Registration No. 33-47666
As filed with the Securities and Exchange Commission on December 31, 1996
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 4 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 7 X
(Check appropriate box or boxes)
FRANKLIN TEMPLETON JAPAN FUND
(Exact Name of Registrant as Specified in Charter)
700 CENTRAL AVENUE, P.O. BOX 33030, ST. PETERSBURG, FLORIDA 33733-8030
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (813) 823-8712
Ellen F. Stoutamire
700 Central Avenue
P.O. Box 33030
ST. PETERSBURG, FLORIDA 33733-8030
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b) of Rule 485
X on JANUARY 1, 1997 pursuant to paragraph (b) of Rule 485
60 days after filing pursuant to paragraph (a)(1) of Rule 485
on pursuant to paragraph (a)(1) of Rule 485
75 days after filing pursuant to paragraph (a)(2) of Rule 485
on pursuant to paragraph (a)(2) of Rule 485
this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
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The Registrant has registered an indefinite number of shares of beneficial
interest under the Securities Act of 1933 pursuant to Rule 24f-2 under the
Investment Company Act of 1940, and filed its Rule 24f-2 Notice for the fiscal
year ended March 31, 1996 on May 29, 1996.
PAGE
FRANKLIN TEMPLETON JAPAN FUND
CROSS-REFERENCE SHEET
FORM N-1A
PART A
<TABLE>
<CAPTION>
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
<S> <C> <C>
1 Cover page Cover Page
2 Synopsis Expense Summary
3 Condensed Financial "Financial Highlights";
Information "How Does the Fund
Measure Performance?"
4 General Description "How Is the Trust Organized?";
of Registrant "How Does the Fund Invest Its Assets?";
"What Are the Fund's Potential Risks?"
5 Management of the Fund "Who Manages the Fund?"
5A Management's Discussion Contained in Registrant's Annual
of Fund Performance Report to Shareholders
6 Capital Stock and Other "How is the Fund Organized?"; "Services
Securities to Help You Manage Your Account"; "What
Distributions Might I Received From the Fund?";
"How Taxation Affects You and the Fund?"
7 Purchase of Securities "How Do I Buy Shares?"; "May I Exchange
Being Offered Shares for Shares of Another Fund?";
"Transaction Procedures and Special
Requirements"; "Services to Help You Manage
Your Account"; "Who Manages the Fund?" "Useful
Terms and Definitions"
8 Redemption or Repurchase "May I Exchange Shares for Shares of Another
Fund?"; "How Do I Sell Shares?"; "Transaction
Procedures and Special Requirements"? "Services
to Help You Manage Your Account"
9 Pending Legal Procedures Not Applicable
</TABLE>
PAGE
FRANKLIN TEMPLETON JAPAN FUND
CROSS-REFERENCE SHEET
FORM N-1A
PART B
<TABLE>
<CAPTION>
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
<S> <C> <C>
10 Cover Page Cover Page
11 Table of Contents Table of Contents
12 General Information and Not Applicable
History
13 Investment Objectives and "How Does the Fund Invest Its Assets?";
Policies "Investment Restrictions"; "What Are the
Fund's Potential Risks?"
14 Management of the "Officers and Trustees"; "Investment
Registrant Advisory and Other Services"
15 Control Persons and "Officers and Trustees"; "Investment
Principal Holders of Advisory and Other Services"; "Miscellaneous
Securities Information?"
16 Investment Advisory and "Investment Advisory and Other Services";
Other Services "The Fund's Underwriter"
17 Brokerage Allocation and "How Does the Fund Buy Securities
Other Practices For Its Portfolio?"
18 Capital Stock and Other "Miscellaneous Information"; "See Prospectus
Securities "How Is The Trust Organized?"
19 Purchase, Redemption and "How Do I Buy, Sell and Exchange Shares?";
Pricing of Securities "How Are Fund Shares Valued?";
Being Offered "Financial Statements"
20 Tax Status "Additional Information on Distributions
and Taxes"
21 Underwriters "The Fund's Underwriter"
22 Calculation of Performance "How Does the Fund Measure Performance?"
Data
23 Financial Statements Financial Statements
</TABLE>
PAGE
PART A
PROSPECTUS
PAGE
PROSPECTUS
& APPLICATION
LOGO
FRANKLIN
TEMPLETON
JAPAN FUND
--------------------------------------------------
JANUARY 1, 1997
INVESTMENT STRATEGY
GLOBAL GROWTH
LOGO
- --------------------------------------------------------------------------------
This prospectus describes the Advisor Class shares of Franklin Templeton
Japan Fund (the "Fund"). It contains information you should know before
investing in the Fund. Please keep it for future reference.
The Fund may borrow money for investment purposes (i.e., "leverage" its
portfolio), which may involve greater risk and additional costs to the
Fund. In addition, the Fund may invest up to 15% of its assets in
illiquid securities, including up to 10% of its assets in restricted
securities, which may involve greater risk and increased Fund expenses.
There are further risks associated with the Fund's policy of investing
primarily in Japanese securities. See "What Are the Fund's Potential
Risks?"
The Fund's SAI for the Advisor Class, dated January 1, 1997, as may be
amended from time to time, includes more information about the Fund's
procedures and policies. It has been filed with the SEC and is
incorporated by reference into this prospectus. For a free copy or a
larger print version of this prospectus, call 1-800/DIAL BEN or write
the Fund at the address shown.
Advisor Class shares are only available for purchase by certain persons,
including, among others, certain financial institutions (such as banks,
trust companies, savings institutions and credit unions); government and
tax-exempt entities; certain pension, profit sharing and employee
benefit plans; certain qualified groups, including family trusts,
endowments, foundations and corporations; Franklin Templeton Fund
Allocator Series; and directors, trustees, officers and full time
employees (and their family members) of Franklin Templeton Group and the
Franklin Templeton Group of Funds. See "About Your Account."
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY OF THE U.S. GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
PAGE
FRANKLIN TEMPLETON
JAPAN FUND
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This prospectus is not an offering of the securities herein
described in any state in which the offering is not authorized.
No sales representative, dealer, or other person is
authorized to give any information or make any representations
other than those contained in this prospectus. Further
information may be obtained from Distributors.
----------------------------------------------------------
When reading this prospectus, you will see
certain terms beginning with capital letters.
This means the term is explained
in our glossary section.
PAGE
<TABLE>
<S> <C> <C>
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary .................... 2
How Does the Fund Invest Its
Assets? ............................ 3
What Are the Fund's Potential
Risks? ............................. 10
Who Manages the
Fund? .............................. 15
How Does the Fund Measure
Performance? ....................... 16
How Is the Fund
Organized? ......................... 17
How Taxation Affects You and the
Fund ............................... 18
ABOUT YOUR ACCOUNT
How Do I Buy
Shares? ............................ 19
May I Exchange Shares for Shares of
Another Fund? ...................... 21
FRANKLIN How Do I Sell
TEMPLETON Shares? ............................ 24
JAPAN FUND What Distributions Might I Receive
- ------------------------ From the Fund? ..................... 25
January 1, 1997 Transaction Procedures and Special
Requirements ....................... 26
Services to Help You Manage Your
700 Central Avenue Account ............................ 31
St. Petersburg, Florida GLOSSARY
33701 Useful Terms and
1-800/DIAL BEN Definitions ........................ 34
</TABLE>
PAGE
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Advisor Class shares of the Fund. Because Advisor Class shares were not offered
to the public before January 1, 1997, the table is based on the historical
expenses of the Class I shares of the Fund, after fee reductions and expense
limitations, for the fiscal year ended March 31, 1996.* Your actual expenses
may vary.
<TABLE>
<S> <C> <C>
A. Shareholder Transaction Expenses**
Maximum Sales Charge Imposed on Purchases NONE
Exchange Fee (per transaction) $5.00***
B. Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees (after fee reduction) 0.00%****
Rule 12b-1 Fees NONE
Other Expenses (audit, legal, business) management,
transfer
agent and custodian) (after expense reimbursement) 1.65%
------
Total Fund Operating Expenses (after expense
reimbursement) 1.65%****
------
C. Example
</TABLE>
Assume the annual return for Advisor Class shares is 5% and operating
expenses are as described above. For each $1,000 investment, you would pay
the following projected expenses if you sold your shares after the number of
years shown.
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
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<S> <C> <C> <C>
$ $ $ $
</TABLE>
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The Fund pays its operating expenses. The effects of these expenses are
reflected in its Net Asset Value or dividends and are not directly charged
to your account.
*Unlike Advisor Class shares, the Class I shares of the Fund have a front-end
sales charge and Rule 12b-1 fees.
**If your transaction is processed through your Securities Dealer you may be
charged a fee by your Securities Dealer for this service.
***$5.00 fee is only for Market Timers. We process all other exchanges without
a fee.
****The Investment Manager and FT Services have agreed in advance to reduce
their respective fees in order to limit total expenses to an annual rate of
1.65% of the Fund's average daily net assets through August 1, 1997. If this
fee reduction is insufficient to so limit the Fund's expenses, FT Services has
agreed to make certain payments to reduce Fund expenses. Without these
reductions, the Fund's "Other Expenses" for Advisor Class would have been 3.80%
and the "Total Fund Operating Expenses" for Advisor Class would have been
4.55%. After August 1, 1997, this agreement may end at any time upon notice to
the Board.
2 o Franklin Templeton Japan Fund
PAGE
HOW DOES THE FUND INVEST ITS ASSETS?
The Fund's Investment Objective
The investment objective of the Fund is long-term capital growth, which it seeks
to achieve through investing its assets primarily in securities of companies
domiciled in Japan and traded in the Japanese securities markets. A company is
considered domiciled in Japan if it is organized under the laws of Japan, at
least half of its assets are located in Japan and it normally derives at least
half of its income from operations or sales in Japan, or if its principal
activities are in Japan. The objective of the Fund is a fundamental policy
which cannot be changed without shareholder approval. The investment policies
and practices described herein are not fundamental policies of the Fund and may
be changed at the discretion of the Board without shareholder approval. Of
course, there can be no assurance that the Fund's investment objective will be
achieved.
The Fund's investments will consist of common stocks, common stock equivalents
(convertible debt securities and warrants), preferred stocks and debt
securities issued by domestic and foreign corporations, domestic and foreign
governments and supranational organizations such as the World Bank, the
European Investment Bank and the Asian Development Bank, as well as the
investments discussed below under "Types of Securities in Which the Fund May
Invest."
Under normal circumstances at least 80% of the Fund's assets will be invested in
equity securities of Japanese issuers. "Equity securities," as used in this
Prospectus, refers to common stock, preferred stock, warrants or rights to
subscribe to or purchase such securities, and sponsored or unsponsored American
Depositary Receipts, European Depositary Receipts and Global Depositary
Receipts. See "Depositary Receipts." Securities considered for purchase by the
Fund may be listed or unlisted, and may be issued by companies in various
industries, with various levels of market capitalization.
Consistent with the Fund's objective of seeking long-term capital growth, the
Fund may purchase debt, as well as equity securities, issued by private and
governmental issuers. Although the Fund would not anticipate that its debt
investments would achieve the same levels of growth as its equity investments,
nevertheless, such investments fluctuate in value based upon changes in such
factors as the general level of interest rates and credit quality, and may be
expected to offer attractive growth opportunities. Additionally, convertible
bonds offer the potential for capital appreciation through the conversion
feature, which enables the holder of the bonds to benefit from increases in the
market price of the securities into which they are convertible.
Franklin Templeton Japan Fund o 3
PAGE
The Fund may invest in debt securities (defined as bonds, notes, debentures,
commercial paper, time deposits, and bankers' acceptances, and which may
include structured investments) which are rated in any rating category by
Moody's or S&P or which are unrated by any rating agency. Such securities may
include high risk, lower quality debt securities, commonly referred to as "junk
bonds." See "What Are the Fund's Potential Risks?" As an operating policy,
which may be changed by the Board, the Fund will not invest more than 5% of its
total assets in debt securities rated lower than Baa by Moody's or BBB by S&P.
The Fund may invest in yen-denominated bonds sold in Japan by non-Japanese
issuers ("Samurai Bonds") and may invest in dollar-denominated bonds sold in
the U.S. 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. Samurai Bonds and Yankee Bonds are subject
to the risks associated with other debt instruments and with securities of
foreign issuers, as described below and in the SAI. Debt securities are subject
to certain market and credit risks. See "How Does the Fund Invest Its
Assets - Debt Securities." in the SAI for descriptions of debt securities rated
BBB by S&P and Baa by Moody's.
Government securities in which the Fund may invest consist of debt securities
issued by the U.S. Treasury which are direct obligations of the U.S. government,
including bills (maturity of one year or less), notes (maturities of one to 10
years) and bonds (generally maturities of greater than 10 years), and debt
securities issued or guaranteed by U.S. government-sponsored instrumentalities
and federal agencies, including the Federal National Mortgage Association
("FNMA"), Federal Home Loan Banks and the Federal Housing Administration.
Mortgage-backed U.S. government securities, such as FNMA certificates, are
highly sensitive to prepayment and interest rates. Prepayments on a pool of
mortgage loans are influenced by a variety of economic, geographic, social and
other factors. Generally, however, prepayments on fixed rate mortgage loans will
increase during a period of falling interest rates and decrease during a period
of rising interest rates. Accordingly, to the extent of the Fund's investment in
mortgage-backed securities, amounts available for reinvestment by the Fund are
likely to be greater during a period of declining interest rates and, as a
result, are likely to be reinvested at lower interest rates than during a
period of rising interest rates. The Fund may also invest in obligations issued
or guaranteed by a foreign government or any of its political subdivisions,
authorities, agencies, or instrumentalities which are rated in any category, as
described above, or which are unrated by any rating agency.
4 o Franklin Templeton Japan Fund
PAGE
The Fund may also lend its portfolio securities and borrow money for investment
purposes (i.e., "leverage" its portfolio). In addition, the Fund may enter into
transactions in options on securities, securities indices and foreign
currencies, forward foreign currency contracts, and futures contracts and
related options. These are generally referred to as derivative instruments, and
involve special risk factors, which are described below.
When deemed appropriate by the Investment Manager, the Fund may invest cash
balances in repurchase agreements and other money market investments to
maintain liquidity in an amount to meet expenses or for day-to-day operating
purposes. These investment techniques are described below and under the heading
"How Does the Fund Invest Its Assets?" in the SAI. When the Investment Manager
believes that unusual market conditions warrant, the Fund may adopt a temporary
defensive position and may invest without limit in money market securities
denominated in U.S. dollars or in the currency of any foreign country. See
"Temporary Investments."
The Fund invests for long-term growth of capital and does not emphasize short-
term trading profits. Accordingly, the Fund expects to have an annual portfolio
turnover rate not exceeding 50%. There can be no assurance that the Fund's
investment objective will be achieved.
Types of Securities in which the Fund May Invest
The Fund is authorized to use the various securities and investment techniques
described below. Although these strategies are regularly used by some investment
companies and other institutional investors in various markets, some of these
strategies cannot at the present time be used to a significant extent by the
Fund in some of the markets in which the Fund will invest and may not be
available for extensive use in the future.
Temporary Investments. For temporary defensive purposes, the Fund may invest up
to 100% of its total assets in the following money market securities,
denominated in U.S. dollars or in the currency of any foreign country, issued by
entities organized in the U.S. or any foreign country: debt obligations issued
or guaranteed by the U.S. government or the governments of foreign countries,
their agencies or instrumentalities; short-term time deposits with banks;
repurchase agreements with banks and broker-dealers with respect to U.S.
government obligations; and finance company and corporate commercial paper, and
other short-term corporate obligations, in each case rated Prime-1 by Moody's
or A or better by S&P or, if unrated, of comparable quality as determined by
the Investment Manager.
Franklin Templeton Japan Fund o 5
PAGE
Borrowing. The Fund may borrow up to one-third of the value of its total assets
from banks to increase its holdings of portfolio securities. Under the 1940 Act,
the Fund is required to maintain continuous asset coverage of 300% with respect
to such borrowings and to sell (within three days) sufficient portfolio holdings
to restore such coverage if it should decline to less than 300% due to market
fluctuations or otherwise, even if such liquidations of the Fund's holdings may
be disadvantageous from an investment standpoint. Leveraging by means of
borrowing may exaggerate the effect of any increase or decrease in the value of
portfolio securities on the Fund's net asset value, and money borrowed will be
subject to interest and other costs (which may include commitment fees and/or
the cost of maintaining minimum average balances) which may or may not exceed
the income received from the securities purchased with borrowed funds.
Loans of Portfolio Securities. The Fund may lend to broker-dealers portfolio
securities with an aggregate market value of up to one-third of its total
assets to generate income for the purpose of offsetting operating expenses.
