certain designated retirement plans (excluding IRA and IRA
rollovers): 1.00% on sales of $1 million but less than $2 million, plus 0.80% on
sales of $2 million but less than $3 million, plus 0.50% on sales of $3 million
but less than $50 million, plus 0.25% on sales of $50 million but less than $100
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<PAGE>
million, plus 0.15% on sales of $100 million or more; and (ii) purchases of most
fixed-income Franklin Templeton Funds made at net asset value by non-designated
retirement plans: 0.75% on sales of $1 million but less than $2 million, plus
0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales of $3
million but less than $50 million, plus 0.25% on sales of $50 million but less
than $100 million, plus 0.15% on sales of $100 million or more. These payment
breakpoints are reset every 12 months for purposes of additional purchases. With
respect to purchases made at net asset value by certain trust companies and
trust departments of banks and certain retirement plans of organizations with
collective retirement plan assets of $10 million or more, FTD, or one of its
affiliates, out of its own resources, may pay up to 1% of the amount invested.
Under agreements with certain banks in Taiwan, Republic of China, the
Fund's Shares are available to such banks' discretionary trust funds at net
asset value. The banks may charge service fees to their customers who
participate in the discretionary trusts. Pursuant to agreements, a portion of
such service fees may be paid to FTD, or an affiliate of FTD to help defray
expenses of maintaining a service office in Taiwan, including expenses related
to local literature fulfillment and communication facilities.
TAX STATUS
The following discussion summarizes certain U.S. Federal tax
considerations incident to an investment in the Fund.
The Fund intends to qualify as a regulated investment company under the
Code. To so qualify, the Fund must, among other things: (a) derive at least 90%
of its gross income from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock or
securities and gains from the sale or other disposition of foreign currencies,
or other income (including gains from options, futures contracts and forward
contracts) derived with respect to the Fund's business of investing in stocks,
securities or currencies; (b) derive less than 30% of its gross income from the
sale or other disposition of the following assets held for less than three
months: (i) stock and securities, (ii) options, futures and forward contracts
(other than options, futures and forward contracts on foreign currencies), and
(iii) foreign currencies (and options, futures and forward contracts on foreign
currencies) which are not directly related to the Fund's principal business of
investing in stocks and securities (or options and futures with respect to stock
or securities); (c) diversify its holdings so that, at the end of each quarter,
(i) at least 50% of the value of the Fund's total assets is
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represented by cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and other securities, with such other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the Fund's total assets and to not more than 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of the Fund's total assets is invested in the securities (other than U.S.
Government securities or securities of other regulated investment companies) of
any one issuer or of any two or more issuers that the Fund controls and that are
determined to be engaged in the same business or similar or related businesses;
and (d) distribute at least 90% of its investment company taxable income (which
includes, among other items, dividends, interest and net short-term capital
gains in excess of net long-term capital losses) each taxable year.
The Treasury Department is authorized to issue regulations providing
that foreign currency gains that are not directly related to the Fund's
principal business of investing in stock or securities (or options and futures
with respect to stock or securities) will be excluded from the income which
qualifies for purposes of the 90% gross income requirement described above. To
date, however, no regulations have been issued.
The status of the Fund as a regulated investment company does not
involve government supervision of management or of its investment practices or
policies. As a regulated investment company, the Fund generally will be relieved
of liability for U.S. Federal income tax on that portion of its net investment
income and net realized capital gains which it distributes to its Shareholders.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement also are subject to a nondeductible 4% excise tax. To
prevent application of the excise tax, the Fund intends to make distributions in
accordance with the calendar year distribution requirement.
Dividends of net investment income and net short-term capital gains are
taxable to Shareholders as ordinary income. Distributions of net capital gains
(the excess of net long-term capital gains over net short-term capital losses)
designated by the Fund as capital gain dividends are taxable to Shareholders as
long-term capital gains, regardless of the length of time the Fund's Shares have
been held by a Shareholder. Generally dividends and distributions are taxable to
Shareholders, whether received in cash or reinvested in Shares of the Fund. Any
distributions that are not from the Fund's investment company taxable income or
net capital gain may be characterized as a return of capital to Shareholders or,
in some cases, as capital gain. Shareholders will be notified annually as to the
Federal
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<PAGE>
tax status of dividends and distributions they receive and any
tax withheld thereon.
