FRANKLIN TEMPLETON JAPAN FUND
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 1, 1996
700 CENTRAL AVENUE
ST. PETERSBURG, FL 33701 1-800/DIAL BEN
TABLE OF CONTENTS
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How Does the Fund Invest Its Assets?......................... 2
What Are the Fund's Potential Risks?......................... 11
Investment Restrictions...................................... 19
Officers and Trustees........................................ 22
Investment Advisory and Other Services....................... 29
How Does the Fund Buy Securities For Its Portfolio?.......... 31
How Do I Buy, Sell and Exchange Shares?...................... 35
How Are Fund Shares Valued?.................................. 41
Additional Information on Distributions and Taxes............ 42
The Fund's Underwriter....................................... 51
How Does the Fund Measure Performance?....................... 54
Miscellaneous Information.................................... 60
Financial Statements......................................... 61
Useful Terms and Definitions................................. 62
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WHEN READING THIS SAI, YOU WILL SEE CERTAIN
TERMS IN CAPITAL LETTER. 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.
The Prospectus, dated August 1, 1996, 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 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 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.
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 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 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 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 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 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 certain countries. Moreover, the economies of some developing
countries may differ favorably or unfavorably from the United States 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 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, 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 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 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.
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.
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 THE PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE 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); and a director of RBC Holdings (U.S.A.) Inc. (a
Stamford, Connecticut bank holding company) and Bar-S Foods.
Age 64
</TABLE>
<TABLE>
POSITION AND
OFFICES WITH THE PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE 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 Trust
102 East Dover Street PLC; chairman of Darby Overseas Investments, Ltd. (an
Easton, Maryland investment firm) (1994-present); chairman and director of
Age 66 Templeton Central and Eastern European Fund; director of
the Amerada Hess Corporation, Christiana Companies, and
the H.J. Heinz Company; Secretary of the United States
Department of the Treasury (1988-January 1993); and
chairman of the board of Dillon, Read & Co. Inc.
(investment banking) prior thereto.
F. BRUCE CLARKE Trustee Retired; formerly, credit adviser, National Bank of
19 Vista View Blvd. Canada, Toronto.
Thornhill, Ontario
Age 86
HASSO-G VON DIERGARDT-NAGLO Trustee Farmer; and president of Clairhaven Investments, Ltd. and
R.R. 3 other private investment companies.
Stouffville, Ontario
Age 80
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 Counsel,
Age 36 Inc.; director, president and chief executive officer of
Templeton Global Investors, Inc.; accountant with Arthur
Andersen & Company (1982-1983); and a member of the
International Society of Financial Analysts and the
American Institute of Certified Public Accountants.
S. JOSEPH FORTUNATO Trustee Member of the law firm of Pitney, Hardin, Kipp & Szuch;
200 Campus Drive and a director of General Host Corporation.
Florham Park, New Jersey
Age 64
</TABLE>
<TABLE>
POSITION AND
OFFICES WITH THE PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE FUND DURING PAST FIVE YEARS
<S> <C> <C>
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 Bank
St. Petersburg, Florida (1991-1995); vice chairman of Templeton, Galbraith &
Age 74 Hansberger Ltd. (1986-1992); and chairman of Templeton
Funds Management, Inc. (1974-1991).
ANDREW H. HINES, JR. Trustee Consultant for the Triangle Consulting Group; chairman of
150 2nd Avenue N. the board and chief executive officer of Florida Progress
St. Petersburg, Florida Corporation (1982-February 1990) and director of various
Age 73 of its subsidiaries; chairman and director of Precise
Power Corporation; executive-in-residence of Eckerd
College (1991-present); and a director of Checkers
Drive-In Restaurants, Inc.
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 Templeton
Age 63 President Distributors, Inc.; director of Franklin Administrative
Services, Inc., General Host Corporation, and Templeton
Global Investors, Inc.; and officer and director, trustee
or managing general partner, as the case may be, of most
other subsidiaries of Franklin Resources, Inc.
