<PAGE> 1
FRANKLIN TEMPLETON
JAPAN FUND
YOUR FUND'S OBJECTIVE:
The Franklin Templeton Japan Fund seeks long-term capital growth by investing
primarily in securities of companies domiciled in Japan and traded in Japanese
securities markets.
March 31, 1997
Dear Shareholder:
This third annual report of the Franklin Templeton Japan Fund covers the year
ended March 31, 1997. During this period, the Japanese economy continued to
falter, the country's banking system remained in crisis, and government policies
failed to convince investors that an end to these problems was near. Although
the yen's depreciation, from 107.26 per U.S. dollar on March 31, 1996, to 123.79
on March 31, 1997, helped Japanese exports become more competitive on the world
market, Japan's unemployment rate declined only slightly from record levels and
the Nikkei 225 stock index fell from 21,407 on March 31, 1996 to 18,003 on March
31, 1997. Within this environment, the Fund's Class I shares provided a one-year
cumulative total return of -26.93%, as discussed in the Performance Summary on
page 4.
Japan's banking system presented the country with its greatest economic
challenge during the reporting period. Huge amounts of uncollectable loans were
secured by land or stock worth less than the amount borrowed, and the lack of
new corporate loans contributed to the economy's poor condition. While the
banking system
1
<PAGE> 2
FRANKLIN TEMPLETON JAPAN FUND
Portfolio Breakdown on 3/31/97
Based on Total Net Assets
[PIE CHART]
<TABLE>
<S> <C>
Capital Equipment 19.9%
Consumer Goods 7.7%
Services 7.3%
Materials 6.2%
Finance 2.4%
Short-Term Obligations &
Other Net Assets 56.5%
</TABLE>
was experiencing problems, the Japanese government had to deal with a fiscal
crisis. Throughout the past few years, public works spending programs, which the
government hoped would stimulate private capital spending, generated most of the
growth in gross domestic product (GDP). In a country that traditionally prides
itself on maintaining a balanced budget, these programs contributed to recent
deficits of approximately 7% of GDP. (In contrast, the U.S. budget deficit has
been cut to below 2% of GDP.) In an effort to shrink the deficit, the Japanese
government raised the national sales tax from 3% to 5% effective April 1, 1997,
and considered increasing corporate taxes. Unfortunately, these actions could
reduce corporate profits and prevent a substantial increase in private capital
spending, which in turn, could aggravate the banks' problems.
The Fund's performance was helped by the fact that we held no shares in large
banks and initiated no new positions in companies dependent on government
spending or vulnerable to competition in a deregulated economy. Our position in
Sony Corp. performed well, as its share price increased 17% during the year.
However, the Fund's total return was adversely affected by the yen's decline
during the period. Since we focus on discovering securities we consider bargains
for the Fund (not predicting the economic environment), we usually do not hedge
changes in the yen/dollar relationship.
In our opinion, movement toward banking reform and economic liberalization may
benefit Japanese stocks. The government does not suffer from a shortage of
ideas, but we believe Japan's problems will be solved only when its leaders
demonstrate the political will to implement these plans. It appears that the
country may be moving in this direction.
This discussion reflects the strategies we employed for the Fund during the past
fiscal year, and includes our opinions as of the close of the period. Since
economic and market conditions are constantly changing, our strategies, and our
evaluations, conclusions and decisions regarding portfolio holdings, may change
as new
2
<PAGE> 3
FRANKLIN TEMPLETON JAPAN FUND
Top 10 Holdings on 3/31/97
As a Percentage of Total Net Assets
<TABLE>
<CAPTION>
% of Total
Company, Industry Net Assets
<S> <C>
Sony Corp.
Appliances & Household Durables 3.9%
Fuji Heavy Industries Ltd.
Industrial Components 3.9%
Mitsubishi Corp.
Wholesale & International Trade 3.2%
Daito Trust Construction Co. Ltd.