Distributions by the Fund reduce the net asset value of the Fund's
Shares. Should a distribution reduce the net asset value below a Shareholder's
cost basis, the distribution nevertheless would be taxable to the Shareholder as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implication of
buying Shares just prior to a distribution by the Fund. The price of Shares
purchased at that time includes the amount of the forthcoming distribution, but
the distribution will generally be taxable to them.
Certain of the debt securities acquired by the Fund may be treated as
debt securities that were originally issued at a discount. Original issue
discount can generally be defined as the difference between the price at which a
security was issued and its stated redemption price at maturity. Although no
cash income is actually received by the Fund, original issue discount that
accrues on a debt security in a given year generally is treated for Federal
income tax purposes as interest and, therefore, such income would be subject to
the distribution requirements of the Code.
Some of the debt securities may be purchased by the Fund at a discount
which exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for Federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount generally will be treated as ordinary income to the extent it does not
exceed the accrued market discount on such debt security. Generally, market
discount accrues on a daily basis for each day the debt security is held by the
Fund at a constant rate over the time remaining to the debt security's maturity
or, at the election of the Fund, at a constant yield to maturity which takes
into account the semiannual compounding of interest.
The Fund may invest in stocks of foreign companies that are classified
under the Code as passive foreign investment companies ("PFICs"). In general, a
foreign company is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income. Under the PFIC rules, an "excess distribution" received
with respect to PFIC stock is treated as having been realized ratably over the
period during which the Fund held the PFIC stock. The Fund itself will be
subject to tax on the portion, if any, of the excess distribution that is
allocated to the Fund's
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<PAGE>
holding period in prior taxable years (and an interest factor will be added to
the tax, as if the tax had actually been payable in such prior taxable years)
even though the Fund distributes the corresponding income to Shareholders.
Excess distributions include any gain from the sale of PFIC stock as well as
certain distributions from a PFIC. All excess distributions are taxable as
ordinary income.
The Fund may be able to elect alternative tax treatment with respect
to PFIC stock. Under an election that currently may be available, the Fund
generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether any distributions
are received from the PFIC. If this election is made, the special rules,
discussed above, relating to the taxation of excess distributions, would not
apply. In addition, another election may be available that would involve marking
to market the Fund's PFIC shares at the end of each taxable year (and on certain
other dates prescribed in the Code), with the result that unrealized gains are
treated as though they were realized. If this election were made, tax at the
Fund level under the PFIC rules would generally be eliminated, but the Fund
could, in limited circumstances, incur nondeductible interest charges. The
Fund's intention to qualify annually as a regulated investment company may limit
its elections with respect to PFIC shares.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC stock, as well as subject the Fund
itself to tax on certain income from PFIC stock, the amount that must be
distributed to Shareholders, and which will be taxed to Shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC stock.
Income received by the Fund from sources within foreign countries may
be subject to withholding and other income or similar taxes imposed by such
countries. If more than 50% of the value of the Fund's total assets at the close
of its taxable year consists of securities of foreign corporations, the Fund
will be eligible and intends to elect to "pass through" to the Fund's
Shareholders the amount of foreign taxes paid by the Fund. Pursuant to this
election, a Shareholder will be required to include in gross income (in addition
to taxable dividends actually received) his pro rata share of the foreign taxes
paid by the Fund, and will be entitled either to deduct (as an itemized
deduction) his pro rata share of foreign income and similar taxes in computing
his taxable income or to use it as a foreign tax credit against his U.S. Federal
income tax liability,
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subject to limitations. No deduction for foreign taxes may be claimed by a
Shareholder who does not itemize deductions, but such a Shareholder may be
eligible to claim the foreign tax credit (see below). Each Shareholder will be
notified within 60 days after the close of the Fund's taxable year whether the
foreign taxes paid by the Fund will "pass through" for that year.