</TABLE>
<TABLE>
POSITION AND
OFFICES WITH THE PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE FUND DURING PAST FIVE YEARS
<S> <C> <C>
CHARLES E. JOHNSON* Trustee and Senior vice president and director of Franklin Resources,
777 Mariners Island Blvd. President Inc.; senior vice president of Franklin Templeton
San Mateo, California Distributors, Inc.; president and chief executive officer
Age 40. of Templeton Worldwide, Inc.; president and director of
Franklin Institutional Service Corporation and chairman of
the board of Templeton Investment Counsel, Inc.; vice
president and/or director, as the case may be, for some of
the subsidiaries of Franklin Resources, Inc.; and an
officer and/or director or trustee, as the case may be, of
various 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.
Wilmington, Delaware
Age 67
GORDON S. MACKLIN Trustee Chairman of White River Corporation (information
8212 Burning Tree Road services); director of Fund America Enterprises Holdings,
Bethesda, Maryland Inc., MCI Communications Corporation, Fusion Systems
Age 68 Corporation, Infovest Corporation, MedImmune, Inc., Source
One Mortgage Services Corp., and Shoppers Express, Inc.
(on-line shopping service); and formerly held the
following positions: 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.
FRED R. MILLSAPS Trustee Manager of personal investments (1978-present); chairman
2665 N.E. 37th Drive and chief executive officer of Landmark Banking
Fort Lauderdale, Florida Corporation (1969-1978); financial vice president of
Age 67 Florida Power and Light (1965-1969); vice president of The
Federal Reserve Bank of Atlanta (1958-1965); and a
director of various other business and nonprofit
organizations.
</TABLE>
<TABLE>
POSITION AND
OFFICES WITH THE PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE FUND DURING PAST FIVE YEARS
<S> <C> <C>
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 an officer and/or director, as the case may be, of
various investment companies in the Franklin Templeton
Group.
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.;
director of Franklin Templeton Investor Services,
Inc.; officers and/or director, as the case may be of
other subsidiaries of Franklin Resources, Inc.
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 47 Franklin Advisers, Inc. and officer of various
investment companies in the Franklin Templeton Group
of Funds.
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).
</TABLE>
<TABLE>
POSITION AND OFFICES
WITH THE FUND PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE DURING PAST FIVE YEARS
<S> <C> <C>
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 of the Templeton Funds; vice president
500 East Broward Blvd. President and treasurer of Templeton Global Investors, Inc. and
Fort Lauderdale, Florida Templeton Worldwide, Inc.; assistant vice president of
Age 56 Franklin Templeton Distributors, Inc.; formerly, vice
president and controller of the Keystone Group, Inc.
JAMES R. BAIO Treasurer Certified public accountant; treasurer of the Templeton
500 East Broward Blvd. Funds; senior vice president of Templeton Worldwide,
Fort Lauderdale, Florida Inc., Templeton Global Investors, Inc., and Templeton
Age 42 Funds Trust Company; formerly, senior tax manager
of Ernst & Young (certified public accountants)
(1977-1989).
</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
Nominting 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.
<TABLE>
<CAPTION>
NUMBER OF BOARDS
TOTAL FEES IN THE FRANKLIN
TOTAL FEES RECEIVED FROM THE TEMPLETON GROUP OF
RECEIVED FROM FRANKLIN TEMPLETON FUNDS ON WHICH
NAME THE TRUST* GROUP OF FUNDS** EACH SERVES***
<S> <C> <C> <C>
Harris J. Ashton $100 $327,925 55
Nicholas F. Brady 100 98,225 23
F. Bruce Clarke 102 83,350 19
Hasso-G von 100 77,350 19
Diergardt-Naglo
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>
*For the fiscal year ended March 31, 1996.
**For the calendar year ended December 31, 1995.
***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.
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 June 25, 1996, the officers and Board members, as a group, owned of
record and beneficially approximately 35,794 shares, or less than 1% 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.
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.
INVESTMENT MANAGEMENT AGREEMENT. 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.