Such loans must be secured by collateral (consisting of any combination of
cash, U.S. government securities or irrevocable letters of credit) in an amount
at least equal (on a daily marked-to-market basis) to the current market value
of the securities loaned. The Fund may terminate the loans at any time and
obtain the return of the securities loaned within five business days. The Fund
will continue to receive any interest or dividends paid on the loaned
securities and will continue to retain any voting rights with respect to the
securities. In the event that the borrower defaults on its obligation to return
borrowed securities, because of insolvency or otherwise, the Fund could
experience delays and costs in gaining access to the collateral and could
suffer a loss to the extent that the value of the collateral falls below the
market value of the borrowed securities.
Options on Securities or Indices. To increase its return or to hedge all or a
portion of its portfolio investments, the Fund may write (i.e., sell) covered
put and call options and purchase put and call options on securities or
securities indices that are traded on U.S. and foreign exchanges or in the
over-the-counter markets. An option on a security is a contract that permits
the purchaser of the option, in return for the premium paid, the right to buy a
specified security (in the case of a call option) or to sell a specified
security (in the case of a put option) from or to the writer of the option at a
designated price during the term of the option. An option on a securities index
permits the purchaser of the option, in return for the premium paid, the right
to receive from the seller cash equal to the difference between the closing
price of the index and the exercise price of the option. The Fund may write a
call or put option only if the option is "covered." This means that so long as
the Fund is obligated as the writer of a
6 o Franklin Templeton Japan Fund
PAGE
call option, it will own the underlying securities subject to the call, or hold
a call at the same or lower exercise price, for the same exercise period, and
on the same securities as the written call. A put is covered if the Fund
maintains liquid assets with a value equal to the exercise price in a
segregated account, or holds a put on the same underlying securities at an
equal or greater exercise price. The value of the underlying securities on
which options may be written at any one time will not exceed 15% of the total
assets of the Fund. The Fund will not purchase put or call options if the
aggregate premium paid for such options would exceed 5% of its total assets at
the time of purchase.
Forward Foreign Currency Contracts and Options on Foreign Currencies. 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 will enter into forward contracts only under two circumstances. First,
when the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security in relation to another currency by entering into a forward
contract to buy the amount of foreign currency needed to settle the transaction.
Second, when the Investment Manager believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, it may enter into a forward contract to sell or buy the amount of the
former foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. The second investment
practice is generally referred to as "cross-hedging." The Fund has no specific
limitation on the percentage of assets it may commit to forward contracts,
subject to its stated investment objective and policies, except that the Fund
will not enter into a forward contract if the amount of assets set aside to
cover forward contracts would impede portfolio management or the Fund's ability
to meet redemption requests. Although forward contracts will be used primarily
to protect the Fund from adverse currency movements, they also involve the risk
that anticipated currency movements will not be accurately predicted. The Fund
may purchase put and call options and write covered put and call options on
foreign currencies for the purpose of protecting against declines in the U.S.
dollar value of foreign currency-denominated portfolio securities and against
increases in the U.S. dollar cost of such securities to be acquired. As in the
case of other kinds of options, however, the writing of an
Franklin Templeton Japan Fund o 7
PAGE
option on a foreign currency constitutes 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 a foreign currency may constitute an effective
hedge against fluctuations in exchange rates although, in the event of rate
movements adverse to the Fund's position, the Fund may forfeit the entire
amount of the premium plus related transaction costs. Options on foreign
currencies to be written or purchased by the Fund are traded on U.S. and
foreign exchanges or over-the-counter.
Futures Contracts. For hedging purposes only, the Fund may buy and sell
financial futures contracts, stock and bond index futures contracts, foreign
currency futures contracts and options on any of the foregoing. A financial
futures contract is an agreement between two parties to buy or sell a specified
debt security at a set price on a future date. An index futures contract is an
agreement to take or make delivery of an amount of cash based on the difference
between the value of the index at the beginning and at the end of the contract
period. A futures contract on a foreign currency is an agreement to buy or sell
a specified amount of a currency for a set price on a future date.
When the Fund enters into a futures contract, it must make an initial deposit,
known as "initial margin," as a partial guarantee of its performance under the
contract. As the value of the security, index or currency fluctuates, either
party to the contract is required to make additional margin payments, known as
"variation margin," to cover any additional obligation it may have under the
contract. In addition, when the Fund enters into a futures contract, it will
segregate assets or "cover" its position in accordance with the 1940 Act. See
"How Does the Fund Invest Its Assets - Futures Contracts." in the SAI. With
respect to positions in futures and related options that do not constitute "bona
fide hedging" positions, the Fund will not enter into a futures contract or
related option contract if, immediately thereafter, the aggregate initial margin
deposits relating to such positions plus premiums paid by it for open futures
option positions, less the amount by which any such options are "in-the-money,"
would exceed 5% of the Fund's total assets.
Repurchase Agreements. For temporary defensive purposes and for cash management
purposes, the Fund may, without limit, enter into repurchase agreements with
U.S. banks and broker-dealers. Under a repurchase agreement, the Fund acquires
a security from a U.S. bank or a registered broker-dealer and simultaneously
agrees to resell the security back to the bank or broker-dealer at a specified
time and price. The repurchase price is in excess of the purchase price by an
amount which reflects an agreed-upon rate of return, which is not
8 o Franklin Templeton Japan Fund
PAGE
tied to the coupon rate on the underlying security. Under the 1940 Act,
repurchase agreements are considered to be loans collateralized by the
underlying security and therefore will be fully collateralized. However, if the
seller should default on its obligation to repurchase the underlying security,
the Fund may experience delay or difficulty in exercising its rights to realize
upon the security and might incur a loss if the value of the security declines,
as well as incur disposition costs in liquidating the security.
Depositary Receipts. The Fund may purchase sponsored or unsponsored American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global
Depositary Receipts ("GDRs") (collectively, "depositary receipts"). ADRs are
depositary receipts typically issued by a U.S. bank or trust company which
evidence ownership of underlying securities issued by a foreign corporation.
EDRs and GDRs are typically issued by foreign banks or trust companies,
although they also may be issued by U.S. banks or trust companies, and evidence
ownership of underlying securities issued by either a foreign or a U.S.
corporation. Generally, depositary receipts in registered form are designed for
use in the U.S. securities market and depositary receipts in bearer form are
designed for use in securities markets outside the U.S. Depositary receipts may
not necessarily be denominated in the same currency as the underlying securities
into which they may be converted. Depositary receipts may be issued pursuant to
sponsored or unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities traded in the form of depositary receipts.
In unsponsored programs, the issuer may not be directly involved in the
creation of the program. Although regulatory requirements with respect to
sponsored and unsponsored programs are generally similar, in some cases it may
be easier to obtain financial information from an issuer that has participated
in the creation of a sponsored program. Accordingly, there may be less
information available regarding issuers of securities underlying unsponsored
programs and there may not be a correlation between such information and the
market value of the depositary receipts. Depositary receipts also involve the
risks of other investments in foreign securities, as discussed below. For
purposes of the Fund's investment policies, the Fund's investments in
depositary receipts will be deemed to be investments in the underlying
securities.
Illiquid and Restricted Securities. The Fund may invest up to 15% of its total
assets in illiquid securities, for which there is a limited trading market and
for which a low trading volume of a particular security may result in abrupt and
erratic price movements. The Fund may be unable to dispose of its holdings in
illiquid securities at then-current market prices and may have to dispose of
such securities over extended periods of time. The Fund may also invest in
securities
Franklin Templeton Japan Fund o 9
PAGE
that are sold (i) in private placement transactions between their issuers and
their purchasers and that are neither listed on an exchange nor traded over-the-
counter, or (ii) in transactions between qualified institutional buyers
pursuant to Rule 144A under the 1933 Act. Such restricted securities are
subject to contractual or legal restrictions on subsequent transfer. As a
result of the absence of a public trading market, such restricted securities
may in turn be less liquid and more difficult to value than publicly traded
securities. Although these securities may be resold in privately negotiated
transactions, the prices realized from the sales could, due to illiquidity, be
less than those originally paid by the Fund or less than their fair value. In
addition, issuers whose securities are not publicly traded may not be subject
to the disclosure and other investor protection requirements that may be
applicable if their securities were publicly traded. If any privately placed or
Rule 144A securities held by the Fund are required to be registered under the
securities laws of one or more jurisdictions before being resold, the Fund may
be required to bear the expenses of registration. The Fund will limit its
investment in restricted securities other than Rule 144A securities to 10% of
its total assets, and will limit its investment in all restricted securities,
including Rule 144A securities, to 15% of its total assets. Restricted
securities, other than Rule 144A securities determined by the Board to be
liquid, are considered to be illiquid and are subject to the Fund's limitation
on investment in illiquid securities.
WHAT ARE THE FUND'S POTENTIAL RISKS?
All investments involve risk and there can be no guarantee against loss
resulting from an investment in the Fund, nor can there be any assurance that
the Fund's investment objective will be attained. As with any investment in
securities, the value of, and income from, an investment in the Fund can
decrease as well as increase, depending on a variety of factors which may
affect the values and income generated by the Fund's portfolio securities,
including general economic conditions and market factors. In addition to the
factors which affect the value of individual securities, you may anticipate
that the value of Fund shares will fluctuate with movements in the broader
equity and bond markets. A decline in the stock market of any country in which
the Fund is invested may also be reflected in declines in the price of the
shares of the Fund. History reflects both decreases and increases in worldwide
stock markets and currency valuations, and these may reoccur unpredictably in
the future.
Investment in Japanese Issuers. Because the Fund will, under normal conditions,
invest at least 80% of its assets in equity securities of Japanese issuers, the
Fund's performance is expected to be closely tied to economic and political
conditions in Japan, and its performance is expected to be more volatile than
more
10 o Franklin Templeton Japan Fund
PAGE
geographically diversified funds. Changes in regulatory, tax or economic policy
in Japan could significantly affect the Japanese securities markets and
therefore the Fund's performance.
Japan's economic growth has declined significantly since 1990. The general
government position has deteriorated as a result of weakening economic growth
and stimulative measures taken to support economic activity and to restore
financial stability. Although the decline in interest rates and fiscal
stimulation packages have helped to contain recessionary forces, uncertainties
remain. Japan is also heavily dependent upon international trade, so its
economy is especially sensitive to trade barriers and disputes. In addition,
Japan's banking industry is undergoing problems related to bad loans and
declining values in real estate.
The common stocks of many Japanese companies trade at high price-earnings
ratios. Differences in accounting methods make it difficult to compare the
earnings of Japanese companies with those of companies in other countries,
especially the U.S. In general, however, reported net income in Japan is
understated relative to U.S. accounting standards and this is one reason why
price-earnings ratios of the stocks of Japanese companies have tended
historically to be higher than those for U.S. stocks. In addition, Japanese
companies have tended historically to have higher growth rates than U.S.
companies and Japanese interest rates have generally been lower than in the
U.S., both of which factors tend to result in lower discount rates and higher
price-earnings ratios in Japan than in the U.S.
Foreign Investments. Up to 20% of the Fund's total assets may be invested in
securities of non-Japanese issuers, including issuers in developing countries.
You should consider carefully the substantial risks involved in investing in
securities issued by companies and governments of foreign nations, including
Japan, which are in addition to the usual risks inherent in domestic
investments. These risks are often heightened for investments in developing
markets, including certain Eastern European countries. See "What Are the Fund's
Potential Risks?" in the SAI. There is the possibility of expropriation,
nationalization or confiscatory taxation, taxation of income earned in foreign
nations (including, for example, withholding taxes on interest and dividends)
or other taxes imposed with respect to investments in foreign nations, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), foreign investment controls on daily stock
market movements, default in foreign government securities, political or social
instability or diplomatic developments which could affect investment in
securities of issuers in foreign nations. Some countries may withhold portions
of interest and dividends at the source. In addition, in many countries there
is less publicly available information about
Franklin Templeton Japan Fund o 11
PAGE
issuers than is available in reports about companies in the U.S. 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 U.S. companies. Further, the Fund may
encounter difficulties or be unable to vote proxies, exercise shareholder
rights, pursue legal remedies, and obtain judgments in foreign courts.
As a non-fundamental policy, the Fund will limit its investment in Russian
securities to 5% of its total assets. Russian securities involve additional
significant risks, including political and social uncertainty (for example,
regional conflicts and risk of war), currency exchange rate volatility,
pervasiveness of corruption and crime in the Russian economic system, delays in
settling portfolio transactions and risk of loss arising out of Russia's system
of share registration and custody. For more information on these risks and
other risks associated with Russian securities, please see "What Are the Fund's
Potential Risks?" in the SAI.
Brokerage commissions, custodial services and other costs relating to investment
in foreign countries are generally more expensive than in the U.S. Brokerage
commissions in Japan are fixed. See "How Does the Fund Buy Securities For Its
Portfolio?" in the SAI. Foreign securities markets also have different clearance
and settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. The inability of the Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser.
In many foreign countries there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the U.S. There is an increased risk, therefore, of uninsured loss due to
lost, stolen, or counterfeit stock certificates. In addition, the foreign
securities markets of many of the countries in which the Fund may invest may
also be smaller, less liquid, and subject to greater price volatility than
those in the U.S. As an open-end investment company, the Fund is limited in the
extent to which it may invest in illiquid securities. See "What Are the Fund's
Potential Risks?" in the SAI. The Tokyo Stock Exchange, however, 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.
12 o Franklin Templeton Japan Fund
PAGE
Prior governmental approval of foreign investments may be required under
certain circumstances in some developing countries, and the extent of foreign
investment in domestic companies may be subject to limitation in other
developing countries. Foreign ownership limitations also may be imposed by the
charters of individual companies in developing countries to prevent, among
other concerns, violation of foreign investment limitations.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. The Fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
Emerging Growth Companies. The Fund has established no criteria regarding the
minimum market capitalization of the companies in which it may invest. While
they may offer greater opportunities for capital appreciation than larger, more
established companies, investments in smaller, emerging growth companies may
involve greater risks and thus may be considered speculative. For example, small
companies may have limited product lines, markets or financial and management
resources. In addition, many small emerging growth company stocks trade less
frequently and in smaller volume, and may be subject to more abrupt or erratic
price movements, than stocks of large companies. The securities of small
emerging growth companies may also be more sensitive to market changes than the
securities of large companies.
High-Risk Debt Securities. The Fund is authorized to invest in debt securities
rated in any category by S&P or Moody's and securities which are unrated by any
rating agency. See "How Does the Fund Invest Its Assets? - Debt Securities." in
the SAI. As an operating policy, which may be changed by the Board without
shareholder approval, the Fund will not invest more than 5% of its total assets
in debt securities rated lower than BBB by S&P or Baa by Moody's. The Board may
consider a change in this operating policy if, in its judgment, economic
conditions change such that a higher level of investment in high-risk, lower
quality debt securities would be consistent with the interests of the Fund and
its shareholders. See "How Does the Fund Invest Its Assets? - Debt Securities."
in
Franklin Templeton Japan Fund o 13
PAGE
the SAI for descriptions of debt securities rated BBB by S&P and Baa by
Moody's. High-risk, lower quality debt securities, commonly referred to as "junk
bonds," are regarded, on balance, as predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation and may be in default. Unrated debt securities are not
necessarily of lower quality than rated securities, but they may not be
attractive to as many buyers. Regardless of rating levels, all debt securities
considered for purchase (whether rated or unrated) will be carefully analyzed
by the Investment Manager to insure, to the extent possible, that the planned
investment is sound. The Fund may, from time to time, invest up to 5% of its
total assets in defaulted debt securities if, in the opinion of the Investment
Manager, the issuer may resume interest payments in the near future.
Leverage. Leveraging by means of borrowing may exaggerate the effect of any
increase or decrease in the value of portfolio securities on the Fund's Net
Asset Value, and money borrowed will be subject to interest and other costs
(which may include commitment fees and/or the cost of maintaining minimum
average balances) which may or may not exceed the income received from the
securities purchased with borrowed funds.
Futures Contracts and Related Options. Successful use of futures contracts and
related options is subject to special risk considerations. A liquid secondary
market for any futures or options contract may not be available when a futures
or options position is sought to be closed. In addition, there may be an
imperfect correlation between movements in the securities or foreign currency
on which the futures or options contract is based and movements in the
securities or currency in the Fund's portfolio. Successful use of futures or
options contracts is further dependent on the Investment Manager's ability to
correctly predict movements in the securities or foreign currency markets, and
no assurance can be given that its judgment will be correct. Successful use of
options on securities or securities indices is subject to similar risk
considerations. The Fund has the authority to purchase over-the-counter
options, which are generally less liquid than exchange traded options. In
addition, by writing covered call options, the Fund gives up the opportunity,
while the option is in effect, to profit from any price increase in the
underlying security above the option exercise price.
There are further risk factors, including possible losses through the holding of
securities in domestic and foreign custodian banks and depositories, described
elsewhere in the Prospectus and in the SAI.
14 o Franklin Templeton Japan Fund
PAGE
WHO MANAGES THE FUND?
The Board. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure that no material conflicts exist between
the classes of shares. While none is expected, the Board will act appropriately
to resolve any material conflict that may arise.