Generally, a credit for foreign taxes is subject to the limitation that
it may not exceed the Shareholder's U.S. tax attributable to his foreign source
taxable income. For this purpose, if the pass-through election is made, the
source of the Fund's income flows through to its Shareholders. With respect to
the Fund, gains from the sale of securities will be treated as derived from U.S.
sources and certain currency fluctuation gains, including fluctuation gains from
foreign-currency denominated debt securities, receivables and payables, will be
treated as ordinary income derived from U.S. sources. The limitation on the
foreign tax credit is applied separately to foreign source passive income (as
defined for purposes of the foreign tax credit), including the foreign source
passive income passed through by the Fund. Shareholders may be unable to claim a
credit for the full amount of their proportionate share of the foreign taxes
paid by the Fund. Foreign taxes may not be deducted in computing alternative
minimum taxable income and the foreign tax credit can be used to offset only 90%
of the alternative minimum tax (as computed under the Code for purposes of this
limitation) imposed on corporations and individuals. If the Fund is not eligible
to make the election to "pass through" to its Shareholders its foreign taxes,
the foreign income taxes it pays generally will reduce investment company
taxable income and the distributions by the Fund will be treated as United
States source income.
Certain options, futures and foreign currency forward contracts in
which the Fund may invest are "section 1256 contracts." Gains or losses on
section 1256 contracts generally are considered 60% long-term and 40% short-term
capital gains or losses ("60/40"); however, foreign currency gains or losses (as
discussed below) arising from certain section 1256 contracts may be treated as
ordinary income or loss. Also, section 1256 contracts held by the Fund at the
end of each taxable year (and on certain other dates as prescribed under the
Code) are "marked-to-market" with the result that unrealized gains or losses are
treated as though they were realized.
Generally, the hedging transactions undertaken by the Fund may result
in "straddles" for U.S. Federal income tax purposes. The straddle rules may
affect the character of gains (or losses) realized by the Fund. In addition,
losses realized by the Fund on positions that are part of the straddle may be
deferred under
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the straddle rules, rather than being taken into account in calculating the
taxable income for the taxable year in which the losses are realized. Because
only a few regulations implementing the straddle rules have been promulgated,
the tax consequences to the Fund of hedging transactions are not entirely clear.
The hedging transactions may increase the amount of short-term capital gain
realized by the Fund which is taxed as ordinary income when distributed to
Shareholders.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections, the
amount, character, and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to Shareholders and which will be taxed to Shareholders as ordinary
income or long-term capital gain may be increased or decreased as compared to a
fund that did not engage in such hedging transactions.
Requirements relating to the Fund's tax status as a regulated
investment company may limit the extent to which the Fund will be able to engage
in transactions in options, futures and foreign currency forward contracts.
Under the Code, gains or losses attributable to fluctuations in foreign
currency exchange rates which occur between the time the Fund accrues income or
other receivables or accrues expenses or other liabilities denominated in a
foreign currency and the time the Fund actually collects such receivables or
pays such liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain financial contracts and options, gains or losses
attributable to fluctuations in the value of foreign currency between the date
of acquisition of the security or contract and the date of disposition also are
treated as ordinary gain or loss. These gains and losses, referred to under the
Code as "section 988" gains and losses, may increase or decrease the amount of
the Fund's net investment income to be distributed to its Shareholders as
ordinary income. For example, fluctuations in exchange rates may increase the
amount of income that the Fund must distribute in order to qualify for treatment
as a regulated investment company and to prevent application of an excise tax on
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undistributed income. Alternatively, fluctuations in exchange rates may decrease
or eliminate income available for distribution. If section 988 losses exceed
other net investment income during a taxable year, the Fund would not be able to
make ordinary dividend distributions, or distributions made before the losses
were realized would be recharacterized as return of capital to Shareholders for
Federal income tax purposes, rather than as an ordinary dividend, reducing each
Shareholder's basis in his Fund Shares, or as a capital gain.