The investment management fee will be reduced as necessary to comply with the
most stringent limits on Fund expenses of any state where the Fund offers it
shares. Currently, the most restrictive limitation on a fund's allowable
expenses for each fiscal year, as a percentage of its average net assets, is
2.5% of the first $30 million in assets, 2% of the next $70 million, and 1.5% of
assets over $100 million. Expense reductions have not been necessary based on
state requirements.
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.
BUSINESS MANAGER AND SERVICES PROVIDED. The Business Manager provides office
space and furnishings, facilities and equipment required for managing the
business affairs of the Fund. The Business Manager also maintains all internal
bookkeeping, clerical, secretarial and administrative personnel and services and
provides certain telephone and other mechanical services. The Business Manager
is covered by fidelity insurance on its officers, directors and employees for
the protection of the Fund.
BUSINESS MANAGEMENT AGREEMENT. Under its business management agreement, the Fund
pays the Business Manager a monthly 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 $1,200 million. Since the Business
Manager's fee covers services often provided by investment advisers to other
funds, the Fund's combined expenses for advisory and administrative services
together may be higher than those of some other investment companies.
INVESTMENT MANAGEMENT AND BUSINESS MANAGEMENT FEES. 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, and business management
fees totaled $5,840 and $941, respectively. Under an agreement by the Investment
Manager and the Business Manager to limit their fees, the Fund paid no
investment management or business management fees for the same periods.
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.
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 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 either Fund's 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/ COST AS A PERCENTAGE OF
SALES PROCEEDS TRADE PROCEEDS
<S> <C>
One million yen or less 1.150%
Over(Y) 1 million -(Y) 5 million 0.900% +(Y) 2,500
Over(Y) 5 million -(Y)10 million 0.700% +(Y)12,500
Over(Y)10 million -(Y)30 million 0.575% +(Y)25,000
Over(Y)30 million -(Y)50 million 0.375% +(Y)85,000
Over(Y)50 million -(Y)100 million 0.225% +(Y)160,000
Over(Y)100 million -(Y)300 million 0.200% +(Y)185,000
Over(Y)300 million -(Y)500 million 0.125% +(Y)410,000
Over(Y)500 million -(Y) 1 billion 0.100% +(Y)535,000
Over(Y) 1 billion Stocks: negotiable
(minimum (Y)1,535,000)
Others: 0.075% + (Y)785,000
</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 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 National Association of Securities
Dealers, 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
The Fund continuously offers its shares through securities dealers who have an
agreement with Distributors. Securities dealers may at times receive the entire
sales charge. A securities dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
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. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - Quantity
Discounts" in the Prospectus.
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.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.
Shares of the Fund may be offered to investors in Taiwan through securities
advisory firms known locally as Securities Investment Consulting Enterprises. In
conformity with local business practices in Taiwan, shares may be offered with
the following schedule of sales charges:
<TABLE>
<CAPTION>
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE
- ------------------------------- ------------
<S> <C>
Under $30,000 3.0%
$30,000 but less than $50,000 2.5%
$50,000 but less than $100,000 2.0%
$100,000 but less than $200,000 1.5%
$200,000 but less than $400,000 1.0%
$400,000 or more 0%
</TABLE>
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors will pay the following
commissions, out of its own resources, to securities dealers who initiate and
are responsible for purchases of $1 million or more: 1% on sales of $1 million
to $2 million, plus 0.80% on sales of $2 million to $3 million, plus 0.50% on
sales of $3 million to $50 million, plus 0.25% on sales of $50 million to $100
million, plus 0.15% on sales of $100 million or more..