Investment Manager. The Investment Manager manages the Fund's assets and makes
the Fund's investment decisions. The Investment Manager also performs similar
services for other funds. The Investment Manager is wholly owned by Resources,
a publicly owned company engaged in the financial services industry through its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources. Together, the Investment Manager and its affiliates
manage over $172 billion in assets. The Templeton organization has been
investing globally since 1940. The Investment Manager and its affiliates have
offices in Argentina, Australia, Bahamas, Canada, France, Germany, Hong Kong,
India, Italy, Luxembourg, Poland, Russia, Scotland, Singapore, South Africa,
U.S., and Vietnam. Please see "Investment Advisory and Other Services" and
"Miscellaneous Information" in the SAI for information on securities
transactions and a summary of the Fund's Code of Ethics.
Portfolio Management. The lead portfolio manager of the Fund since its
inception is William T. Howard, Jr. Mr. Howard is vice president of the
Investment Manager. He holds a BA degree in international studies from Rhodes
College and an MBA degree in finance from Emory University. He is a Chartered
Financial Analyst and a member of the Financial Analysts Society. Before
joining the Templeton organization in 1993, Mr. Howard was a portfolio manager
and analyst with Tennessee Consolidated Retirement System in Nashville,
Tennessee, where he was responsible for research and management of the
international equity portfolio, and specialized in the Japanese equity market.
As a portfolio manager and research analyst with Templeton, Mr. Howard's
research responsibilities include the transportation/shipping and hospital
management and supplies industries worldwide. He is also responsible for
research coverage of both Japan and New Zealand.
Gary P. Motyl and Gary R. Clemons exercise secondary portfolio management
responsibilities for the Fund. Mr. Motyl is senior vice president of the
Investment Manager. He holds a BS degree in finance from Lehigh University and
an MBA degree in finance from Pace University. He is a Chartered Financial
Analyst. Prior to joining the Templeton organization in 1981, Mr. Motyl worked
from 1974 to 1979 as a security analyst with Standard & Poor's Corporation, and
as a research analyst and portfolio manager from 1979 to 1981 with
Franklin Templeton Japan Fund o 15
PAGE
Landmark First Mortgage Bank, where he had responsibility for equity research
and managed several pension and profit sharing plans. His research
responsibilities with Templeton include the global automobile industry and
country coverage of Germany. Mr. Clemons is vice president of the Investment
Manager. He holds a BS degree in geology from the University of Nevada and an
MBA degree in finance from the University of Wisconsin. He joined the
Investment Manager in 1993. Prior to that time he was a research analyst at
Templeton Quantitative Advisors, Inc. in New York, where he was also
responsible for management of a small capitalization fund. As a research
analyst with Templeton, Mr. Clemons has responsibility for the
telecommunications industries and country coverage of Columbia, Peru, Sweden
and Norway.
Management Fees. For the fiscal year ended March 31, 1996, the Fund paid no
management fees (0.00% of average daily net assets). The Investment Manager
voluntarily agreed to reduce its fee in order to limit total expenses of the
Fund. Without this voluntary agreement, management fees would be 0.75% of the
Fund's average daily net assets. After August 1, 1997, this agreement may end at
any time upon notice to the Board.
Portfolio Transactions. The Investment Manager tries to obtain the best
execution on all transactions. If the Investment Manager believes more than one
broker or dealer can provide the best execution, consistent with internal
policies it may consider research and related services and the sale of Fund
shares, as well as shares of other funds in the Franklin Templeton Group of
Funds, when selecting a broker or dealer. Please see "How Does the Fund Buy
Securities For Its Portfolio?" in the SAI for more information.
Administrative Services. FT Services (and, prior to October 1, 1996, Templeton
Global Investors, Inc.) provides certain administrative services and facilities
for the Fund. Please see "Investment Advisory and Other Services" in the SAI for
more information.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, the Fund advertises its performance. The more commonly used
measure of performance is total return. Performance figures are usually
calculated using the maximum sales charge, if applicable. Certain performance
figures may not include any sales charge or 12b-1 fees.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested.
The Fund's investment results will vary. Performance figures are always based on
past performance and do not guarantee future results. For a more detailed
16 o Franklin Templeton Japan Fund
PAGE
description of how the Fund calculates its performance figures, please see "How
Does the Fund Measure Performance?" in the SAI.
HOW IS THE FUND ORGANIZED?
The Fund is a diversified open-end management investment company, commonly
called a mutual fund. It was organized as a business trust under the laws of
Delaware on October 29, 1991, and is registered with the SEC under the 1940 Act.
The Fund offers two classes of shares: Franklin Templeton Japan Fund - Class I
and Franklin Templeton Japan Fund - Advisor Class. The Fund began offering two
classes of shares on January 1, 1997. All shares purchased before that time are
considered Class I shares. Class I and Advisor Class shares differ as to sales
charges, expenses and services. Different fees and expenses will affect
performance. In the future, additional series or classes of shares may be
offered. A further description of Class I is set forth below.
Each class will vote separately on matters (1) affecting only that class, (2)
expressly required to be voted on separately by state law, or (3) required to
be voted on separately by the 1940 Act. Shares of each class represent
proportionate interests in the assets of the Fund and have the same voting and
other rights and preferences as the other classes of the Fund for matters that
affect the Fund as a whole.
Class I. Class I shares of the Fund are described in a separate prospectus
relating only to that class. You may buy Class I shares through your investment
representative or directly by contacting the Fund. If you would like a
prospectus relating to the Fund's Class I shares, contact your investment
representative or Distributors.
Class I shares of the Fund have sales charges and Rule 12b-1 charges that may
affect performance. Class I shares have a front-end sales charge of 5.75% (6.10%
of the net amount invested) which is reduced on certain transactions of $50,000
or more. Class I shares are subject to Rule 12b-1 expenses equal to a maximum
of 0.35% per year of Class I's average daily net assets. Shares of Class I may
be subject to a Contingent Deferred Sales Charge upon redemption.
The Fund has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
Franklin Templeton Japan Fund o 17
PAGE
The Fund does not intend to hold annual shareholder meetings. It may hold a
special meeting, however, for matters requiring shareholder approval under the
1940 Act. The Fund will call a special meeting of shareholders for the purpose
of considering the removal of a Board member if requested in writing to do so
by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection
with electing or removing members of the Board.
HOW TAXATION AFFECTS YOU AND THE FUND
Federal Tax Information
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund intends to elect to be treated and to qualify each year as a regulated
investment company under Subchapter M of the Code. A regulated investment
company generally is not subject to Federal income tax on income and gains
distributed in a timely manner to its shareholders. The Fund intends to
distribute to shareholders substantially all of its net investment income and
net realized capital gains, which generally will be taxable income or capital
gains in their hands. Distributions declared in October, November or December to
shareholders of record on a date in such month and paid during the following
January will be treated as having been received by shareholders on December 31
in the year such distributions were declared. The Fund will inform shareholders
each year of the amount and nature of such income or gains. Sales or other
dispositions of Fund shares generally will give rise to taxable gain or loss.
Japan Taxes
Pursuant to the tax convention between the U.S. and Japan (the "Convention"), a
Japanese withholding tax at the maximum rate of 15% is, with certain
exceptions, imposed upon dividends paid by Japanese corporations to the Fund.
Pursuant to the present terms of the Convention, interest received by the Fund
from sources within Japan is subject to a Japanese withholding tax at a maximum
rate of 10%. Capital gains of the Fund arising from its investments as
described herein are not taxable in Japan.
Generally, the Fund will be subject to the Japan securities transaction tax on
its sale of certain securities in Japan. The current rates of such tax range
from 0.03% to 0.30% depending upon the particular type of securities involved.
Transactions involving equity securities are currently taxed at the highest
rate.
18 o Franklin Templeton Japan Fund
PAGE
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
Opening Your Account
You may buy shares with a minimum initial investment of $5 million (in the
aggregate) in one or more Advisor Class shares of the Franklin Templeton Funds
($25 for subsequent investments) except if you fall in one of the following
categories of investors satisfying one of the following criteria:
(a) Broker-dealers, qualified registered investment advisors or certified
financial planners, who have entered into a supplemental agreement with
Distributors for clients participating in comprehensive fee programs;
(b) Qualified registered investment advisors or registered certified financial
planners who have clients invested in Mutual Series on October 31, 1996;
(c) Qualified registered investment advisors or registered certified financial
planners who did not have clients invested in Mutual Series on October 31,
1996 may buy through a broker-dealer or service agent who has entered into
an agreement with Distributors;
(d) Employer stock, bonus, pension or profit-sharing plans that meet the
requirements for qualification under Section 401 of the Code, including
salary reduction plans qualified under Section 401(k) of the Code, if the
number of employees is 5,000 or more or the plan has assets of $50 million
or more;
(e) Effective on or about February 1, 1997, participants in Franklin
Templeton's 401(k) Plan and Franklin Templeton's Profit Sharing Plan;
(f) Trust companies and bank trust departments initially investing in any
Franklin Templeton Fund at least $1 million of assets held in a fiduciary,
agency, advisory, custodial or similar capacity and over which the trust
companies, bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion;
(g) Governments, municipalities and tax-exempt entities that meet the
requirements for qualification under Section 501 of the Code (subject to
an initial investment in Advisor Class shares of $1 million);
(h) Any other investor, including a private investment vehicle such as a family
trust or foundation, who is a member of a qualified group may also
Franklin Templeton Japan Fund o 19
PAGE
purchase Advisor Class shares of the Fund if the group as a whole meets the
required minimum initial investment of $5 million;
(i) Directors, trustees, officers and full-time employees (and members of their
immediate family) of Franklin Templeton Group and Franklin Templeton Group
of Funds who invest $100 or more;
(j) Accounts managed by the Franklin Templeton Group;
(k) Each series of Franklin Templeton Fund Allocator Series that invests $1,000
or more.
If you are covered in any of the categories above, and currently own Class I
shares of the Fund, you may have the proceeds of the redemption of your Class I
shares of the Fund invested in the Advisor Class shares of the Fund during a
six month period ending on June 30, 1997. Generally, for federal income tax
purposes, there will be no recognition of gain or loss associated with such a
transaction. If you wish to invest the proceeds of the redemption of your Class
I shares in Advisor Class shares of the Fund, send us your redemption and
purchase instructions in writing. You may wish to consult with your tax advisor
to determine whether there are any state income tax consequences to such a
transaction.
The qualified group referred to in Item (h) above, is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
If you are subject to the $5 million minimum investment requirement, the cost
or current value (whichever is higher) of your investment in other funds in the
Franklin Templeton Funds will be included for purposes of determining
compliance with the required minimum investment amount, provided that at
20 o Franklin Templeton Japan Fund
PAGE
least $1 million is invested in Advisor Class shares of the Franklin Templeton
Funds.
The minimum for subsequent investments in Advisor Class shares is $25 for most
purchases of Advisor Class shares of the Fund and for purchases by directors,
trustees, officers and full-time employees (and members of their immediate
family) of Franklin Templeton Group and Franklin Templeton Funds; and $1,000
for each series of Franklin Templeton Fund Allocator Series.
Purchase Price of Fund Shares
Advisor Class shares are purchased at Net Asset Value without a sales charge.
Securities Dealers may receive compensation up to 0.25% of the amount invested
from Distributors or an affiliated company.
How Do I Buy Shares in Connection with Retirement Plans?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction for taxable investors.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums. Some
Franklin Templeton Funds do not offer Advisor Class shares.
Franklin Templeton Japan Fund o 21
PAGE
<TABLE>
<CAPTION>
METHOD STEPS TO FOLLOW
- -----------------------------------------------------------------------
<S> <C>
BY MAIL 1. Send us written instructions signed by all
account owners
2. Include any outstanding share certificates
for the shares you're exchanging
- -----------------------------------------------------------------------
BY PHONE Call Shareholder Services
If you do not want the ability to exchange by
phone to apply to your account, please let us
know.
- -----------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- -----------------------------------------------------------------------
</TABLE>
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
How We Process Your Exchange
If you are exchanging your Advisor Class shares of the Fund you may:
o exchange into any of our money funds except Franklin Templeton Money Fund II.
o exchange into the other Advisor Class shares of the Franklin Templeton Funds
(excluding Templeton Developing Markets Trust, Templeton Foreign Fund and
Templeton Growth Fund, Inc., except as described below), Mutual Series Class
Z Shares and Templeton Institutional Funds, Inc., if you meet the investment
requirements of the fund to be acquired.
o exchange into the Advisor Class shares of Templeton Developing Markets Trust,
Templeton Foreign Fund and Templeton Growth Fund, Inc. only if you fall into
one of the following categories: (i) you are a broker-dealer or a qualified
registered investment advisor who has entered into a special agreement with
Distributors for your clients who are participating in comprehensive fee
programs; (ii) you are a qualified registered investment advisor or certified
financial planner who has clients invested in Mutual Series on October 31,
1996; (iii) you are a qualified registered investment advisor or certified
financial planner who did not have clients invested in Mutual Series on
October 31, 1996 and are buying through a broker-dealer or service agent who
has entered into an agreement with Distributors; (iv) you are a director,
trustee, officer or full-time employee (or a family member) of the Franklin
Templeton Group or the Franklin Templeton Funds; (v) you are a participant in
Franklin Templeton's 401(k) Plan or Franklin Templeton's Profit Sharing Plan;
(vi) the exchanging shareholder is an account managed by the Franklin
Templeton
22 o Franklin Templeton Japan Fund
PAGE
Group; or (vii) the exchanging shareholder is a series of the Franklin
Templeton Fund Allocator Series.
o If the fund you are exchanging into does not offer Advisor Class shares, you
may exchange into the Class I shares of the fund at Net Asset Value.
Please be aware that the following restrictions may apply to exchanges:
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically registered
money fund account requiring only one signature for all transactions. Please
notify us in writing if you do not want this option to be available on your
account(s). Additional procedures may apply. Please see "Transaction
Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy upon 60 days' written notice.
o Your exchange may be restricted or refused if you: (i) request an exchange out
of the Fund within two weeks of an earlier exchange request, (ii) exchange
shares out of the Fund more than twice in a calendar quarter, or (iii)
exchange shares equal to at least $5 million, or more than 1/4 of 1% of the
Fund's net assets. Shares under common ownership or control are combined for
these limits. If you exchange shares as described in this paragraph, you will
be considered a Market Timer. Each exchange by a Market Timer, if accepted,
will be charged $5.00. Some of our funds do not allow investments by Market
Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
Franklin Templeton Japan Fund o 23
PAGE
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
<TABLE>
<CAPTION>
METHOD STEPS TO FOLLOW
- ----------------------------------------------------------------------
<S> <C>
BY MAIL 1. Send us written instructions signed by all
account owners
2. Include any outstanding share certificates
for the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts
may need to send additional documents.
Accounts under court jurisdiction may have
additional requirements.
- ----------------------------------------------------------------------
BY PHONE
(Only available if you have completed and sent to us the telephone
redemption agreement included with this prospectus)
Telephone requests will be accepted:
o If the request is $50,000 or less.
Institutional accounts may exceed $50,000 by
completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued
for the shares you want to sell or have
already returned to the Fund
o Unless you are selling shares in a Trust
Company retirement plan account
o Unless the address on your account was
changed by phone within the last 30 days
Beginning on or about May 1, 1997, you will be
able to redeem shares by telephone without
completing a telephone redemption agreement.
Please notify us if you do not want this
option to be available on your account. If you
later decide you would like this option, send
us written instructions signed by all account
owners.
- ----------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ----------------------------------------------------------------------
</TABLE>
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
24 o Franklin Templeton Japan Fund
PAGE
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
Trust Company Retirement Plan Accounts
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
Dividends and capital gains are calculated and distributed the same way for each
class of the Fund. The amount of any income dividends per share will differ,
however, generally due to the difference in the applicable Rule 12b-1 fees of
any class. Advisor Class shares are not subject to Rule 12b-1 fees.
The Fund intends to pay a dividend at least annually representing substantially
all of its net investment income and any net realized capital gains.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution.
Distribution Options
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy additional shares of the same
class of the Fund by reinvesting capital gain distributions, dividend
distributions, or both. This is a convenient way to accumulate additional
shares and maintain or increase your earnings base.
Franklin Templeton Japan Fund o 25
PAGE
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy Advisor Class shares or Class I shares of another Franklin
Templeton Fund. Many shareholders find this a convenient way to diversify their
investments.
3. Receive distributions in cash - You may receive capital gains distributions,
dividend distributions, or both in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE THE SHAREHOLDER APPLICATION
INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT REPRESENTATIVE WHICH
OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL AUTOMATICALLY
REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE ADVISOR CLASS SHARES OF
THE FUND. For Trust Company retirement plans, special forms are required to
receive distributions in cash. You may change your distribution option at any
time by notifying us by mail or phone. Please allow at least seven days prior to
the record date for us to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
How and When Shares Are Priced
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the scheduled close of the NYSE, generally 4:00
p.m. Eastern time. You can find the prior day's closing Net Asset Value and
Offering Price of the Fund in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.