Upon the sale or exchange of his Shares, a Shareholder will realize a
taxable gain or loss depending upon his basis in the Shares. Such gain or loss
will be treated as capital gain or loss if the Shares are capital assets in the
Shareholder's hands, and generally will be long-term if the Shareholder's
holding period for the Shares is more than one year and generally otherwise will
be short-term. Any loss realized on a sale or exchange will be disallowed to the
extent that the Shares disposed of are replaced (including replacement through
the reinvesting of dividends and capital gain distributions in the Fund) within
a period of 61 days beginning 30 days before and ending 30 days after the
disposition of the Shares. In such a case, the basis of the Shares acquired will
be adjusted to reflect the disallowed loss. Any loss realized by a Shareholder
on the sale of the Fund's Shares held by the Shareholder for six months or less
will be treated for Federal income tax purposes as a long-term capital loss to
the extent of any distributions of long-term capital gains received by the
Shareholder with respect to such Shares.
In some cases, Shareholders will not be permitted to take sales charges
into account for purposes of determining the amount of gain or loss realized on
the disposition of their Shares. This prohibition generally applies where (1)
the Shareholder incurs a sales charge in acquiring the stock of a regulated
investment company, (2) the stock is disposed of before the 91st day after the
date on which it was acquired, and (3) the Shareholder subsequently acquires
shares of the same or another regulated investment company and the otherwise
applicable sales charge is reduced or eliminated under a "reinvestment right"
received upon the initial purchase of shares of stock. In that case, the gain or
loss recognized will be determined by excluding from the tax basis of the Shares
exchanged all or a portion of the sales charge incurred in acquiring those
Shares. This exclusion applies to the extent that the otherwise applicable sales
charge with respect to the newly acquired Shares is reduced as a result of
having incurred a sales charge initially. Sales charges affected by this rule
are treated as if they were incurred with respect to the stock acquired under
the
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reinvestment right. This provision may be applied to successive
acquisitions of stock.
The Fund generally will be required to withhold Federal income tax at a
rate of 31% ("backup withholding") from dividends paid, capital gain
distributions, and redemption proceeds to Shareholders if (1) the Shareholder
fails to furnish the Fund with the Shareholder's correct taxpayer identification
number or social security number and to make such certifications as the Fund may
require, (2) the IRS notifies the Shareholder or the Fund that the Shareholder
has failed to report properly certain interest and dividend income to the IRS
and to respond to notices to that effect, or (3) when required to do so, the
Shareholder fails to certify that he is not subject to backup withholding. Any
amounts withheld may be credited against the Shareholder's Federal income tax
liability.
Ordinary dividends and taxable capital gain distributions declared in
October, November, or December with a record date in such month and paid during
the following January will be treated as having been paid by the Fund and
received by Shareholders on December 31 of the calendar year in which declared,
rather than the calendar year in which the dividends are actually received.
Distributions also may be subject to state, local and foreign taxes.
U.S. tax rules applicable to foreign investors may differ significantly from
those outlined above. This discussion does not purport to deal with all of the
tax consequences applicable to Shareholders. Shareholders are advised to consult
their own tax advisers for details with respect to the particular tax
consequences to them of an investment in the Fund.
PRINCIPAL UNDERWRITER
Franklin Templeton Distributors, Inc. ("FTD" or the
"Principal Underwriter"), P.O. Box 33030, St. Petersburg, Florida
33733-8030, toll free telephone (800) 237-0738, is the Principal
Underwriter of the Fund's Shares. FTD is a wholly owned
subsidiary of Franklin.