Construction & Housing 2.7%
Tokio Marine & Fire Insurance Co. Ltd.
Insurance 2.4%
East Japan Railway Co.
Transportation 2.3%
Wacoal Corp.
Textiles & Apparel 2.3%
Matsushita Electric Industrial Co. Ltd.
Electrical & Electronics 2.2%
Mitsubishi Heavy Industries Ltd.
Industrial Components 2.1%
Hitachi Ltd.
Electrical & Electronics 2.0%
</TABLE>
For a complete list of portfolio holdings, see page 10 of this report.
circumstances arise. Although past performance of a specific investment
or sector cannot guarantee future performance, such information can be useful in
analyzing securities we purchase or sell for the Fund. It should be remembered
that there are specific risks involved with investing in a single foreign
country, including increased susceptibility to currency fluctuations, market
volatility, and economic, social, and political uncertainty. These risks and
other considerations are discussed in the Fund's prospectus.
Thank you for your continued support of the Franklin Templeton Japan Fund. We
welcome your comments and look forward to serving you in the future.
Sincerely,
/s/William T. Howard, Jr.
William T. Howard, Jr., CFA
Portfolio Manager
Franklin Templeton Japan Fund
CELEBRATING 50 YEARS
This year marks 50 years of business for Franklin Templeton. Over these years,
we have experienced profound changes in technology, regulations and customer
expectations within the mutual fund industry. As one of the largest mutual fund
families, we're proud to be an innovative industry leader, providing people like
you with an opportunity to invest in companies and governments around the globe.
In addition, we want to stress that all securities markets move both up and
down. Mixed in with the good years can be some bad years. Accordingly, mutual
fund share prices also move up and down. Every investor should expect such
fluctuations, which can be wide. When markets are going down, as well as up, we
encourage investors to maintain a long-term perspective. We thank you for your
past support and look forward to serving your investment needs in the years
ahead.
3
<PAGE> 4
PERFORMANCE SUMMARY
CLASS I
The Franklin Templeton Japan Fund Class I shares provided a cumulative total
return of -26.93% for the one-year period ended March 31, 1997. Cumulative total
return measures the change in value of an investment, assuming reinvestment of
dividends and capital gains, and does not include the initial sales charge.
The Fund's share price, as measured by net asset value, decreased by $2.91, from
$10.35 on March 31, 1996 to $7.44 on March 31, 1997. During the reporting
period, shareholders received distributions totaling 17.0 cents ($0.17) per
share in short-term capital gains. Of course, past performance is not predictive
of future results, and distributions will vary depending on income earned by the
Fund and any profits realized from the sale of securities in the portfolio, as
well as the level of the Fund's operating expenses.
The graph to the right compares the Fund's performance since inception on July
28, 1994 with the performance of the unmanaged Nikkei 225 Index. Please remember
that the Fund and the index will perform differently because the index is not
managed according to any investment strategy, does not contain cash (the Fund
generally carries a certain percentage of cash at any given time), and includes
no sales charges or management expenses. Of course, one cannot invest directly
in an index and the index is not representative of the Fund's portfolio.