The Price We Use When You Buy or Sell Shares
You buy shares of Advisor Class at the Net Asset Value per share. We calculate
it to two decimal places using standard rounding criteria. You also sell shares
at Net Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your
26 o Franklin Templeton Japan Fund
PAGE
redemption proceeds will not earn interest between the time we receive the order
from your dealer and the time we receive any required documents.
Proper Form
An order to buy shares is in proper form when we receive your signed
shareholder application and check. Written requests to sell or exchange shares
are in proper form when we receive written instructions signed by all registered
owners, with a signature guarantee if necessary. We must also receive any
outstanding share certificates for those shares.
Written Instructions
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
Franklin Templeton Japan Fund o 27
PAGE
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. YOU SHOULD
VERIFY THAT THE INSTITUTION IS AN ELIGIBLE GUARANTOR PRIOR TO SIGNING. A
NOTARIZED SIGNATURE IS NOT SUFFICIENT.
Share Certificates
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate
is lost, stolen or destroyed, you may have to pay an insurance premium of up to
2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form.
In this case, you should send the certificate and assignment form in separate
envelopes.
Telephone Transactions
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm instructions are genuine. We will also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
Trust Company Retirement Plan Accounts. You may not sell shares or change
distribution options on Trust Company retirement plans by phone. While you may
exchange shares of Trust Company IRA and 403(b) retirement accounts by phone,
certain restrictions may be imposed on other retirement plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
28 o Franklin Templeton Japan Fund
PAGE
Account Registrations and Required Documents
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
Joint Ownership. If you open an account with two or more owners, we register
the account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or
more owners, all owners must sign instructions to process transactions and
changes to the account. Even if the law in your state says otherwise, you will
not be able to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Trusts. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
Required Documents. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
<TABLE>
<CAPTION>
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- -----------------------------------------------------------------------
<S> <C>
CORPORATION Corporate Resolution
- -----------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
- -----------------------------------------------------------------------
TRUST 1. The pages from the trust document that
identify the trustees, or
2. A certification for trust
- -----------------------------------------------------------------------
</TABLE>
Street or Nominee Accounts. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both
Franklin Templeton Japan Fund o 29
PAGE
dealers must have an agreement with Distributors or we will not process the
transfer. Contact your Securities Dealer to initiate the transfer. We will
process the transfer after we receive authorization in proper form from your
delivering Securities Dealer. Accounts may be transferred electronically
through the NSCC. For accounts registered in street or nominee name, we may
take instructions directly from the Securities Dealer or your nominee.
Electronic Instructions. If there is a Securities Dealer or other
representative of record on your account, we are authorized to use and execute
electronic instructions received directly from your dealer or representative
without further inquiry. Electronic instructions may be processed through the
services of the NSCC, which currently include the NSCC's "Networking,"
"Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's PCTrades
II(TM) System.
Tax Identification Number
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is $50 or less, except for investors
under categories (d), (e), (j) and (k) under "Opening Your Account." We will
only do this if the value of your account falls below this minimum because you
voluntarily sold your shares and your account has been inactive (except for the
reinvestment of distributions) for at least six months. Before we close your
account, we will notify you and give you 30 days to increase the value of your
account to the required minimum amount of at least $100.
30 o Franklin Templeton Japan Fund
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SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to account application included with this
prospectus or contact your investment representative. The market value of the
Fund's shares may fluctuate and a systematic investment plan such as this will
not assure a profit or protect against a loss. You may discontinue the program
at any time by notifying Investor Services by mail or phone.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum
payment amount for each withdrawal must be at least $50. For retirement plans
subject to mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. You will generally receive your payment by the
end of the month in which a payment is scheduled. When you sell your shares
under a systematic withdrawal plan, it is a taxable transaction.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us in
writing at least seven business days before the end of the month preceding a
scheduled payment. Please see "How Do I Buy, Sell and Exchange Shares? -
Systematic Withdrawal Plan" in the SAI for more information.
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
Franklin Templeton Japan Fund o 31
PAGE
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
Brokers and Dealers and Plan Administrators
You may buy and sell Fund shares through registered broker-dealers. The Fund
does not impose a sales or service charge but your broker-dealer may charge you
a transaction fee. Transaction fees and services may vary among broker-dealers,
and your broker-dealer may impose higher initial or subsequent investment
requirements than those established by the Fund. Services provided by broker-
dealers may include allowing you to establish a margin account and borrow on
the value of the Fund's shares in that account. If your broker-dealer receives
your order before pricing on a given day, the broker-dealer is required to
forward the order to the Fund before pricing closes on that day. A broker-
dealer's failure to timely forward an order may give rise to a claim by the
investor against the broker.
Third party plan administrators of tax-qualified retirement plans and other
entities may provide sub-transfer agent services to the Fund. In such cases, the
Fund may pay the third party an annual sub-transfer agency fee that is not
greater than the Fund otherwise would have paid for such services.
Institutional Accounts
Institutional investors will likely be required to complete an institutional
account application. There may be additional methods of opening accounts and
purchasing, redeeming or exchanging shares of the Fund available for
institutional accounts. To obtain an institutional application or additional
information regarding institutional accounts, contact Franklin Templeton
Institutional Services at 1-800/321-8563 Monday through Friday, from 9:00 a.m.
to 5:00 p.m. Eastern time.
Availability of These Services
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
32 o Franklin Templeton Japan Fund
PAGE
What If I Have Questions About My Account?
If you have any questions about your account, you may write to Investor
Services, P.O. Box 33030, St. Petersburg, FL 33733-8030. The Fund and
Distributors are also located at this address. You may also contact us by phone
at one of the numbers listed below.
<TABLE>
<CAPTION>
HOURS OF OPERATION (EASTERN
TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- ------------------------------------------------------------------------
<S> <C> <C>
Shareholder Services 1-800/632-2301 8:30 a.m. to 8:00 p.m.
Dealer Services 1-800/524-4040 8:30 a.m. to 8:00 p.m.
Fund Information 1-800/DIAL BEN 8:30 a.m. to 11:00 p.m.
(1-800/342-5236) 9:30 a.m. to 5:30 p.m.
(Saturday)
Retirement Plans 1-800/527-2020 8:30 a.m. to 8:00 p.m.
Institutional Services 1-800/321-8563 9:00 a.m. to 8:00 p.m.
TDD (hearing impaired) 1-800/851-0637 8:30 a.m. to 8:00 p.m.
</TABLE>
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
Franklin Templeton Japan Fund o 33
PAGE
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1933 Act - Securities Act of 1933, as amended.
1940 Act - Investment Company Act of 1940, as amended.
Board - The Board of Trustees of the Fund.
Class I and Advisor Class - The Fund offers two classes of shares, designated
"Class I" and "Advisor Class." The two classes have proportionate interests in
the Fund's portfolio. Class I shares are subject to a sales charge structure
and a Rule 12b-1 plan. Advisor Class shares are purchased without a sales
charge and do not have a Rule 12b-1 plan.
Code - Internal Revenue Code of 1986, as amended.
Contingency Period - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. Regardless of when during the month
you purchased shares, they will age one month on the last day of that month and
each following month.
Contingent Deferred Sales Charge (CDSC) - A sales charge of 1% that may apply
if you sell your shares within the Contingency Period.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
Franklin Funds - the mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust.
Franklin Templeton Funds - The Franklin Funds and the Templeton Funds.
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries.
Franklin Templeton Group of Funds - All U.S. registered investment companies in
the Franklin Group of Funds(R), the Templeton Group of Funds.
FT Services - Franklin Templeton Services, Inc., the Fund's administrator.
Investment Manager - Templeton Investment Counsel, Inc., Broward Financial
Centre, Fort Lauderdale, FL 33394-3091.
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
transfer agent and shareholder servicing agent.
IRS - Internal Revenue Service.
Market Timer(s) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
34 o Franklin Templeton Japan Fund
PAGE
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
Moody's - Moody's Investors Service, Inc.
Mutual Series - Franklin Mutual Series Fund Inc., a member of the Franklin Group
of Funds, formerly the Mutual Series Fund Inc. Each series of Mutual Series
began offering three classes of shares on November 1, 1996, Class I, Class II
and Class Z. All shares sold before that time are designated Class Z shares.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - the value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NSCC - National Securities Clearing Corporation.
NYSE - New York Stock Exchange, Inc.
Offering Price - The public offering price is based on the Net Asset Value per
share and includes the front-end sales charge, if applicable. The maximum
front-end sales charge is 5.75% for Class I. Advisor Class has no front-end
sales charge.
Qualified Retirement Plan(s) - an employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information.
S&P - Standard and Poor's Corporation.
SEC - U.S. Securities and Exchange Commission.
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
Templeton Funds - The U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund.
Trust Company - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States.
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly-owned
subsidiaries of Resources.
Franklin Templeton Japan Fund o 35
PAGE
INSTRUCTIONS AND IMPORTANT NOTICE
SUBSTITUTE W-9 INSTRUCTIONS INFORMATION
General. Backup withholding is not an additional tax. Rather, the tax liability
of persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained from the IRS.
Obtaining a Number. If you do not have a Social Security Number/Taxpayer
Identification Number or you do not know your SSN/TIN, you must obtain Form
SS-5 or Form SS-4 from your local Social Security or IRS office and apply for
one. If you have checked the "Awaiting TIN" box and signed the certification,
withholding will apply to payments relating to your account unless you provide
a certified TIN within 60 days.
What SSN/TIN to Give. Please refer to the following guidelines:
<TABLE>
<CAPTION>
ACCOUNT TYPE GIVE SSN OF ACCOUNT TYPE GIVE EMPLOYER ID # OF
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
o Individual Individual o Trust, Estate, or Trust, Estate, or
Pension Plan Trust Pension Plan Trust
- --------------------------------------------------------------------------------
o Joint Individual Owner who o Corporation, Corporation,
will be paying Partnership, or Partnership, or
tax or first- other organization other organization
named individual
- --------------------------------------------------------------------------------
o Unif. Gift/ Minor o Broker nominee Broker nominee
Transfer to Minor
- --------------------------------------------------------------------------------
o Sole Proprietor Owner of
business
- --------------------------------------------------------------------------------
o Legal Guardian Ward, Minor,
or Incompetent
- --------------------------------------------------------------------------------
</TABLE>
Exempt Recipients. Please provide your TIN and check the "Exempt Recipient" box
if you are an exempt recipient. Exempt recipients include:
<TABLE>
<S> <C>
A corporation An exempt charitable remainder
trust or a non-exempt trust
A financial institution described in section
4947(a)(1)
An organization exempt from
tax under section 501(a), A registered dealer in
or an individual retirement securities or commodities
plan registered in the U.S. or a
U.S. possession
</TABLE>
36 o Franklin Templeton Japan Fund
PAGE
<TABLE>
<S> <C>
A real estate investment trust An entity registered at all
times under the Investment
A common trust fund operated Company Act of 1940
by a bank under section
584(a)
</TABLE>
IRS Penalties. If you do not supply us with your SSN/TIN, you will be subject to
an IRS $50 penalty unless your failure is due to reasonable cause and not
willful neglect. If you fail to report certain income on your federal income
tax return, you will be treated as negligent and subject to an IRS 20% penalty
on any underpayment of tax attributable to such negligence, unless there was
reasonable cause for the resulting underpayment and you acted in good faith. If
you falsify information on this form or make any other false statement
resulting in no backup withholding on an account which should be subject to
backup withholding, you may be subject to an IRS $500 penalty and certain
criminal penalties including fines and imprisonment.
SUBSTITUTE W-8 INSTRUCTIONS INFORMATION
Exempt Foreign Person. Check the "Exempt Foreign Person" box if you qualify as
a non-resident alien or foreign entity that is not subject to certain U.S.
information return reporting or to backup withholding rules. Dividends paid to
your account may be subject to withholding of up to 30%. You are an "Exempt
Foreign Person" if you are not (1) a citizen or resident of the U.S., or (2) a
U.S. corporation, partnership, estate, or trust. In the case of an individual,
an "Exempt Foreign Person" is one who has been physically present in the U.S.
for less than 31 days during the current calendar year. An individual who is
physically present in the U.S. for at least 31 days during the current calendar
year will still be treated as an "Exempt Foreign Person," provided that the
total number of days physically present in the current calendar year and the two
preceding calendar years does not exceed 183 days (counting all of the days in
the current calendar year, only one-third of the days in the first preceding
calendar year and only one-sixth of the days in the second preceding calendar
year). In addition, lawful permanent residents or green card holders may not be
treated as "Exempt Foreign Persons." If you are an individual or an entity, you
must not now be, or at this time expect to be, engaged in a U.S. trade or
business with respect to which any gain derived from transactions effected by
the Fund/Payer during the calendar year is effectively connected to the U.S.
(or your transactions are exempt from U.S. taxes under a tax treaty).
Permanent Address. The Shareholder Application must contain your permanent
address if you are an "Exempt Foreign Person." If you are an individual, provide
your permanent address. If you are a partnership or corporation, provide the
Franklin Templeton Japan Fund o 37
PAGE
address of your principal office. If you are an estate or trust, provide the
address of your permanent residence or the principal office of any fiduciary.
Notice of Change in Status. If you become a U.S. citizen or resident after you
have provided certification of your foreign status, or if you cease to be an
"Exempt Foreign Person," you must notify the Fund/Payer within 30 days of your
change in status. Reporting will then begin on the account(s) listed, and
backup withholding may also begin unless you certify to the Fund/Payer that (1)
the taxpayer identification number you have given is correct, and (2) the
Internal Revenue Service has not notified you that you are subject to backup
withholding because you failed to report certain interest or dividend income.
You may use Form W-9, "Payer's Request for Taxpayer Identification Number and
Certification," to make these certifications. If an account is no longer active,
you do not have to notify a Fund/Payer or broker of your change in status
unless you also have another account with the same Fund/Payer that is still
active. If you receive interest from more than one Fund/Payer or have dealings
with more than one broker or barter exchange, file a certificate with each. If
you have more than one account with the same Fund/Payer, the Fund/Payer may
require you to file a separate certificate for each account.
When to File. File these certifications with the Fund before a payment is made
to you, unless you have already done this in either of the two preceding
calendar years.
How Often You Must File. This certificate generally remains in effect for three
calendar years. A Fund/Payer or broker, however, may require that a new
certificate be filed each time a payment is made. On joint accounts for which
each joint owner is a foreign person, each must provide a certification of
foreign status.
38 o Franklin Templeton Japan Fund
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FOR CORPORATE SHAREHOLDERS--FORM OF RESOLUTION
It will be necessary for corporate shareholders to provide a certified copy of a
resolution or other certificate of authority to authorize the purchase as well
as sale (redemption) of shares and withdrawals by checks or drafts. You may use
the following form of resolution or you may prefer to use your own. It is
understood that the Fund, Franklin Templeton Distributors, Inc., Franklin
Templeton Investor Services, Inc., the custodian bank and their affiliates may
rely upon these authorizations until revoked or amended by written notice
delivered by registered or certified mail to the Fund.
CERTIFIED COPY OF RESOLUTION (Corporation or Association)
The undersigned hereby certifies and affirms that he/she is the duly elected
of
_________________________________ of _____________________________________
Title Corporate Name
a _______________________________ organized under the laws of the State of
Type of Organization
___________________ and that the following is a true and correct copy
State
of a resolution adopted by the Board of Directors at a meeting duly called and
held on __________________________
Date
RESOLVED, that the ____________________________________________________
Officers' Titles
of this Corporation or Association are authorized to open an account in
the name of the Corporation or Association with one or more of the
Franklin Group of Funds or Templeton Family of Funds (collectively, the
"Funds") and to deposit such funds of this Corporation or Association in
this account as they deem necessary or desirable; that the persons
authorized below may endorse checks and other instruments for deposit to
said account or accounts; and
FURTHER RESOLVED, that any of the following __________ officers are
number
authorized to sign any share assignment on behalf of this Corporation or
Association and to take any other actions as may be necessary to sell or
redeem its shares in the Funds or to sign checks or drafts withdrawing
funds from the account; and
FURTHER RESOLVED, that this Corporation or Association shall hold
harmless, indemnify, and defend the Funds, their custodian bank, Franklin
Templeton Distributors, Inc., Franklin Templeton Investor Services, Inc.,
and their affiliates, from any claim, loss or liability resulting in whole
or in
Franklin Templeton Japan Fund o 39
PAGE
part, directly or indirectly, from their reliance from time to time upon
any certifications by the secretary or any assistant secretary of this
Corporation or Association as to the names of the individuals occupying
such offices and their acting in reliance upon these resolutions until
actual receipt by them of a certified copy of a resolution of the Board of
Directors of the Corporation or Association modifying or revoking any or
all such resolutions.
The undersigned further certifies that the below named persons, whose
signatures appear opposite their names and office titles, are duly elected
officers of the Corporation or Association. (Attach additional list if
necessary.)