The Fund, pursuant to Rule 12b-1 under the 1940 Act, has adopted a
Distribution Plan (the "Plan"). Under the Plan, the Fund may reimburse the
Principal Underwriter or others quarterly (subject to a limit of 0.35% per annum
of the Fund's average daily net assets) for costs and expenses incurred by FTD
or others in connection with any activity which is primarily intended to result
in the sale of the Fund's Shares. Payments to FTD or others could be for various
types of activities, including (1) payments to broker-dealers who provide
certain services of
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value to the Fund's Shareholders (sometimes referred to as a "trail fee"); (2)
reimbursement of expenses relating to selling and servicing efforts or of
organizing and conducting sales seminars; (3) payments to employees or agents of
the Principal Underwriter who engage in or support distribution of Shares; (4)
payments of the costs of preparing, printing and distributing prospectuses and
reports to prospective investors and of printing and advertising expenses; (5)
payment of dealer commissions and wholesaler compensation in connection with
sales of the Fund's Shares exceeding $1 million (on which the Fund imposes no
initial sales charge) and interest or carrying charges in connection therewith;
and (6) such other similar services as the Fund's Board of Trustees determines
to be reasonably calculated to result in the sale of Shares. Under the Plan, the
costs and expenses not reimbursed in any one given quarter (including costs and
expenses not reimbursed because they exceed 0.35% of the Fund's average daily
net assets) may be reimbursed in subsequent quarters or years.
During the fiscal year ended March 31, 1995, FTD incurred costs and
expenses (including advanced commissions) of $5,649 in connection with
distribution of the Fund's Shares. Unreimbursed expenses, which amounted to
$3,446 as of March 31, 1995, may be reimbursed by the Fund during the fiscal
year ending March 31, 1995 or in subsequent years. In the event that the Plan is
terminated, the Trust will not be liable to FTD for any unreimbursed expenses
that have been carried forward from previous months or years. During the fiscal
year ended March 31, 1995, FTD spent, with repect to the Fund, the following
amounts: compensation to dealers, $665, sales promotion, $-0-, sales materials,
$-0-, printing, $4,867, advertising, $-0-; and wholesaler commissions, $117.
The Distribution Agreement provides that the Principal Underwriter will
use its best efforts to maintain a broad and continuous distribution of the
Fund's Shares among bona fide investors and may sign selling agreements with
responsible dealers, as well as sell to individual investors. The Shares are
sold only at the Offering Price in effect at the time of sale, and the Fund
receives not less than the full net asset value of the Shares sold. The discount
between the Offering Price and the net asset value of the Fund's Shares may be
retained by the Principal Underwriter or it may reallow all or any part of such
discount to dealers. During the fiscal year ended March 31, 1995, FTD retained
such discount of $5,220 or approximately 15.32% of the gross commissions on
sales of Shares of the Fund.
The Distribution Agreement provides that the Fund shall pay the costs
and expenses incident to registering and qualifying its Shares for sale under
the Securities Act of 1933 and under the
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applicable blue sky laws of the jurisdictions in which the Principal Underwriter
desires to distribute such Shares, and for preparing, printing and distributing
prospectuses and reports to Shareholders. The Principal Underwriter pays the
cost of printing additional copies of the prospectus and reports to Shareholders
used for selling purposes. (The Fund pays the costs of preparation, set-up and
initial supply of its prospectus for existing Shareholders.)
The Distribution Agreement is subject to renewal from year to year in
accordance with the provisions of the 1940 Act and terminates automatically in
the event of its assignment. The Distribution Agreement may be terminated
without penalty by either party upon 60 days' written notice to the other,
provided termination by the Fund shall be approved by the Board of Trustees or a
majority (as defined in the 1940 Act) of the Shareholders. The Principal
Underwriter is relieved of liability for any act or omission in the course of
its performance of the Distribution Agreement, in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations.
FTD is the principal underwriter for the other Templeton Funds.
DESCRIPTION OF SHARES
The Trust Instrument provides that the holders of not less than
two-thirds of the outstanding Shares of the Fund may remove a person serving as
Trustee either by declaration in writing or at a meeting called for such
purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee if requested in writing
to do so by the holders of not less than 10% of the outstanding Shares of the
Fund.
The Shares have non-cumulative voting rights so that the holders of a
plurality of the Shares voting for the election of Trustees at a meeting at
which 50% of the outstanding Shares are present can elect all the Trustees and
in such event, the holders of the remaining Shares voting for the election of
Trustees will not be able to elect any person or persons to the Board of
Trustees.