<TABLE>
<CAPTION>
FRANKLIN TEMPLETON NIKKEI 225
JAPAN FUND INDEX
<S> <C> <C>
7/28/94 $9,425 $10,000
7/29/94 $9,444 $10,011
8/31/94 $9,434 $10,086
9/30/94 $9,416 $9,672
10/31/94 $9,491 $10,096
11/30/94 $9,312 $9,441
12/30/94 $9,369 $9,696
1/31/95 $9,208 $9,180
2/28/95 $9,000 $8,642
3/31/95 $9,407 $9,100
4/28/95 $9,549 $9,788
5/31/95 $9,170 $8,930
6/30/95 $9,084 $8,380
7/31/95 $9,369 $9,244
8/31/95 $9,322 $9,069
9/29/95 $9,303 $8,851
10/31/95 $9,008 $8,451
11/30/95 $9,293 $9,014
12/29/95 $9,673 $9,415
1/31/96 $9,768 $9,528
2/29/96 $9,683 $9,373
3/29/96 $9,835 $9,796
4/30/96 $10,472 $10,313
5/31/96 $10,093 $9,954
6/28/96 $9,987 $10,076
7/31/96 $9,639 $9,487
8/30/96 $9,021 $9,084
9/30/96 $9,176 $9,452
10/31/96 $8,558 $8,804
11/29/96 $8,500 $9,035
12/31/96 $7,843 $8,182
1/31/97 $7,312 $7,400
2/28/97 $7,350 $7,529
3/31/97 $7,186 $7,125
</TABLE>
4
<PAGE> 5
FRANKLIN TEMPLETON JAPAN FUND
CLASS I
Periods Ended 3/31/97
<TABLE>
<CAPTION>
Since
Inception
One-Year (7/28/94)
<S> <C> <C>
Cumulative Total Return(1) -26.93% -23.76%
Average Annual Total Return(2) -31.13% -11.62%
Value of $10,000 Investment(3) $ 6,887 $ 7,186
-----------------------------------------------------------------------
3/31/96 3/31/97
One-Year Total Return(4) 4.55% -26.93%
-----------------------------------------------------------------------
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the maximum 5.75% initial sales
charge.
2. Average annual total return represents the average annual change in value of
an investment over the indicated periods and includes the maximum 5.75% initial
sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the indicated periods and include the maximum 5.75% initial sales
charge.
4. One-year total return represents the change in value of an investment over
the one-year periods ended on the indicated dates and does not include the sales
charge.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Investment return and principal value will fluctuate with Japan's market
conditions, its currency and economic, social and political climate. You may
have a gain or loss when you sell your shares. Past performance is not
predictive of future results.
The Fund's Investment Manager and Fund Administrator have agreed in advance to
reduce a portion of their respective fees and, in the case of the Fund
Administrator, to make certain payments to reduce expenses, which increases
total return to shareholders. If they had not taken this action, the total
returns for Class I shares would have been lower. After August 1, 1997, the fee
reduction and expense reimbursement may be discontinued at any time upon notice
to the Fund's Board of Trustees.
5
<PAGE> 6
PERFORMANCE SUMMARY
ADVISOR CLASS
The Franklin Templeton Japan Fund Advisor Class shares produced an aggregate
total return of -8.60% for the three-month period from inception on January 1,
1997 through March 31, 1997. The Fund's share price, as measured by net asset
value, decreased by $0.70, from $8.14 on January 2, 1997 (day of commencement of
sales), to $7.44 on March 31, 1997. Of course, past performance is not
predictive of future results.
FRANKLIN TEMPLETON JAPAN FUND
ADVISOR CLASS
Period Ended 3/31/97
<TABLE>
<CAPTION>
Since
Inception
(1/1/97)
<S> <C>
Aggregate Total Return(1) -8.60%
</TABLE>
1. Aggregate total return represents the change in value of an investment over
the period indicated. Since Advisor Class shares have been in existence for less
than one year, average annual total returns are not provided.
Note: Investment return and principal value will fluctuate with market
conditions, currencies, and the economic, social and political climates of
countries where investments are made. You may have a gain or loss when you sell
your shares. Past performance is not predictive of future results.
The Fund's Investment Manager and Fund Administrator have agreed in advance to
reduce a portion of their respective fees and, in the case of the Fund
Administrator, to make certain payments to reduce expenses, which increases
total return to shareholders. If they had not taken this action, the total
returns for Advisor Class shares would have been lower. After August 1, 1997,
the fee reduction and expense reimbursement may be discontinued at any time upon
notice to the Fund's Board of Trustees.
6
<PAGE> 7
Many investors have asked us about the activities of Sir John Templeton, since
his retirement from the funds. We asked Professor Robert Herrmann to update us
on Sir John's current activities and his comments follow.