<TABLE>
<S> <C>
- --------------------------------------- ---------------------------------------
name/title (please print or type) Signature
- --------------------------------------- ---------------------------------------
name/title (please print or type) Signature
- --------------------------------------- ---------------------------------------
name/title (please print or type) Signature
- --------------------------------------- ---------------------------------------
name/title (please print or type) Signature
- --------------------------------------- ---------------------------------------
Name of Corporation or Association Date
</TABLE>
Certified from minutes ________________________________________________________
Name and Title
CORPORATE SEAL (if appropriate)
40 o Franklin Templeton Japan Fund
PAGE
FRANKLIN TEMPLETON
TELEPHONE REDEMPTION AUTHORIZATION AGREEMENT
You may use Franklin Templeton's telephone redemption privilege to redeem
uncertificated Franklin Templeton Fund shares for up to $50,000 (or your
shareholder account balance, whichever is less) per day, per fund account in
accordance with the terms of the Funds' prospectus.
The telephone redemption privilege is available only to shareholders who
specifically request it. If you would like to add this redemption privilege to
the other telephone transaction privileges now automatically available to
Franklin Templeton Fund shareholders, please sign and return this authorization
to Franklin/Templeton Investor Services, Inc. ("Investor Services"), transfer
agent and shareholder servicing agent for the Franklin Templeton Funds.
Shareholder Authorization: I/We request the telephone redemption privilege under
the terms described below and in the prospectus for each investment company in
Franklin Templeton (a "Franklin Templeton Fund" or a "Fund"), now open or
opened at a later date, holding shares registered as follows:
- --------------------------------------------------------------------------------
Print name(s) as shown in registration (called "Shareholder")
- --------------------------------------------------------------------------------
Account number(s)
I/We authorize each Fund and Investor Services to honor and act upon telephone
requests, given as provided in this agreement, to redeem shares from any
Shareholder account.
- ----------------------------------- -------------------------------------
Signature(s) of all registered owners and date
- ----------------------------------- -------------------------------------
- ----------------------------------- -------------------------------------
Printed name (and title/capacity, if applicable)
Verification Procedures: I/We understand and agree that: (1) each Fund and
Investor Services will employ reasonable procedures to confirm that redemption
instructions communicated by telephone are genuine and that if these
confirmation procedures are not followed, the Fund or Investor Services may be
liable for any losses due to unauthorized or fraudulent telephone instructions;
(2) the confirmation procedures will include the recording of telephone calls
requesting redemptions, requiring that the caller provide certain personal
and/or account information requested by the telephone service agent at the time
of the call for the purpose of establishing the caller's identification, and
the sending of confirmation statements to the address of record each time a
redemption is
Franklin Templeton Japan Fund o 41
PAGE
initiated by telephone; and (3) as long as the Fund and Investor Services follow
the confirmation procedures in acting on instructions communicated by telephone
which were reasonably believed to be genuine at the time of receipt, neither
they nor their parent or affiliates will be liable for any loss, damages or
expenses caused by an unauthorized or fraudulent redemption request.
Jointly Owned/Co-Trustee Accounts: Each of us signing this agreement as either
joint owners or co-trustees authorize each Fund and Investor Services to honor
telephone redemption requests given by ANY ONE of the signers or our investment
representative of record, if any, ACTING ALONE.
Appointment of Attorney-in-Fact: In order to issue telephone redemption requests
acting alone, each of us individually makes the following appointment: I hereby
appoint the other joint owner(s)/co-trustee(s) as my agent(s)
(attorney[s]-in-fact) with full power and authority to individually act for me
in any lawful way with respect to the issuance of instructions to a Fund or
Investor Services in accordance with the telephone redemption privilege we have
requested by signing this agreement. This appointment shall not be affected by
my subsequent disability or incompetency and shall remain in effect until it is
revoked by either written notice from any one of us delivered to a Fund or
Investor Services by registered mail, return receipt requested, or by a Fund or
Investor Services upon receipt of any information that causes a Fund or
Investor Services to believe in good faith that there is or that there may be a
dispute among any of us with respect to the Franklin Templeton Fund account(s)
covered by this agreement. Each of us agrees to notify the Fund or Investor
Services immediately upon the death of any of the undersigned.
Corporate/Partnership/Trust/Retirement Accounts: The Shareholder and each of us
signing this agreement on behalf of the Shareholder represent and warrant to
each Franklin Templeton Fund and Investor Services that the Shareholder has the
authority to enter into this agreement and that each of us are duly authorized
to execute this agreement on behalf of the Shareholder. The Shareholder agrees
that its election of the telephone redemption privilege means that a Fund or
Investor Services may honor a telephone redemption request given by ANY officer/
partner/member/administrator or agent of Shareholder ACTING ALONE.
Restricted Accounts: Telephone redemptions and dividend option changes may not
be accepted on Franklin Templeton Trust Company retirement accounts.
PLEASE RETURN THIS FORM TO:
Franklin/Templeton Investor Services, Inc.
P.O. Box 33030
St. Petersburg, FL 33733-8030
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Franklin Templeton Japan Fund o 49
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FRANKLIN TEMPLETON GROUP OF FUNDS
LITERATURE REQUEST E Call 1-800/DIAL BEN (1-800/342-5236) today for a free
descriptive brochure and prospectus on any of the funds listed below. The
prospectus contains more complete information, including fees, charges and
expenses, and should be read carefully before investing or sending money.
INTERNATIONAL GROWTH
Franklin Global Health Care Fund
Franklin International Equity Fund
Franklin Templeton Japan Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Global Infrastructure Fund
Templeton Global
Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller
Companies Fund
Templeton Greater European Fund
Templeton Growth Fund
Templeton Latin America Fund
Templeton Pacific Growth Fund
Templeton World Fund
INTERNATIONAL GROWTH
AND INCOME
Franklin Global Utilities Fund
Franklin Templeton German
Government Bond Fund
Franklin Templeton
Global Currency Fund
Templeton Global Bond Fund
Templeton Growth and Income Fund
INTERNATIONAL INCOME
Franklin Global Government
Income Fund
Franklin Templeton Hard
Currency Fund
Franklin Templeton High
Income Currency Fund
Templeton Americas
Government Securities Fund
GROWTH
Franklin Blue Chip Fund
Franklin California Growth Fund
Franklin DynaTech Fund
Franklin Equity Fund
Franklin Gold Fund
Franklin Growth Fund
Franklin MidCap Growth Fund
Franklin Small Cap Growth Fund
GROWTH AND INCOME
Franklin Balance Sheet
Investment Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Franklin MicroCap Value Fund
Franklin Natural Resources Fund
Franklin Premier Return Fund
Franklin Real Estate Securities Fund
Franklin Rising Dividends Fund
Franklin Strategic Income Fund
Franklin Utilities Fund
Franklin Value Fund
Templeton American Trust, Inc.
INCOME
Franklin Adjustable Rate
Securities Fund
Franklin Adjustable U.S.
Government Securities Fund
Franklin AGE High Income Fund
Franklin Investment
Grade Income Fund
Franklin Short-Intermediate U.S.
Government Securities Fund
Franklin U.S. Government
Securities Fund
Franklin Money Fund
Franklin Federal Money Fund
FOR NON-U.S. INVESTORS:
Franklin Tax-Advantaged
High Yield Securities Fund
Franklin Tax-Advantaged
International Bond Fund
Franklin Tax-Advantaged U.S.
Government Securities Fund
FOR CORPORATIONS:
Franklin Corporate Qualified
Dividend Fund
FRANKLIN FUNDS SEEKING
TAX-FREE INCOME
Federal Intermediate-Term
Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund
Puerto Rico Tax-Free Income Fund
Tax-Exempt Money Fund
FRANKLIN STATE-SPECIFIC FUNDS
SEEKING TAX-FREE INCOME
Alabama
Arizona*
Arkansas**
California*
Colorado
Connecticut
Florida*
Georgia
Hawaii**
Indiana
Kentucky
Louisiana
Maryland
Massachusetts***
Michigan*
Minnesota***
Missouri
New Jersey
New York*
North Carolina
Ohio***
Oregon
Pennsylvania
Tennessee**
Texas
Virginia
Washington**
VARIABLE ANNUITIES
Franklin Valuemark(SM)
Franklin Templeton Valuemark
Income Plus (an immediate annuity)
*Two or more fund options available: long-term portfolio, intermediate-term
portfolio, a portfolio of insured municipal securities, and/or a high yield
portfolio (CA) and a money market portfolio (CA and NY).
**The fund may invest up to 100% of its assets in bonds that pay interest
subject to the federal alternative minimum tax.
PAGE
PART B
STATEMENT OF ADDITIONAL INFORMATION
PAGE
FRANKLIN TEMPLETON JAPAN FUND
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 1, 1997
700 CENTRAL AVENUE
ST. PETERSBURG, FL 33701 1-800/DIAL BEN
TABLE OF CONTENTS
How Does the Fund Invest Its Assets?...........................................
What Are the Fund's Potential Risks?...........................................
Investment Restrictions........................................................
Officers and Trustees..........................................................
Investment Advisory and Other Services.........................................
How Does the Fund Buy Securities For Its Portfolio?............................
How Do I Buy, Sell and Exchange Shares?........................................
How Are Fund Shares Valued?....................................................
Additional Information on Distributions and Taxes..............................
The Fund's Underwriter.........................................................
How Does the Fund Measure Performance?.........................................
Miscellaneous Information......................................................
Financial Statements...........................................................
Useful Terms and Definitions...................................................
Appendices.....................................................................
WHEN READING THIS SAI, YOU WILL SEE CERTAIN
TERMS BEGINNING WITH CAPITAL LETTERS. THIS MEANS THE TERM
IS EXPLAINED UNDER "USEFUL TERMS AND DEFINITIONS."
The Franklin Templeton Japan Fund (the "Fund") is a diversified open-end
management investment company. The Fund's investment objective is long-term
capital growth. The Fund seeks to achieve its objective by investing in
securities of companies domiciled in Japan and traded in Japanese securities
markets. This SAI relates to the Advisor Class shares of the Fund.
Advisor Class shares are only available for purchase by certain persons,
including, among others, certain financial institutions (such as banks, trust
companies, savings institutions and credit unions); government and tax-exempt
entities; certain pension, profit sharing and employee benefit plans; certain
qualified groups, including family trusts, endowments, foundations and
corporations; Franklin Templeton Fund Allocator Series; and directors, trustees,
officers and full time employees (and their family members) of Franklin
Templeton Group and the Franklin Templeton Group of Funds.
The Advisor Class Prospectus, dated January 1, 1997, as may be amended from time
to time, contains the basic information you should know before investing in the
Fund. For a free copy, call 1-800/DIAL BEN or write the Fund at the address
shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE
-1-
PAGE
PROSPECTUS.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
- - ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
- - ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY ANY BANK;
- - ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
HOW DOES THE FUND INVEST ITS ASSETS?
INVESTMENT POLICIES. The investment objective and policies of the Fund are
described in the Fund's Prospectus under the heading "How Does the Fund Invest
Its Assets?"
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 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, 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 S&P or Moody's or that are unrated by any rating agency. As
an operating policy, which may be changed by the Board 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 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
-2-
JPAGE
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
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-denominated bonds sold in Japan by non-Japanese
issuers ("Samurai bonds") and in dollar-denominated bonds sold in the U.S. 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 "Additional
Information on Distributions and Taxes") 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.
-3-
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STRUCTURED INVESTMENTS. Included among the issuers of debt securities in which
the Fund may invest are entities organized and operated solely for the purpose
of restructuring the investment characteristics of various securities. These
entities are typically organized by investment banking firms which receive fees
in connection with establishing each entity and arranging for the placement of
its securities. This type of restructuring involves the deposit with or purchase
by an entity, such as a corporation or trust, of specified instruments and the
issuance by that entity of one or more classes of securities ("structured
investments") backed by, or representing interests in, the underlying
instruments. The cash flows on the underlying instruments may be apportioned
among the newly issued structured investments to create securities with
different investment characteristics such as varying maturities, payment
priorities or interest rate provisions. The extent of the payments made with
respect to structured investments is dependent on the extent of the cash flows
on the underlying instruments. Because structured investments of the type in
which the Fund anticipates investing typically involve no credit enhancement,
their credit risk will generally be equivalent to that of the underlying
instruments.
The Fund is permitted to invest in a class of structured investments that is
either subordinated or unsubordinated to the right of payment of another class.
Subordinated structured investments typically have higher yields and present
greater risks than unsubordinated structured investments. Although the Fund's
purchase of subordinated structured investments would have a similar economic
effect to that of borrowing against the underlying securities, the purchase will
not be deemed to be leveraged for purposes of the limitations placed on the
extent of the Fund's assets that may be used for borrowing activities.
Certain issuers of structured investments may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, a Fund's investment in these
structured investments may be limited by the restrictions contained in the 1940
Act. Structured investments are typically sold in private placement
transactions, and there currently is no active trading market for structured
investments. To the extent such investments are illiquid, they will be subject
to the Fund's restrictions on investments in illiquid securities.
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 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
-4-
PAGE
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 U.S. 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.
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
-5-
PAGE
changes, in the opinion of the 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 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, the
Fund's loss will be limited to the premium paid for the option plus related
transaction costs. The success of this strategy will depend, in part, on the
accuracy of the correlation between the changes in value of the underlying
security, 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
-6-
PAGE
not readily marketable. See "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 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 Investment Manager to
forecast currency exchange rate movements correctly. Should
-7-
PAGE
exchange rates move in an unexpected manner, the Fund may not achieve the
anticipated benefits of foreign currency futures or may realize losses.
WHAT ARE THE FUND'S POTENTIAL RISKS?
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 U.S. 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 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 U.S., 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 U.S., South East Asia and the Middle
East. Because of the concentration of Japanese exports in highly visible
products such as
-8-
PAGE
automobiles, machine tools and semiconductors and the large trade surpluses
ensuing therefrom, Japan has had difficult relations with its trading partners,
particularly the U.S., 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, which are in
addition to the usual risks inherent in domestic investments.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting, auditing and
financial reporting standards, and auditing practices and requirements may not
be comparable to those applicable to U.S. companies. The Fund, therefore, may
encounter difficulty in obtaining market quotations for purposes of valuing its
portfolio and calculating its Net Asset Value. Foreign markets have
substantially less volume than the NYSE and securities of some foreign companies
are less liquid and more volatile than securities of comparable U.S. 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 U.S., are likely to be higher. In many foreign countries there is less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the U.S.
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.
In addition, many countries in which the Fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic products, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Investments in Eastern European countries may involve risks of nationalization,
expropriation and confiscatory taxation. The Communist governments of a number
of Eastern European countries expropriated large amounts of private property in
the past, in many cases without adequate
-9-
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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 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 the Fund.
Investing in Russian securities involves a high degree of risk and special
considerations not typically associated with investing in the U.S. securities
markets, and should be considered highly speculative. Such risks include: (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 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,
-10-
PAGE
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 issues deemed
suitable by the Investment Manager. Further, this also could cause a delay in
the sale of Russian 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 cessation of trading on national exchanges, expropriation,
nationalization or confiscatory taxation, withholding and other foreign taxes on
income or other amounts, foreign exchange controls (which may include suspension
of the ability to transfer currency from a given country), default in foreign
government securities, political or social instability, or diplomatic
developments which could affect investments in securities of issuers in foreign
nations.
The Fund may be affected either unfavorably or favorably by fluctuations in the
relative rates of exchange between the currencies of different nations, by
exchange control regulations and by indigenous economic and political
developments. Some countries in which the Fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Further,
certain currencies may not be internationally traded. Certain of these
currencies have experienced a steady devaluation relative to the U.S. dollar.
Any devaluations in the currencies in which the Fund's portfolio securities are
denominated may have a detrimental impact on the Fund. Through the 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 Board considers at least annually the likelihood of the imposition by any
foreign government of exchange control restrictions which would affect the
liquidity of the 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 Board also considers the degree of risk
involved through the holding of portfolio securities in domestic and foreign
securities depositories (see "Investment Advisory and Other Services"). However,
in the absence of willful misfeasance, bad faith or gross negligence on the part
of the 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 Board's
appraisal of the risks will always be correct or that such exchange control
restrictions or political acts of foreign governments will not occur.
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
-11-
PAGE
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.
There are several risks associated with transactions in options on securities
indices. For example, there are significant differences between the securities
and options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. A decision
as to whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events. There can be no
assurance that a liquid market will exist when the Fund seeks to close out an
option position. If the Fund were unable to close out an option that it had
purchased on a securities index, it would have to exercise the option in order
to realize any profit or the option may expire worthless. If trading were
suspended in an option purchased by the Fund, it would not be able to close out
the option. If restrictions on exercise were imposed, the Fund might be unable
to exercise an option it has purchased. Except to the extent that a call option
on an index written by the Fund is covered by an option on the same index
purchased by the Fund, movements in the index may result in a loss to the Fund;
however, such losses may be mitigated by changes in the value of the Fund's
securities during the period the option was outstanding.
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 "What Are the Fund's Potential
Risks?" in the Prospectus.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. The Fund MAY NOT:
1. Invest in real estate or mortgages on real estate (although the Fund
may invest in marketable securities secured by real estate or interests
therein); 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 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.