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to securities dealers who initiate and are responsible for
purchases by certain retirement plans pursuant to a sales charge waiver, as
discussed in the Prospectus: 1% on sales of $$500,000 to $2 million, plus 0.80%
on sales of $2 million to $3 million, plus 0.50% on sales of $3 million to $50
million, plus 0.25% on sales of $50 million to $100 million, plus 0.15% on sales
of $100 million or more. Distributors may make these payments in the form of
contingent advance payments, which may be recovered from the securities dealer
or set off against other payments due to the dealer if shares are sold within 12
months of the calendar month of purchase. Other conditions may apply. All terms
and conditions may be imposed by an agreement between Distributors, or one of
its affiliates, and the securities dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy Fund
shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds, including Class II shares, acquired more than 90 days before the Letter
is filed, will be counted towards completion of the Letter but will not be
entitled to a retroactive downward adjustment in the sales charge. Any
redemptions you make during the 13-month period, except in the case of certain
retirement plans, will be subtracted from the amount of the purchases for
purposes of determining whether the terms of the Letter have been completed. If
the Letter is not completed within the 13-month period, there will be an upward
adjustment of the sales charge, depending on the amount actually purchased (less
redemptions) during the period. The upward adjustment does not apply to certain
retirement plans. If you execute a Letter prior to a change in the sales charge
structure of the Fund, you may complete the Letter at the lower of the new sales
charge structure or the sales charge structure in effect at the time the Letter
was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in your name
until you fulfill the Letter. This policy of reserving shares does not apply to
certain retirement plans. If total purchases, less redemptions, equal the amount
specified under the Letter, the reserved shares will be deposited to an account
in your name or delivered to you or as you direct. If total purchases, less
redemptions, exceed the amount specified under the Letter and is an amount that
would qualify for a further quantity discount, a retroactive price adjustment
will be made by Distributors and the securities dealer through whom purchases
were made pursuant to the Letter (to reflect such further quantity discount) on
purchases made within 90 days before and on those made after filing the Letter.
The resulting difference in offering price will be applied to the purchase of
additional shares at the offering price applicable to a single purchase or the
dollar amount of the total purchases. If the total purchases, less redemptions,
are less than the amount specified under the Letter, you will remit to
Distributors an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge that would have applied to
the aggregate purchases if the total of the purchases had been made at a single
time. Upon remittance, the reserved shares held for your account will be
deposited to an account in your name or delivered to you or as you direct. If
within 20 days after written request the difference in sales charge is not paid,
the redemption of an appropriate number of reserved shares to realize the
difference will be made. In the event of a total redemption of the account prior
to fulfillment of the Letter, the additional sales charge due will be deducted
from the proceeds of the redemption, and the balance will be forwarded to you.
If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will be
purchased at the net asset value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at net asset value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of 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 first business 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 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
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 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.
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.
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 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 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 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.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions during the period July 28, 1994 (commencement of operations) through
March 31, 1995, and for the fiscal year ended March 31, 1996, were $149,606 and
$34,066, respectively. After allowances to dealers, Distributors retained $5,220
and $25,733 in net underwriting discounts and commissions. Distributors may be
entitled to reimbursement under the Fund's Rule 12b-1 plan, as discussed below.
Except as noted, Distributors received no other compensation from the Fund for
acting as underwriter.
THE FUND'S RULE 12B-1 PLAN
The Fund has adopted a distribution plan or "Rule 12b-1 plan" pursuant to Rule
12b-1 of the 1940 Act. Under the plan, the Fund may reimburse Distributors or
others up to a maximum of 0.35% per year of its average daily net assets,
payable quarterly, for costs and expenses incurred in connection with any
activity which is primarily intended to result in the sale of the Fund's shares.
Payments to Distributors or others could be for various types of activities,
including (1) payments to broker-dealers who provide certain services of value
to the Fund's shareholders (sometimes referred to as a "trail fee"); (2)
reimbursement of expenses relating to selling and servicing efforts or of
organizing and conducting sales seminars; (3) payments to employees or agents of
Distributors who engage in or support distribution of shares; (4) payments of
the costs of preparing, printing and distributing prospectuses and reports to
prospective investors and of printing and advertising expenses; (5) payment of
dealer commissions and wholesaler compensation in connection with sales of the
Fund's shares exceeding $1 million (on which the Fund imposes no initial sales
charge) and interest or carrying charges in connection therewith; and (6) such
other similar services as the Board determines to be reasonably calculated to
result in the sale of shares. Under the plan, the costs and expenses not
reimbursed in any one given quarter (including costs and expenses not reimbursed
because they exceed 0.35% of the Fund's average daily net assets) may be
reimbursed in subsequent quarters or years.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plan as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plan for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
The plan has been approved in accordance with the provisions of Rule 12b-1. The
plan is renewable annually by a vote of the Board, including a majority vote of
the Board members who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the plan, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such Board members be done by the non-interested
members of the Board. The plan and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of the
management agreement with the Investment Manager, or by vote of a majority of
the Fund's outstanding shares. Distributors or any dealer or other firm may also
terminate their respective distribution or service agreement at any time upon
written notice.