THE NEW CAREER OF
SIR JOHN TEMPLETON
[PHOTO SIR JOHN TEMPLETON]
BY PROFESSOR
ROBERT HERRMANN
In 1992, Sir John Templeton retired after a 50-year career of helping investors
manage their money. Currently, he devotes all of his time and efforts to the
John Templeton Foundation. A major portion of his assets remain invested in
Templeton funds, managed by many of the investment professionals he selected and
trained. For sentimental reasons, he allows his name to be associated with the
funds, although he knows no more about their management and holdings than any
other investor.
Sir John Templeton established the Templeton Foundation in 1987, to foster the
acquisition of spiritual information through scientific research. Working with
scientists, theologians and others, he strives toward a new science that uses
empirical and statistical scientific methods to discover and test spiritual
knowledge. A crucial ingredient in his research is what Sir John calls "humility
theology," an attitude of humility toward the Creator, combined with
receptiveness to the theological significance of current scientific discoveries.
Universal spiritual laws, or "laws of life," are among the areas of
investigation. In his recent book, Worldwide Laws of Life, Sir John compiles 200
laws and proverbs from nearly all religions, and deeply embedded in human
history. For example, the Golden Rule taught by Jesus in the Sermon on the
Mount, states "Do unto others as you would have others do unto you," and is
affirmed by all major religions as an acceptable, universal law of life. Other
books which Sir John has authored or co-authored during the past few years
include: The Humble Approach, Is God the Only Reality, Evidence of Purpose,
Who's Who in Theology and Science and The God Who Would Be Known.
With an annual budget of more than $30 million, the Templeton Foundation
sponsors 60 programs focusing on spiritual progress and the benefits of freedom.
Sir John's first sizable investment in the programs was the Templeton Prize for
Progress in Religion. A panel of nine judges gives the annual award which now
exceeds $1.2 million to individuals who have shown extraordinary originality in
furthering the world's understanding of God or spirituality.
Recipients of the prize include Professor Paul Davies, author of The Mind of
God; the Right Honorable Lord Jacobovits, former Chief Rabbi of Great Britain
and The Commonwealth; the Reverend Dr. Billy Graham, world-renowned preacher and
presidential inauguration speaker; Mr. Nikkyo Nimano, founder of the World
Conference on Religion and Peace; and Sir Sarepalli Radhakrishnan, former
President of India, and Oxford professor of Eastern Religions and Ethics.
To encourage young people's and their parents' appreciation of spiritual laws of
life, Sir John established an essay contest for teenagers in his home county of
Franklin, Tennessee. Students submit essays about the spiritual life principles
they plan to follow, and prizes are offered semiannually. In 1996, more than 800
youth participated. Twenty-six similar programs have been launched in various
locations, with the support of generous local donors.
The Foundation also sponsors a worldwide program that awards college-level
faculty who teach courses integrating science and religion. During the program's
first two years, more than 200 courses were created. The Foundation maintains an
extensive program of research and education on the health benefits of
spirituality, including prizes for medical schools providing courses on
spirituality in medicine. Lastly, the Foundation publishes a newsletter with
over 2,000 subscribers. Free subscriptions are available to Templeton
shareholders by writing to the Foundation.