-12-
JPAGE
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 futures
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 "How Does the Fund Buy Securities For Its
Portfolio?" as to transactions in the same securities for the Fund
and/or other mutual funds and clients with the same or affiliated
advisers.)
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 NYSE or American Stock Exchange, 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.
-13-
PAGE
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 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.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in value of portfolio securities
or the amount of assets will not be considered a violation of any of the
foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk ("*").
<TABLE>
<CAPTION>
POSITION AND
OFFICES WITH PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE THE FUND DURING PAST FIVE YEARS
- --------------------- ------------ ----------------------
<S> <C> <C>
HARRIS J. ASHTON Trustee Chairman of the board, president, and chief executive
Metro Center officer of General Host Corporation (nursery and craft
1 Station Place centers); director of RBC Holdings (U.S.A.) Inc. (a
Stamford, Connecticut bank holding company) and Bar-S Foods; and director or
Age 64 trustee of 55 of the investment companies in the
Franklin Templeton Group of Funds.
</TABLE>
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<TABLE>
<CAPTION>
POSITION AND
OFFICES WITH PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE THE FUND DURING PAST FIVE YEARS
- --------------------- ------------ ----------------------
<S> <C> <C>
NICHOLAS F. BRADY* Trustee Chairman of Templeton Emerging Markets Investment Trust
The Bullitt House PLC; chairman of Templeton Latin America Investment
102 East Dover Street Trust PLC; chairman of Darby Overseas Investments, Ltd.
Easton, Maryland (an investment firm) (1994-present); chairman and
Age 66 director of Templeton Central and Eastern European
Fund; director of the Amerada Hess Corporation,
Christiana Companies, and the H.J. Heinz Company;
formerly, Secretary of the United States Department of
the Treasury (1988-January 1993) and chairman of the
board of Dillon, Read & Co. Inc. (investment banking)
prior to 1988; and director or trustee of 23 of the
investment companies in the Franklin Templeton Group of
Funds.
HASSO-G VON DIERGARDT-NAGLO Trustee Farmer; president of Clairhaven Investments, Ltd. and
R.R. 3 other private investment companies; and director or
Stouffville, Ontario trustee of 12 of the investment companies in the
Age 80 Franklin Templeton Group of Funds.
MARTIN L. FLANAGAN* Trustee and Vice Senior vice president, treasurer and chief financial
777 Mariners Island Blvd. President officer of Franklin Resources, Inc.; director and
San Mateo, California executive vice president of Templeton Investment
Age 36 Counsel, Inc.; director, president and chief executive
officer of Templeton Global Investors, Inc.; and a
member of the International Society of Financial
Analysts and the American Institute of Certified Public
Accountants; formerly, accountant with Arthur Andersen
& Company (1982-1983); officer and/or director, as the
case may be, of other subsidiaries of Franklin
Resources, Inc.; and director or trustee of 60 of the
investment companies in the Franklin Templeton Group of
Funds.
S. JOSEPH FORTUNATO Trustee Member of the law firm of Pitney, Hardin, Kipp & Szuch;
200 Campus Drive and a director of General Host Corporation (nursery and
Florham Park, New Jersey craft centers); and director or trustee of 57 of the
Age 64 investment companies in the Franklin Templeton Group of
Funds.
JOHN Wm. GALBRAITH Trustee President of Galbraith Properties, Inc. (personal
360 Central Avenue investment company); director of Gulf West Banks, Inc.
Suite 1300 (bank holding company) (1995-present) and Mercantile
St. Petersburg, Florida Bank (1991-1995); vice chairman of Templeton, Galbraith
Age 74 & Hansberger Ltd. (1986-1992); and chairman of
Templeton Funds Management, Inc. (1974-1991); and
director or trustee of 23 of the investment companies
in the Franklin Templeton Group of Funds.
</TABLE>
-15-
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<TABLE>
<CAPTION>
POSITION AND
OFFICES WITH PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE THE FUND DURING PAST FIVE YEARS
- --------------------- ------------ ----------------------
<S> <C> <C>
ANDREW H. HINES, JR. Trustee Consultant for the Triangle Consulting Group; chairman
150 2nd Avenue N. and director of Precise Power Corporation;
St. Petersburg, Florida executive-in-residence of Eckerd College
Age 73 (1991-present); director of Checkers Drive-In
Restaurants, Inc.; formerly, chairman of the board and
chief executive officer of Florida Progress Corporation
(1982-February 1990) and director of various of its
subsidiaries; and director or trustee of 24 of the
investment companies in the Franklin Templeton Group of
Funds.
CHARLES B. JOHNSON* Trustee, Chairman President, chief executive officer, and director of
777 Mariners Island Blvd. of the Franklin Resources, Inc.; chairman of the board and
San Mateo, California Board and Vice director of Franklin Advisers, Inc. and Franklin
Age 63 President Templeton Distributors, Inc.; director of General Host
Corporation (nursery and craft centers), and Templeton
Global Investors, Inc.; and officer and/or director,
trustee or managing general partner, as the case may
be, of most other subsidiaries of Franklin Resources,
Inc.; and director or trustee of 56 of the investment
companies in the Franklin Templeton Group of Funds.
CHARLES E. JOHNSON* Trustee and Senior vice president and director of Franklin
777 Mariners Island Blvd. President Resources, Inc.; senior vice president of Franklin
San Mateo, California Templeton Distributors, Inc.; president and chief
Age 40 executive officer of Templeton Worldwide, Inc.;
president and director of Franklin Institutional
Services Corporation; chairman of the board of
Templeton Investment Counsel, Inc.; officer and/or
director, as the case may be, of other subsidiaries of
Franklin Resources, Inc.; and officer and director or
trustee of 39 of the investment companies in the
Franklin Templeton Group of Funds.
BETTY P. KRAHMER Trustee Director or trustee of various civic associations;
2201 Kentmere Parkway formerly, economic analyst, U.S. government, and
Wilmington, Delaware director or trustee of 23 of the investment companies
Age 67 in the Franklin Templeton Group of Funds.
GORDON S. MACKLIN Trustee Chairman of White River Corporation (information
8212 Burning Tree Road services); director of Fund America Enterprises
Bethesda, Maryland Holdings, Inc., MCI Communications Corporation, Fusion
Age 68 Systems Corporation, Infovest Corporation, MedImmune,
Inc., Source One Mortgage Services Corp., and Shoppers
Express, Inc. (on-line shopping service); formerly,
chairman of Hambrecht and Quist Group; director of H&Q
Healthcare Investors and Lockheed Martin Corporation,
and president of the National Association of Securities
Dealers, Inc.; and director or trustee of 52 of the
investment companies in the Franklin Templeton Group of
Funds.
FRED R. MILLSAPS Trustee Manager of personal investments (1978-present);
2665 N.E. 37th Drive director of various business and nonprofit
Fort Lauderdale, Florida organizations; formerly, chairman and chief executive
Age 67 officer of Landmark Banking Corporation (1969-1978);
financial vice president of Florida Power and Light
(1965-1969); vice president of The Federal Reserve Bank
of Atlanta (1958-1965); and director or trustee of 24
of the investment companies in the Franklin Templeton
Group of Funds.
</TABLE>
-16-
PAGE
<TABLE>
<CAPTION>
POSITION AND
OFFICES WITH PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE THE FUND DURING PAST FIVE YEARS
- --------------------- ------------ ----------------------
<S> <C> <C>
EDITH E. HOLIDAY Trustee Director (1993-present) of Amerada Hess Corporation and
3239 38th Street, N.W. Hercules Incorporated; director of Beverly Enterprises,
Washington, D.C. Inc. (1995-present) and H.J. Heinz Company
Age 44 (1994-present); chairman (1995-present) and trustee
(1993-present) of National Child Research Center;
formerly, assistant to the President of the United
States and Secretary of the Cabinet (1990-1993),
general counsel to the United States Treasury
Department (1989-1990), and counselor to the Secretary
and Assistant Secretary for Public Affairs and Public
Liaison - United States Treasury Department
(1988-1989); and director or trustee of 15 of the
investment companies in the Franklin Templeton Group of
Funds.
RUPERT H. JOHNSON, JR. Vice President Executive vice president and director of Franklin
777 Mariners Island Blvd. Resources, Inc. and Franklin Templeton Distributors,
San Mateo, California Inc.; president and director of Franklin Advisers,
Age 55 Inc.; director of Franklin Templeton Investor Services,
Inc.; and officer and/or director, trustee or managing
general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc., and officer
and/or director of 60 of the investment companies in
the Franklin Templeton Group of Funds.
HARMON E. BURNS Vice President Executive vice president, secretary and director of
777 Mariners Island Blvd. Franklin Resources, Inc.; executive vice president and
San Mateo, California director of Franklin Templeton Distributors, Inc.;
Age 51 executive vice president of Franklin Advisers, Inc.;
officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer
and/or director or trustee of 60 of the investment
companies in the Franklin Templeton Group of Funds.
DEBORAH R. GATZEK Vice President Senior vice president and general counsel of Franklin
777 Mariners Island Blvd. Resources, Inc.; senior vice president of Franklin
San Mateo, California Templeton Distributors, Inc.; vice president of
Age 48 Franklin Advisers, Inc. and officer of 60 of the
investment companies in the Franklin Templeton Group of
Funds.
</TABLE>
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<TABLE>
<CAPTION>
POSITION AND
OFFICES WITH PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE THE FUND DURING PAST FIVE YEARS
- --------------------- ------------ ----------------------
<S> <C> <C>
MARK G. HOLOWESKO Vice President and director of Templeton Global Advisors
Lyford Cay President Limited; chief investment officer of global equity
Nassau, Bahamas research for Templeton Worldwide, Inc.; president or
Age 36 vice president of the Templeton Funds; formerly,
investment administrator with Roy West Trust
Corporation (Bahamas) Limited (1984-1985); and officer
of 23 of the investment companies in the Franklin
Templeton Group of Funds.
WILLIAM T. HOWARD, JR. Vice Vice president of Templeton Investment Counsel, Inc.;
500 East Broward Blvd. President formerly, portfolio manager and analyst, Tennessee
Fort Lauderdale, Florida Consolidated Retirement System (1986-1993).
Age 38
JOHN R. KAY Vice Vice president and treasurer of Templeton Global
500 East Broward Blvd. President Investors, Inc. and Templeton Worldwide, Inc.;
Fort Lauderdale, Florida assistant vice president of Franklin Templeton
Age 56 Distributors, Inc.; formerly, vice president and
controller of the Keystone Group, Inc.; and officer of
27 of the investment companies in the Franklin
Templeton Group of Funds.
JAMES R. BAIO Treasurer Certified public accountant; senior vice president of
500 East Broward Blvd. Templeton Worldwide, Inc., Templeton Global Investors,
Fort Lauderdale, Florida Inc., and Templeton Funds Trust Company; formerly,
Age 42 senior tax manager of Ernst & Young (certified public
accountants) (1977-1989); and treasurer of 23 of the
investment companies in the Franklin Templeton Group of
Funds.
</TABLE>
Nonaffiliated members of the Board and Mr. Brady are currently paid 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
and its portion of a flat fee of $2,000 for each Audit Committee and/or
Nominating and Compensation Committee meeting attended. All of the Fund's
officers and Trustees also hold positions with other investment companies in the
Franklin Templeton Group of Funds. They may receive fees from these funds for
their services. The following table provides the total fees paid to
nonaffiliated Board members by the Fund and by other funds in the Franklin
Templeton Group of Funds.
-18-
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<TABLE>
<CAPTION>
TOTAL FEES RECEIVED NUMBER OF BOARDS
TOTAL FEES FROM THE IN THE FRANKLIN TEMPLETON
RECEIVED FROM FRANKLIN TEMPLETON GROUP OF FUNDS ON
NAME THE TRUST(A) GROUP OF FUNDS(B) WHICH EACH SERVES(C)
- ---- ------------ ----------------- --------------------
<S> <C> <C> <C>
Harris J. Ashton $100 $327,925 55
Nicholas F. Brady 100 98,225 23
F. Bruce Clarke(D) 102 83,350 19
Hasso-G von Diergardt-Naglo 100 77,350 19
S. Joseph Fortunato 100 344,745 57
John Wm. Galbraith 100 70,100 22
Andrew H. Hines, Jr. 169 106,325 23
Betty P. Krahmer 100 93,475 23
Gordon S. Macklin 167 321,525 52
Fred R. Millsaps 102 104,325 23
</TABLE>
(A) For the fiscal year ended March 31, 1996.
(B) For the calendar year ended December 31, 1995.
(C) We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does
not include the total number of series or funds within each investment
company for which the Board members are responsible. The Franklin
Templeton Group of Funds currently includes 60 registered investment
companies, with approximately 164 U.S. based funds or series.
(D) F. Bruce Clarke resigned as trustee on October 20, 1996.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director, trustee or
managing general partner. No officer or Board member received any other
compensation, including pension or retirement benefits, directly from the Fund
or other funds in the Franklin Templeton Group of Funds. Certain officers or
Board members who are shareholders of Resources may be deemed to receive
indirect remuneration by virtue of their participation, if any, in the fees paid
to its subsidiaries.
As of December 1, 1996, the officers and Board members, as a group, owned of
record and beneficially approximately 41 shares, or less than 1% of each class
of the Fund's total outstanding shares. Many of the Board members also own
shares in other funds in the Franklin Templeton Group of Funds. Charles B.
Johnson and Rupert H. Johnson, Jr. are brothers and the father and uncle,
respectively, of Charles E. Johnson.
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Manager and Services Provided. The Investment Manager provides
investment research and portfolio management services, including the selection
of securities for the Fund to buy, hold or sell and the selection of brokers
through whom the Fund's portfolio transactions are executed. The Investment
Manager's activities are subject to the review and supervision of the Board to
whom the Investment Manager renders periodic reports of the Fund's investment
activities. The Investment Manager is covered by fidelity insurance on its
officers, directors and employees for the protection of the Fund.
-19-
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The Investment Manager and its affiliates act as investment manager to numerous
other investment companies or funds and accounts. The Investment Manager may
give advice and take action with respect to any of the other funds it manages,
or for its own account, that may differ from action taken by the Investment
Manager on behalf of the Fund. Similarly, with respect to the Fund, the
Investment Manager is not obligated to recommend, buy or sell, or to refrain
from recommending, buying or selling any security that the Investment Manager
and access persons, as defined by the 1940 Act, may buy or sell for its or their
own account or for the accounts of any other fund. The Investment Manager is not
obligated to refrain from investing in securities held by the Fund or other
funds that it manages. Of course, any transactions for the accounts of the
Investment Manager and other access persons will be made in compliance with the
Fund's Code of Ethics. Please see "Miscellaneous Information-Summary of Code of
Ethics."
Investment Management Fees. Under its investment management agreement, the Fund
pays the Investment Manager a monthly fee equal to an annual rate of 0.75% of
its average daily net assets. Each class pays its proportionate share of the
management fee. For the fiscal year ended March 31, 1996 and for the period from
July 28, 1994 (commencement of operations) to March 31, 1995, investment
management fees, before fee reductions and expense limitations, totaled $29,228
and $4,738, respectively. Under an agreement by the Investment Manager to limit
its fees, the Fund paid no investment management fees for the same periods.
After August 1, 1997, this agreement may end at any time upon notice to the
Board.
Investment Management Agreement. The investment management agreement is in
effect until July 31, 1997. The investment management agreement for the Fund may
continue in effect for successive annual periods if its continuance is
specifically approved at least annually by a vote of the Board or by a vote of
the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Board members who are not parties to the
investment management agreement or interested persons of any such party (other
than as members of the Board), cast in person at a meeting called for that
purpose. The investment management agreement may be terminated without penalty
at any time by the Board or by a vote of the holders of a majority of the Fund's
outstanding voting securities, or by the Investment Manager on 60 days' written
notice, and will automatically terminate in the event of its assignment, as
defined in the 1940 Act.
Administrative Services. Under an agreement with the Fund, FT Services provides
certain administrative services and facilities for the Fund. These include
preparing and maintaining books, records, and tax and financial reports, and
monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under the administration agreement, the Fund pays FT Services a monthly
administration fee equal on an annual basis to 0.15% of the first $200 million
in assets, 0.135% of the next $500 million, 0.1% of the next $500 million, and
0.075% of assets over $1.2 billion. Since FT Services' 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. Each class of shares pays its proportionate share of
the administration fee.
For the fiscal year ended March 31, 1996 and the period from July 28, 1994
(commencement of operations) to March 31, 1995, administrative services fees,
before reductions and expense limitations, totaled $5,840 and $941,
respectively. Under an agreement with FT Services (and, prior to October 1,
1996, Templeton Global Investors, Inc.) to limit its fees, the Fund paid no
-20-
PAGE
administrative services fees for the same period. After August 1, 1997, this
agreement may end at any time upon notice to the Board.
Shareholder Servicing Agent. Investor Services, a wholly-owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account.