The plan and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the Fund's outstanding shares, and all material amendments to the plan or any
related agreements shall be approved by a vote of the non-interested members of
the Board, cast in person at a meeting called for the purpose of voting on any
such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plan and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plan should be continued.
For the fiscal year ended March 31, 1996, the total amount paid by the Fund
pursuant to the plan was $13,667, which was used for the following purposes:
<TABLE>
<CAPTION>
DOLLAR AMOUNT
<S> <C>
Advertising $126
Printing and mailing of prospectuses other
than to current shareholders $8,743
Payments to underwriters $1,965
Payments to broker-dealers $8,432
Other $14
</TABLE>
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 follows. 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 the maximum front-end sales charge is deducted from the initial $1,000
purchase, and income dividends and capital gain distributions are reinvested at
net asset value. The quotation assumes the account was completely redeemed at
the end of each one-, five- and ten-year period and the deduction of all
applicable charges and fees. If a change is made to the sales charge structure,
historical performance information will be restated to reflect the maximum
front-end sales charge currently in effect.
When considering the Fund's average annual total return quotations, you should
keep in mind that the maximum front-end sales charge reflected in each quotation
is a one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the Fund. The
Fund's average annual total return for the one-year period ended on March 31,
1996 and since inception (July 28, 1994), were -1.46% and -0.99%, 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 Fund's cumulative total return for the one-year period ended on March 31,
1996 and since inception (July 28, 1994), were -1.46% and -1.65%, respectively.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's net
asset value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of net asset value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
For investors who are permitted to buy shares of the Fund without a sales
charge, sales literature about the Fund 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 with the substitution of net
asset value for the public offering price.
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 Fund's performance 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.
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.
(13) Comparison of the characteristics of various emerging markets,
including population, financial and economic conditions.
(14) Quotations from the empleton 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."
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.
As of June 25, 1996, the principal shareholder 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.
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 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.
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.
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.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
BOARD - The Board of Trustees of the Fund
BUSINESS MANAGER - Templeton Global Investors, Inc., Broward Financial Centre,
Fort Lauderdale, FL 33394-3091
CD - Certificate of deposit
CLASS I AND CLASS II - Certain funds in the Franklin Templeton Funds offer two
classes of shares, designated "Class I" and "Class II." The two classes have
proportionate interests in the same portfolio of investment securities. They
differ, however, primarily in their sales charge structures and 12b-1 plans.
Because the Fund's sales charge structure and 12b-1 plan are similar to those of
Class I shares, shares of the Fund are considered Class I shares for redemption,
exchange and other purposes.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN FUNDS - the mutual funds in the Franklin Group of Funds/TRADEMARK/
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 mutual funds in the
Franklin Group of Funds /TRADEMARK/ and the Templeton Group of Funds
INVESTMENT MANAGER - Templeton Investment Counsel, Inc., Broward Financial
Centre, Fort Lauderdale, Florida 33394-3091
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc.
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investor Service, Inc.
NET ASSET VALUE (NAV) - the value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
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. The maximum front-end sales
charge is 5.75%
PROSPECTUS - the prospectus for the Fund dated August 1, 1996, as may be amended
from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - a financial institution which, 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.
S&P - Standard & Poor's Corporation
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
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or another
wholly-owned subsidiary of Resources.
- --------
/FN/
* 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.