To contact Sir John Templeton or receive the free newsletter subscription,
please write to:
The John Templeton Foundation
2 Radnor Corporate Center #320
100 Matsonford Road
Radnor, PA 19087
7
<PAGE> 8
FRANKLIN TEMPLETON JAPAN FUND
Financial Highlights
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE -- CLASS I
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
JULY 28, 1994
YEAR ENDED MARCH 31 (COMMENCEMENT
------------------------- OF OPERATIONS) TO
1997 1996 MARCH 31, 1995
-------- -------- ----------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 10.35 $ 9.93 $ 10.00
------- ------ ------
Income from investment operations:
Net investment income (loss) (.05) (.02) .10
Net realized and unrealized gain (loss) (2.69) .47 (.12)
------- ------ ------
Total from investment operations (2.74) .45 (.02)
------- ------ ------
Distributions:
Dividends from net investment income -- (.03) (.05)
Distributions from net realized gain (.17) -- --
------- ------ ------
Total distributions (.17) (.03) (.05)
------- ------ ------
Change in net asset value (2.91) .42 (.07)
------- ------ ------
Net asset value, end of period $ 7.44 $ 10.35 $ 9.93
======= ====== ======
TOTAL RETURN* (26.93)% 4.55% (.19)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $ 7,128 $ 6,232 $ 1,444
Ratio of expenses to average net assets 3.05% 4.90% 12.05%**
Ratio of expenses, net of reimbursement, to average net assets 2.00% 1.99% 1.25%**
Ratio of net investment income (loss) to average net assets (.77)% (.05)% 1.92%**
Portfolio turnover rate 23.43% 54.97% --
Average commission rate paid (per share) $ .0603 $ .0552
* TOTAL RETURN DOES NOT REFLECT SALES COMMISSIONS. NOT ANNUALIZED FOR PERIODS OF LESS THAN ONE YEAR.
** ANNUALIZED.
</TABLE>
8
<PAGE> 9
FRANKLIN TEMPLETON JAPAN FUND
Financial Highlights (cont.)
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE -- ADVISOR CLASS
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 2, 1997+
THROUGH
MARCH 31, 1997
----------------
<S> <C>
Net asset value, beginning of period $ 8.14
------
Income from investment operations:
Net investment income .02
Net realized and unrealized loss (.72)
------
Total from investment operations (.70)
------
Change in net asset value (.70)
------
Net asset value, end of period $ 7.44
======
TOTAL RETURN* (8.60)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $ 55
Ratio of expenses to average net assets 3.48%**
Ratio of expenses, net of reimbursement, to average net assets 1.65%**
Ratio of net investment income to average net assets .94%**
Portfolio turnover rate 23.43%
Average commission rate paid (per share) $ .0603
* NOT ANNUALIZED FOR PERIODS OF LESS THAN ONE YEAR.
** ANNUALIZED.
+ COMMENCEMENT OF SALES.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE> 10
FRANKLIN TEMPLETON JAPAN FUND
Investment Portfolio, March 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS: 43.5%
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
APPLIANCES & HOUSEHOLD DURABLES: 3.9%
Sony Corp. Jpn. 4,000 $ 279,777
- ------------------------------------------------------------------------------------------------------------------------
CHEMICALS: 1.5%
Daicel Chemical Industries Ltd. Jpn. 30,000 107,949
- ------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION & HOUSING: 7.1%
Daito Trust Construction Co. Ltd. Jpn. 20,000 195,682
Maeda Corp. Jpn. 10,000 54,176
National House Industrial Co. Ltd. Jpn. 11,000 127,193
Toda Corp. Jpn. 23,000 132,231
----------
509,282
- ------------------------------------------------------------------------------------------------------------------------
ELECTRICAL & ELECTRONICS: 4.1%
Hitachi Ltd. Jpn. 16,000 142,314
Matsushita Electric Industrial Co. Ltd. Jpn. 10,000 156,061
----------
298,375
- ------------------------------------------------------------------------------------------------------------------------
FOREST PRODUCTS & PAPER: 3.7%
Hokuetsu Paper Mills Ltd. Jpn. 29,000 131,317
Rengo Co. Ltd. Jpn. 27,000 133,177
----------
264,494