Custodian. The Chase Manhattan Bank, at its principal office at MetroTech
Center, Brooklyn, New York 11245, and at the offices of its branches and
agencies throughout the world, acts as custodian of the Fund's assets. The
custodian does not participate in decisions relating to the purchase and sale of
portfolio securities.
Auditors. McGladrey & Pullen LLP, 555 Fifth Avenue, New York, New York, are the
Fund's independent auditors. During the fiscal year ended March 31, 1996, their
auditing services consisted of rendering an opinion on the financial statements
of the Fund included in the Fund's Annual Report to Shareholders for the fiscal
year ended March 31, 1996, and review of the Fund's filings with the SEC and the
IRS. Advisor Class shares of the Fund were not offered to the public before
January 1, 1997.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
The selection of brokers and dealers to execute transactions in the Fund's
portfolio is made by the Investment Manager in accordance with criteria set
forth in the investment management agreement and any directions that the Board
may give.
When placing a portfolio transaction, the Investment Manager seeks to obtain
prompt execution of orders at the most favorable net price. When portfolio
transactions are done on a securities exchange, the amount of commission paid by
the Fund is negotiated between the Investment Manager and the broker executing
the transaction. The determination and evaluation of the reasonableness of the
brokerage commissions paid in connection with portfolio transactions are based
to a large degree on the professional opinions of the persons responsible for
the placement and review of the transactions. These opinions are based on, among
others, the experience of these individuals in the securities industry and
information available to them about the level of commissions being paid by other
institutional investors of comparable size. The Investment Manager will
ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in the
opinion of the Investment Manager, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
The amount of commission is not the only factor the Investment Manager considers
in the selection of a broker to execute a trade. If the Investment Manager
believes it is in the Fund's best interest, the Investment Manager may place
portfolio transactions with brokers who provide the types of services described
below, even if it means the Fund will pay a higher commission than if no weight
were given to the broker's furnishing of these services. This will be done only
if, in the opinion of the Investment Manager, the amount of any additional
commission is reasonable in relation to the value of the services. Higher
commissions will be paid only when the brokerage and research services
-21-
PAGE
received are bona fide and produce a direct benefit to the Fund or assist the
Investment Manager in carrying out its responsibilities to the Fund, or when it
is otherwise in the best interest of the Fund to do so, whether or not such
services may also be useful to the Investment Manager in advising other clients.
When the Investment Manager believes several brokers are equally able to provide
the best net price and execution, it may decide to execute transactions through
brokers who provide quotations and other services to the Fund, in an amount of
total brokerage as may reasonably be required in light of these services.
Specifically, these services may include providing the quotations necessary to
determine the Fund's Net Asset Value, as well as research, statistical and other
data.
It is not possible to place a dollar value on the special executions or on the
research services received by the Investment Manager from dealers effecting
transactions in portfolio securities. The allocation of transactions in order to
obtain additional research services permits the Investment Manager to supplement
its own research and analysis activities and to receive the views and
information of individuals and research staff of other securities firms. As long
as it is lawful and appropriate to do so, the Investment Manager and its
affiliates may use this research and data in their investment advisory
capacities with other clients. If the Fund's officers are satisfied that the
best execution is obtained, the sale of Fund shares (which shall be deemed to
include also shares of other funds which have either the same investment adviser
or an investment adviser affiliated with the Investment Manager) may also be
considered a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions.
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.
<TABLE>
<CAPTION>
Amount of Purchase/Sales Proceeds Cost as a Percentage of Trade Proceeds
- --------------------------------- --------------------------------------
<S> <C>
One million yen or less 1.150%
Over(yen) 1 million -(yen) 5 million 0.900% +(yen) 2,500
Over(yen) 5 million -(yen)10 million 0.700% +(yen)12,500
Over(yen)10 million -(yen)30 million 0.575% +(yen)25,000
Over(yen)30 million -(yen)50 million 0.375% +(yen)85,000
Over(yen)50 million -(yen)100 million 0.225% +(yen)160,000
Over(yen)100 million -(yen)300 million 0.200% +(yen)185,000
Over(yen)300 million -(yen)500 million 0.125% +(yen)410,000
Over(yen)500 million -(yen) 1 billion 0.100% +(yen)535,000
Over(yen) 1 billion Stocks: negotiable
(minimum (yen)1,535,000)
Others: 0.075% + (yen)785,000
</TABLE>
*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
-22-
PAGE
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.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next investment
management fee payable to the Investment Manager will be reduced by the amount
of any fees received by Distributors in cash, less any costs and expenses
incurred in connection with the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by the Investment Manager are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to all
by the Investment Manager, taking into account the respective sizes of the funds
and the amount of securities to be purchased or sold. In some cases this
procedure could have a detrimental effect on the price or volume of the security
so far as the Fund is concerned. In other cases it is possible that the ability
to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Fund.
During the period July 28, 1994 (commencement of operations) through March 31,
1995, and the fiscal year ended March 31, 1996, the Fund paid brokerage
commissions totaling $6,000 and $52,000, respectively.
As of March 31, 1996, the Fund did not own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as securities dealers.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Reinvestment Date. Shares acquired through the reinvestment of dividends will be
purchased at the Net Asset Value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
-23-
PAGE
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
Systematic Withdrawal Plan. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
Through Your Securities Dealer. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your securities dealer.
Redemptions in Kind. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day
-24-
PAGE
period. This commitment is irrevocable without the prior approval of the SEC. In
the case of redemption requests in excess of these amounts, the Board reserves
the right to make payments in whole or in part in securities or other assets of
the Fund, in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of the Fund. In these
circumstances, the securities distributed would be valued at the price used to
compute the Fund's net assets and you may incur brokerage fees in converting the
securities to cash. The Fund does not intend to redeem illiquid securities in
kind. If this happens, however, you may not be able to recover your investment
in a timely manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
Special Services. The Franklin Templeton Institutional Services Department
provides specialized services, including recordkeeping, for institutional
investors. The cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions that maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such owners. For each beneficial owner in
the omnibus account, the Fund may reimburse Investor Services an amount not to
exceed the per account fee that the Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the scheduled close of the
NYSE, generally 4:00 p.m. Eastern time, each day that the NYSE is open for
trading. As of the date of this SAI, the Fund is informed that the NYSE observes
the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex- dividend date. Portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System for which market quotations are readily available are valued at the last
quoted sale
-25-
PAGE
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by the Investment Manager.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange prior to the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
of the NYSE on each day that the NYSE is open. Trading in European or Far
Eastern securities generally, or in a particular country or countries, may not
take place on every NYSE business day. Furthermore, trading takes place in
various foreign markets on days that are not business days for the NYSE and on
which the Fund's Net Asset Value is not calculated. Thus, the calculation of the
Fund's Net Asset Value does not take place contemporaneously with the
determination of the prices of many of the portfolio securities used in the
calculation and, if events materially affecting the values of these foreign
securities occur, the securities will be valued at fair value as determined by
management and approved in good faith by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the Net Asset Value of the Fund's shares is determined as of such times.
Occasionally, events affecting the values of these securities may occur between
the times at which they are determined and the scheduled close of the NYSE that
will not be reflected in the computation of the Fund's Net Asset Value. If
events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or securities dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the form of
dividends, interest and other
-26-
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income derived from its investments. This income, less the expenses incurred in
the Fund's operations, is its net investment income from which income dividends
may be distributed. Thus, the amount of dividends paid per share may vary with
each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made twice each year. One distribution may be made in December to reflect any
net short-term and net long-term capital gains realized by the Fund as of
October 31 of that year. Any net short-term and net long-term capital gains
realized by the Fund during the remainder of the fiscal year may be distributed
following the end of the fiscal year. The Fund may make one distribution derived
from net short-term and net long-term capital gains in any year or adjust the
timing of its distributions for operational or other reasons.
TAXES
As stated in the Prospectus, the Fund has elected to be treated as a regulated
investment company under Subchapter M of the Code. The Board reserves the right
not to maintain the qualification of the Fund as a regulated investment company
if it determines this course of action to be beneficial to shareholders. In that
case, the Fund will be subject to federal and possibly state corporate taxes on
its taxable income and gains, and distributions to shareholders will be taxable
to the extent of the Fund's available earnings and profits.
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 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.
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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 you 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 you as long-term capital gains,
regardless of the length of time you have held the Fund's shares. Generally
dividends and distributions are taxable to you, 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 you or, in some cases, as capital gain. You will be
notified annually as to the federal tax status of dividends and distributions
you 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 your cost basis, the
distribution nevertheless would be taxable to you 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, you 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 you.
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.
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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
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, you will be
required to include in gross income (in addition to taxable dividends actually
received) your pro rata share of the foreign taxes paid by the Fund, and will be
entitled either to deduct (as an itemized deduction) your pro rata share of
foreign income and similar taxes in computing your taxable income or to use it
as a foreign tax credit against your U.S. federal income tax liability, subject
to limitations. No deduction for foreign taxes may be claimed if you do not
itemize deductions, in such case, you may be eligible to claim the foreign tax
credit (see below). You 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 your U.S. tax attributable to your 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
-29-
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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. You may be unable to claim a credit for the full amount of your
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 U.S. 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 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
-30-
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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
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 your shares, you will realize a taxable gain or
loss depending upon your basis in the shares. Such gain or loss will be treated
as capital gain or loss if the shares are capital assets in your hands, and
generally will be long-term if your 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 you on the sale of the Fund's shares which you have
held 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 you received with respect to such shares.
In some cases, you 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 your shares. This prohibition generally applies where (1) you incur 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) you subsequently acquire 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 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 you if (1) you fail to furnish the Fund with your correct
taxpayer identification number or social security number and to make such
certifications as the Fund may require, (2) the IRS notifies you or the Fund
that you have 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,
you fail to certify that you are not subject to
-31-
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backup withholding. Any amounts withheld may be credited against your 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. You are advised to consult your own tax
advisers for details with respect to the particular tax consequences of an
investment in the Fund.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering for shares of the Fund. The
underwriting agreement will continue in effect for successive annual periods if
its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of the Fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting called
for that purpose. The underwriting agreement terminates automatically in the
event of its assignment and may be terminated by either party on 60 days'
written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Distributors will not receive compensation from the Fund for acting as
underwriter with respect to the Advisor Class shares.
Distributors and/or its affiliates provide financial support to various
Securities Dealers which sell shares of the Franklin Templeton Group of Funds.
Such support is based primarily upon the amount of sale of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; Securities Dealer support of, and
participation in, Distributor's marketing programs; Securities Dealer's
compensation programs for its registered representatives; and the extent of the
Securities Dealers marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributor's retention of underwriting
concessions and, in the case of funds which have distribution plans pursuant to
12b-1, from payments to Distributors pursuant to such plans. In addition,
certain Securities Dealers may receive brokerage commissions generated by fund
portfolio transactions in accordance with the Rules of the NASD.
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HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Current yield and average annual total return quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the Fund to compute or express performance for the Advisor Class shares follows.
For any period prior to January 1, 1997, the standardized performance quotations
for Advisor Class will be calculated by substituting the performance of Class I
for the relevant time period, and excluding the effect of the maximum sales
charge and including the effect of Rule 12b-1 fees applicable to Class I.
Regardless of the method used, past performance is not necessarily indicative of
future results, but is an indication of the return to shareholders only for the
limited historical period used.
TOTAL RETURN
Average Annual Total Return. Average annual total return is determined by
finding the average annual rates of return over one-, five- and ten-year
periods, or fractional portion thereof, that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes income dividends and capital gain distributions are reinvested at Net
Asset Value. The quotation assumes the account was completely redeemed at the
end of each one-, five- and ten-year period and the deduction of all applicable
charges and fees.
The average annual total return for Advisor Class for the one-year period ended
on March 31, 1996 and since inception (July 28, 1994), would have been ____% and
____%, respectively.
These figures were calculated according to the SEC formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the period
Cumulative Total Return. The Fund may also quote its cumulative total return, in
addition to its average annual total return. These quotations are computed the
same way, except the cumulative total return will be based on the Fund's actual
return for a specified period rather than on its average return over the period.
The cumulative total return for Advisor Class for the one-year period ended on
March 31, 1996 and since inception (July 28, 1994), would have been ____% and
____%, respectively.
VOLATILITY
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Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
For any period prior to January 1, 1997, sales literature about Advisor Class
may quote a current distribution rate, yield, cumulative total return, average
annual total return and other measures of performance as described elsewhere in
this SAI by substituting the performance of Class I for the relevant time period
and excluding the effect of the maximum sales charge, if applicable, and Rule
12b-1 fees applicable to Class I.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of both the Franklin Group of Funds and Templeton Group
of Funds.
COMPARISONS AND OTHER INFORMATION
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the performance of Advisor Class
to the return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, if any, as well as the value of its shares that are
based upon the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
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In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition,
there can be no assurance that the Fund will continue its performance as
compared to these other averages.
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.
(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 and industry distribution of the Fund's portfolio and
the Fund's top ten holdings.
(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.
(12) The number of shareholders in the Fund or the aggregate number of
shareholders of the Franklin Templeton Group of Funds or the dollar
amount of fund and private account assets under management.
-35-
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(13) Comparison of the characteristics of various emerging markets,
including population, financial and economic conditions.
(14) Quotations from the Templeton organization's founder, Sir John
Templeton,* advocating the virtues of diversification and long-term
investing, including the following:
- "Never follow the crowd. Superior performance is possible only
if you invest differently from the crowd."
- "Diversify by company, by industry and by country."
- "Always maintain a long-term perspective."
- "Invest for maximum total real return."
- "Invest - don't trade or speculate."
- "Remain flexible and open-minded about types of investment."
- "Buy low."
- "When buying stocks, search for bargains among quality
stocks."
- "Buy value, not market trends or the economic outlook."
- "Diversify. In stocks and bonds, as in much else, there is
safety in numbers."
- "Do your homework or hire wise experts to help you."
- "Aggressively monitor your investments."
- "Don't panic."
- "Learn from your mistakes."
- "Outperforming the market is a difficult task."
- "An investor who has all the answers doesn't even understand
all the questions."
- --------
* Sir John Templeton sold the Templeton organization to Resources 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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MISCELLANEOUS INFORMATION
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 48 years and
now services more than 2.5 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Together, the Franklin Templeton Group has over $143
billion in assets under management for more than 4.1 million U.S. based mutual
fund shareholder and other accounts. The Franklin Templeton Group of Funds
offers 114 U.S. based mutual funds to the public. The Fund may identify itself
by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past eight years.
[NOTE: THIS INFORMATION SHOULD BE AS OF A DATE NO MORE THAN 30 DAYS PRIOR TO THE
FILING OF THE REGISTRATION STATEMENT.] As of __________, 1996, the principal
shareholder of the Class I shares of the Fund, beneficial or of record, was as
follows:
<TABLE>
<CAPTION>
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
- ---------------- ------------ ----------
<S> <C> <C>
Templeton Global Investors, Inc.
500 E. Broward Blvd.
Ft. Lauderdale, Fl 33394-3091 51,239 7%
</TABLE>
From time to time, the number of Fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of the Fund, no other person holds beneficially or of record more
than 5% of the Fund's Advisor Class outstanding shares.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, prior to
executing instructions regarding the account; (b) interplead disputed funds or
accounts with a court of competent jurisdiction; or (c) surrender ownership of
all or a portion of the account to the IRS in response to a Notice of Levy.
Summary of Code of Ethics. Employees of Resources or its subsidiaries who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance
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officer and must be completed within 24 hours after clearance; (ii) copies of
all brokerage confirmations must be sent to a compliance officer and, within 10
days after the end of each calendar quarter, a report of all securities
transactions must be provided to the compliance officer; and (iii) access
persons involved in preparing and making investment decisions must, in addition
to (i) and (ii) above, file annual reports of their securities holdings each
January and inform the compliance officer (or other designated personnel) if
they own a security that is being considered for a fund or other client
transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Fund for the fiscal year ended March 31, 1996, including the auditors'
report, are incorporated herein by reference. The unaudited financial statements
contained in the Semi-Annual Report to Shareholders of the Fund for the period
ended September 30, 1996 are also incorporated herein by reference. The audited
and unaudited financial statements do not include information for Advisor Class
as these shares were not publicly offered prior to the date of this SAI.
-38-
PAGE
USEFUL TERMS AND DEFINITIONS
1933 Act - Securities Act of 1933, as amended.
1940 Act - Investment Company Act of 1940, as amended.
Board - The Board of the Fund.
CD - Certificate of deposit.
Class I and Advisor Class - The Fund offers two classes of shares, designated
"Class I" and "Advisor Class." The two classes have proportionate interests in
the Fund's portfolio. Class I shares are subject to a sales charge structure and
a Rule 12b-1 plan. Advisor Class shares are purchased without a sales charge and
do not have a Rule 12b-1 plan.
Code - Internal Revenue Code of 1986, as amended.
Contingency Period - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. Regardless of when during the month
you purchased shares, they will age one month on the last day of that month and
each following month.
Contingent Deferred Sales Charge (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
Franklin Funds - the mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust.
Franklin Templeton Funds - The Franklin Funds and the Templeton Funds.
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries.