PERFORMANCE INFORMATION
The Fund may, from time to time, include its total return in
advertisements or reports to Shareholders or prospective investors. Quotations
of average annual total return for the Fund will be expressed in terms of the
average annual compounded
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rate of return for periods in excess of one year or the total return for periods
less than one year of a hypothetical investment in the Fund over periods of one,
five, or ten years (up to the life of the Fund) calculated pursuant to the
following formula: P(1 + T)n = ERV (where P = a hypothetical initial payment of
$1,000, T = the average annual total return for periods of one year or more or
the total return for periods of less than one year, n = the number of years, and
ERV = the ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period). All total return figures reflect the deduction of the
maximum initial sales charge and deduction of a proportional share of Fund
expenses on an annual basis, and assume that all dividends and distributions are
reinvested when paid. The total return for the period from July 28, 1994
(commencement of operations) through March 31, 1995, on an annualized basis, was
-5.93%.
Performance information for the Fund may be compared, in reports and
promotional literature, to: (i) unmanaged indices so that investors 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 Analytical Services, Inc., a widely
used independent research firm which ranks mutual funds by overall performance,
investment objectives and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from an investment in the Fund. Unmanaged indices may
assume the reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.
Performance information for the Fund reflects only the performance of a
hypothetical investment in the Fund during the particular time period on which
the calculations are based. Performance information should be considered in
light of the Fund's investment objective and policies, characteristics and
quality of the portfolio and the market conditions during the given time period,
and should not be considered as a representation of what may be achieved in the
future.
From time to time, the Fund and the Investment Manager may also refer
to the following information:
(1) The Investment Manager's and its affiliates' market share of
international equities managed in mutual funds prepared or published by
Strategic Insight or a similar statistical organization.
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<PAGE>
(2) 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.
(3) 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.
(4) The geographic distribution of the Fund's portfolio.
(5) The GNP 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.
(6) 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 EAFE - Index).
(7) The major industries located in various jurisdictions as
published by the Morgan Stanley Index.
(8) Rankings by DALBAR Surveys, Inc. with respect to mutual fund
shareholder services.
(9) Allegorical stories illustrating the importance of
persistent long-term investing.
(10) The Fund's portfolio turnover rate and its ranking relative
to industry standards as published by Lipper Analytical
Services, Inc. or Morningstar, Inc.
(11) 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.
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<PAGE>
(12) Quotations from the Templeton organization's founder, Sir John
Templeton,* advocating the virtues of diversification and long-term
investing, including the following:
o "Never follow the crowd. Superior performance is
possible only if you invest differently from the
crowd."
o "Diversify by company, by industry and by country."
o "Always maintain a long-term perspective."
o "Invest for maximum total real return."
o "Invest - don't trade or speculate."
o "Remain flexible and open-minded about types of
investment."
o "Buy low."
o "When buying stocks, search for bargains among quality
stocks."
o "Buy value, not market trends or the economic outlook."
o "Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
o "Do your homework or hire wise experts to help you."
o "Aggressively monitor your investments."
o "Don't panic."
o "Learn from your mistakes."
o "Outperforming the market is a difficult task."
o "An investor who has all the answers doesn't even
understand all the questions."
o "There's no free lunch."
--------
** Sir John Templeton sold the Templeton organization to
Franklin Resources, Inc. in October, 1992 and resigned from the
Fund's Board on April 16, 1995. He is no longer involved with
the investment management process.
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<PAGE>
o "And now the last principle: Do not be fearful or
negative too often."
In addition, the Fund and the Investment Manager may also refer to the
number of Shareholders in the Fund or the aggregate number of shareholders of
the Franklin Templeton Funds or the dollar amount of fund and private account
assets under management in advertising materials.
FINANCIAL STATEMENTS
The financial statements contained in the Fund's Annual Report to
Shareholders dated March 31, 1995 are incorporated herein by reference.
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