Franklin Templeton Group of Funds - All U.S. registered investment companies in
the Franklin Group of Funds(R), the Templeton Group of Funds.
FT Services - Franklin Templeton Services, Inc., the Fund's administrator.
Investment Manager - Templeton Investment Counsel, Inc., Broward Financial
Centre, Fort Lauderdale, FL 33394-3091.
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
transfer agent and shareholder servicing agent.
IRS - Internal Revenue Service.
-39-
PAGE
Market Timer(s) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
Moody's - Moody's Investors Service, Inc.
Mutual Series - Franklin Mutual Series Fund Inc., a member of the Franklin Group
of Funds, formerly Mutual Series Fund Inc. Each series of Mutual Series began
offering three classes of shares on November 1, 1996, Class I, Class II and
Class Z. All shares sold before that time are designated Class Z shares.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - the value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation.
NYSE - New York Stock Exchange.
Offering Price - The public offering price is based on the Net Asset Value per
share and includes the front-end sales charge, if applicable. The maximum
front-end sales charge is 5.75% for Class I. Advisor Class has no front-end
sales charge.
Qualified Retirement Plan(s) - an employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust.
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information.
S&P - Standard and Poor's Corporation.
SEC - U.S. Securities and Exchange Commission.
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
Templeton Funds - The U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund.
-40-
PAGE
Trust Company - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States.
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly-owned
subsidiaries of Resources.
-41-
PAGE
APPENDICES
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
Moody's
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
-42-
PAGE
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
COMMERCIAL PAPER RATINGS
Moody's
Moody's commercial paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Fund, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
-43-
PAGE
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
-44-
PAGE
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS: Incorporated by reference from
Registrant's 1996 Annual Report:
Independent Auditor's Report
Investment Portfolio as of March 31, 1996
Statement of Assets and Liabilities as of March 31, 1996
Statement of Operations for fiscal year ended March 31, 1996
Statement of Changes in Net Assets for fiscal year ends
March 31, 1996 and 1995
Notes to Financial Statements
Incorporated by reference from the Registrant's (unaudited)
September 30, 1996 Semi-Annual Report:
Investment Portfolios
Statements of Assets and Liabilities
Statements of Operations
Statement of Changes in Net Assets
Notes to Financial Statements
(b) EXHIBITS
(1) Amended and Restated Trust Instrument *
(2) By-Laws *
(3) Not Applicable
(4) Not Applicable
(5) Investment Management Agreement *
(6) Amended and Restated Distribution Agreement *
(7) Not Applicable
(8) Form of Custody Agreement *
(9) (A) Form of Fund Administration Agreement
(B) Form of Transfer Agent Agreement *
(C) Form of Sub-Transfer Agent Services Agreement *
(D) Form of Shareholder Sub-Accounting Services
Agreement *
(10) Opinion and consent of counsel (filed with Rule
24f-2 Notice) **
(11) Consent of independent public accountants
(12) Not Applicable
(13) Not Applicable
(14) Not Applicable
(15) Form of Distribution Plan *
(16) Schedule showing computation of performance
quotations provided in response to Item 22 (unaudited) *
(17) Power of Attorney ***
(18) Assistant Secretary's Certificate pursuant to Rule
483 (b) *
(27) Financial Data Schedule
- --------------------
* Filed with Post-Effective Amendment No. 2 to the
Registration Statement on July 25, 1995
** Rule 24f-2 Notice filed with the Securities and Exchange Commission
on May 29, 1996.
*** Filed with Pre-Effective Amendment No. 2 to the Registration
Statement on April 15, 1994.
PAGE
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
Number of
TITLE OF CLASS RECORDHOLDERS
Shares of Beneficial Interest, 833 as of November 30, 1996
par value $0.01 per Share -
ITEM 27. INDEMNIFICATION.
Reference is made to Article III, Section 7 and Article VII,
Section 2 of the Registrant's Agreement and Declaration of
Trust and Article VI of the By-Laws, which are filed herewith.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers
and controlling persons of the Registrant by the Registrant
pursuant to the Declaration of Trust or otherwise, the
Registrant is aware that in the opinion of the Securities and
Exchange Commission, such indemnification is against public
policy as expressed in the Act and, therefore, is
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by trustees, officers
or controlling persons of the Registrant in connection with
the successful defense of any act, suit or proceeding) is
asserted by such trustees, officers or controlling persons in
connection with the shares being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issues.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER AND ITS
OFFICERS AND DIRECTORS
The business and other connections of Templeton Investment
Counsel, Inc. are described in Parts A and B of this
Registration Statement.
For information relating to the investment advisers' officers
and directors, reference is made to Forms ADV filed under the
Investment Advisers Act of 1940 by Templeton Investment
Counsel, Inc.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Franklin Templeton Distributors, Inc. also acts as
principal underwriter of shares of:
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
Franklin Asset Allocation Fund
Franklin California Tax Free Income Fund, Inc.
Franklin California Tax Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Premier Return Fund
Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Advantaged High Yield Securities Fund
Franklin Tax-Advantaged International Bond Fund
Franklin Tax-Advantaged U.S. Government Securities
Fund
Franklin Tax Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
(b) The directors and officers of FTD, located at 777 Mariners Island
Blvd., San Mateo, California 94404, are as follows:
<TABLE>
<CAPTION>
Position with the
NAME POSITION WITH UNDERWRITER REGISTRANT
<S> <C> <C>
Charles B. Johnson Chairman of the Board and Director Trustee, Chairman and Vice
President
Gregory E. Johnson President None
Rupert H. Johnson, Jr. Executive Vice President and Director Vice President
Kenneth V. Domingues Senior Vice President None
Harmon E. Burns Executive Vice President and Director Vice President
Edward V. McVey Senior Vice President None
Deborah R. Gatzek Senior Vice President and Assistant Vice President
Secretary
William J. Lippman Senior Vice President None
Richard C. Stoker Senior Vice President None
Charles E. Johnson Senior Vice President Trustee and President
500 E Broward Blvd.
Ft. Lauderdale, FL
Richard C. Stoker Senior Vice President None
Peter Jones Senior Vice President None
700 Central Avenue
St. Petersburg, FL
James K. Blinn Vice President None
Richard O. Conboy Vice President None
James A. Escobedo Vice President None
Bert W. Feuss Vice President None
Loretta Fry Vice President None
Robert N. Geppner Vice President None
Mike Hackett Vice President None
Philip J. Kearns Vice President None
Ken Leder Vice President None
Jack Lemein Vice President None
John R. McGee Vice President None
H. G. Mumford, Jr. Vice President None
Vivian J. Palmieri Vice President None
Kent P. Strazza Vice President None
Alison Hawksley Assistant Vice President None
John R. Kay Assistant Vice President Vice President
500 E Broward Blvd.
Ft. Lauderdale, FL
Francie Arnone Assistant Vice President None
Sarah Stypa Assistant Vice President None
Andrea Dover Assistant Vice President None
Laura Komar Assistant Vice President None
Virginia Marans Assistant Vice President None
Bernadette Marino Howard Assistant Vice President None
Susan Thompson Assistant Vice President None
Kenneth A. Lewis Treasurer None
Leslie M. Kratter Secretary None
Philip A. Scatena Assistant Treasurer None
Karen DeBellis Assistant Treasurer Assistant Treasurer
700 Central Avenue
St. Petersburg, FL
</TABLE>
(c) Not Applicable (Information on unaffiliated underwriters).
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books, and other documents required to be
maintained by Registrant pursuant to Section 31(a) of the
Investment Company Act of 1940 and rules promulgated
thereunder are in the possession of Franklin Templeton
Services, Inc., 500 East Broward Blvd., Fort Lauderdale,
Florida 33394.
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS.
(a) Not Applicable.
(b) Not Applicable.
(c) Registrant undertakes to call a meeting of Shareholders
for the purpose of voting upon the question of removal of a
Trustee or Trustees when requested to do so by the holders of
at least 10% of the Registrant's outstanding shares of
beneficial interest and in connection with such meeting to
comply with the shareholder communications provisions of
Section 16(c) of the Investment Company Act of 1940.
PAGE
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, the Registrant, as amended, the
Registrant certifies that it meets all the requirements for effectiveness of
this Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this Amendment to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of St. Petersburg in the State of Florida on the 30th day of December, 1996.
FRANKLIN TEMPLETON JAPAN FUND
(REGISTRANT)
By:
Charles E. Johnson*
President
*By:/s/JOHN K. CARTER
John K. Carter,
attorney-in-fact**
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
____________________ President (Chief December 30, 1996
Charles E. Johnson* Executive Officer)
___________________ Trustee, Chairman, December 30, 1996
Charles B. Johnson* and Vice President
____________________ Trustee December 30, 1996
Martin L. Flanagan*
___________________ Trustee December 30, 1996
Betty P. Krahmer*
___________________ Trustee December 30, 1996
Fred R. Millsaps*
PAGE
____________________ Trustee December 30, 1996
Harris J. Ashton*
____________________ Trustee December 30, 1996
S. Joseph Fortunato*
____________________ Trustee December 30, 1996
Andrew H. Hines, Jr.*
____________________ Trustee December 30, 1996
John Wm. Galbraith*
____________________ Trustee December 30, 1996
Gordon S. Macklin*
____________________ Trustee December 30, 1996
Nicholas F. Brady*
____________________ Treasurer (Chief December 30, 1996
James R. Baio* Financial and Accounting Officer)
</TABLE>
*By:/s/JOHN K. CARTER
John K. Carter,
Attorney-in-fact**
** Powers of Attorney filed in Pre-Effective Amendment No. 2 on April 15,
1994, or are contained herewith.
PAGE
POWER OF ATTORNEY
The undersigned officers and Trustees of FRANKLIN TEMPLETON
JAPAN FUND (the "Registrant") hereby appoint Allan S. Mostoff, Jeffrey L.
Steele, William J. Kotapish, Deborah R. Gatzek, Barbara J. Green, Larry L.
Greene, and John K. Carter (with full power to each of them to act alone) his
attorney-in-fact and agent, in all capacities, to execute, and to file any of
the documents referred to below relating to Post-Effective Amendments to the
Registrant's registration statement on Form N-1A under the Investment Company
Act of 1940, as amended, and under the Securities Act of 1933 covering the sale
of shares by the Registrant under prospectuses becoming effective after this
date, including any amendment or amendments increasing or decreasing the amount
of securities for which registration is being sought, with all exhibits and any
and all documents required to be filed with respect thereto with any regulatory
authority. Each of the ndersigned grants to each of said attorneys, full
authority to do every act necessary to be done in order to effectuate the same
as fully, to all intents and purposes as he could do if personally present,
thereby ratifying all that said attorneys-in-fact and agents, may lawfully do
or cause to be done by virtue hereof.
The undersigned officers and Trustees hereby execute this
Power of Attorney as of this 12th day of December, 1996.
<TABLE>
<CAPTION>
<S> <C>
/s/HARRIS J. ASHTON /s/CHARLES B. JOHNSON
Harris J. Ashton, Trustee Charles B. Johnson, Trustee
/s/NICHOLAS F. BRADY /s/CHARLES E. JOHNSON
Nicholas F. Brady, Trustee Charles E. Johnson, Trustee and President
/s/MARTIN L. FLANAGAN /s/BETTY P. KRAHMER
Martin L. Flanagan, Trustee Betty P. Krahmer, Trustee
/s/S. JOSHEPH FORTUNATO /s/GORDON S. MACKLIN
S. Joseph Fortunato, Trustee Gordon S. Macklin, Trustee
/s/JOHN WM. GALBRAITH /s/FRED R. MILLSAPS
John Wm. Galbraith, Trustee Fred R. Millsaps, Trustee
/s/ANDREW H. HINES, JR. /s/HASSO-G VON DIERGARDT-NAGLO
Andrew H. Hines, Jr., Trustee Hasso-G Von Diergardt-Naglo, Trustee
/s/EDITH E. HOLIDAY /s/JAMES R. BAIO
Edith E. Holiday, Trustee James R. Baio, Treasurer
</TABLE>
SECURITIES AND EXCHAGNE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT
FILED WITH
POST-EFFECTIVE AMENDMENT NO. 4 TO
REGISTRATION STATEMENT
ON
FORM N-1A
FRANKLIN TEMPLETON JAPAN FUND
PAGE
EXHIBIT LIST
EXHIBIT NUMBER NAME OF EXHIBIT
9(A) Fund Administration Agreement
27 Financial Data Schedule
PAGE
FUND ADMINISTRATION AGREEMENT BETWEEN
FRANKLIN TEMPLETON JAPAN FUND
AND
FRANKLIN TEMPLETON SERVICES, INC.
AGREEMENT dated as of October 1, 1996, between Franklin
Templeton Japan Fund (the "Fund"), an investment company registered under the
Investment Company Act of 1940 ("1940 Act"), Franklin Templeton Services, Inc.
("FTS" or "Administrator").
In consideration of the mutual promises herein made, the
parties hereby agree as follows:
(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to each Fund:
(a) providing office space, telephone, office equipment
and supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless
these facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for
payment on behalf of the Fund;
(d) supervising preparation of periodic reports to
shareholders, notices of dividends, capital gains distributions and tax credits;
and attending to routine correspondence and other communications with individual
shareholders when asked to do so by the Fund's shareholder servicing agent or
other agents of the Fund;
(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services engaged by the
Fund; providing fund accounting services, including preparing and supervising
publication of daily net asset value quotations, periodic earnings reports and
other financial data; and coordinating trade settlements;
(f) monitoring relationships with organizations serving the
Fund, including custodians, transfer agents, public accounting firms, law firms,
printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping
requirements under the federal securities laws, including the 1940 Act and the
rules and regulations thereunder, and under other applicable state and federal
laws; and maintaining books and records for the Fund (other than those
maintained by the custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's
income tax returns, and monitoring the Fund's compliance with subchapter M of
the Internal Revenue Code, as amended, and other applicable tax laws and
regulations;
(i) monitoring the Fund's ompliance with: 1940 Act and other
federal securities laws, and rules and regulations thereunder; state and foreign
laws and regulations applicable to the operation of investment companies; the
Fund's investment objectives, policies and restrictions; and the Code of Ethics
and other policies adopted by the Fund's Board of Trustees ("Board") or by the
Fund's investment adviser and applicable to the Fund;
(j) providing executive, clerical and secretarial
personnel needed to carry out the above responsibilities;
(k) preparing and filing regulatory reports, including
without limitation Forms N-1A and N-SAR, proxy statements, information
statements and U.S. and foreign ownership reports; and
(l) providing support services incidental to carrying
out these duties.
Nothing in this Agreement shall obligate the Fund to pay any compensation to the
officers of the Fund. Nothing in this Agreement shall obligate FTS to pay for
the services of third parties, including attorneys, auditors, printers, pricing
services or others, engaged directly by the Fund to perform services on behalf
of the Fund.
(2) The Fund agrees, during the life of this Agreement, to pay to FTS
as compensation for the foregoing a monthly fee equal on an annual basis to
0.15% of the first $200 million of the average daily net assets of each Fund
during the month preceding each payment, reduced as follows: on such net assets
in excess of $200 million up to $700 million, a monthly fee equal on an annual
basis to 0.135%; on such net assets in excess of $700 million up to $1.2
billion, a monthly fee equal on an annual basis to 0.10%; and on such net assets
in excess of $1.2 billion, a monthly fee equal on an annual basis to 0.075%.
From time to time, FTS may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in the purchase price
of its services. FTS shall be contractually bound hereunder by the terms of any
publicly announced waiver of its fee, or any limitation of each affected Fund's
expenses, as if such waiver or limitation were fully set forth herein.
(3) This Agreement shall remain in full force and effect through for
one year after its execution and thereafter from year to year to the extent
continuance is approved annually by the Board of the Fund.
(4) This Agreement may be terminated by the Fund at any time on sixty
(60) days' written notice without payment of penalty, provided that such
termination by the Fund shall be directed or approved by the vote of a majority
of the Board of the Fund in office at the time or by the vote of a majority of
the outstanding voting securities of the Fund (as defined by the 1940 Act); and
shall automatically and immediately terminate in the event of its assignment (as
defined by the 1940 Act).
(5) In the absence of willful misfeasance, bad faith or gross
negligence on the part of FTS, or of reckless disregard of its duties and
obligations hereunder, FTS shall not be subject to liability for any act or
omission in the course of, or connected with, rendering services hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their duly authorized officers.
FRANKLIN TEMPLETON SERVICES, INC.
By:/s/MARTIN L. FLANAGAN
Martin L. Flanagan
President
FRANKLIN TEMPLETON JAPAN FUND
By:/s/JOHN R. KAY
John R. Kay
Vice President
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TEMPLETON JAPAN FUND SEPTEMBER 30, 1996 SEMI-ANNUAL REPORT AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000887400
<NAME> FRANKLIN TEMPLETON JAPAN FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 7236631
<INVESTMENTS-AT-VALUE> 6826950
<RECEIVABLES> 154984
<ASSETS-OTHER> 0
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</TABLE>