- ------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL COMPONENTS: 8.7%
Fuji Heavy Industries Ltd. Jpn. 62,000 278,240
Mitsubishi Heavy Industries Ltd. Jpn. 23,000 149,713
Sanyo Electric Co. Ltd. Jpn. 34,000 128,390
Shinko Electric Industries Jpn. 2,000 68,893
----------
625,236
- ------------------------------------------------------------------------------------------------------------------------
INSURANCE: 2.4%
Tokio Marine & Fire Insurance Co. Ltd. Jpn. 17,000 173,203
- ------------------------------------------------------------------------------------------------------------------------
METALS & MINING: 1.0%
Nittetsu Mining Co. Ltd. Jpn. 12,000 70,834
- ------------------------------------------------------------------------------------------------------------------------
TEXTILES & APPAREL: 3.8%
Nisshinbo Industries Inc. Jpn. 17,000 112,307
Wacoal Corp. Jpn. 16,000 163,014
----------
275,321
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
FRANKLIN TEMPLETON JAPAN FUND
Investment Portfolio, March 31, 1997 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TRANSPORTATION: 4.1%
Daiwa Logistics Co. Ltd. Jpn. 9,600 $ 129,635
East Japan Railway Jpn. 40 163,338
----------
292,973
- ------------------------------------------------------------------------------------------------------------------------
WHOLESALE & INTERNATIONAL TRADE: 3.2%
Mitsubishi Corp. Jpn. 26,000 231,261
----------
TOTAL COMMON STOCKS (cost $4,127,681) 3,128,705
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL IN
LOCAL CURRENCY*
- ------------------------------------------------------------------------------------------------------------------------
SHORT TERM OBLIGATIONS: 54.8% (cost $3,934,616)
- ------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bills, 4.84% to 5.23% with
maturities to 6/19/97 U.S. 3,965,000 3,934,649
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS: 98.3% (cost $8,062,297) 7,063,354
OTHER ASSETS, LESS LIABILITIES: 1.7% 119,557
----------
TOTAL NET ASSETS: 100.0% $7,182,911
==========
</TABLE>
* CURRENCY OF COUNTRY INDICATED.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE> 12
FRANKLIN TEMPLETON JAPAN FUND
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1997
<TABLE>
<S> <C>
Assets:
Investments in securities, at value
(identified cost $8,062,297) $7,063,354
Cash 768
Receivables:
Investment securities sold 4,183
Fund shares sold 81,284
Dividends 18,826
Fee reimbursement 9,247
Unamortized organization costs 53,767
----------
Total assets 7,231,429
----------
Liabilities:
Payable for fund shares redeemed 7,215
Accrued expenses 41,303
----------
Total liabilities 48,518
----------
Net assets, at value $7,182,911
==========
Net assets consist of:
Net unrealized depreciation $ (998,943)
Accumulated net realized loss (822,109)
Net capital paid in on shares of
beneficial interest 9,003,963
----------
Net assets, at value $7,182,911
==========
Class I
Net asset value per share
($7,128,010 / 958,580 shares
outstanding) $ 7.44
==========
Maximum offering price
($7.44 / 94.25%) $ 7.89
==========
Advisor Class
Net asset value per share
($54,901 / 7,381 shares outstanding) $ 7.44
==========
</TABLE>
STATEMENT OF OPERATIONS
for the year ended March 31, 1997
<TABLE>
<S> <C> <C>
Investment income:
(net of $7,211 foreign taxes
withheld)
Dividends $ 41,229
Interest 41,139
----------
Total income $ 82,368
Expenses:
Management fees (Note 3) 49,723
Administrative fees (Note 3) 9,942
Distribution fees (Note 3)
Class I 23,146
Transfer agent fees (Note 3) 18,700
Custodian fees 2,900
Reports to shareholders 11,000
Audit fees 9,500
Legal fees 9,500
Registration and filing fees 43,400
Trustees' fees and expenses 600
Amortization of organization
costs 22,692
Other 1,331
----------
Total expenses 202,434
Less expenses reimbursed
(Note 3) (68,992)
----------
Total expenses less
reimbursement 133,442
----------
Net investment loss (51,074)
Realized and unrealized loss:
Net realized loss on:
Investments (814,140)
Foreign currency
transactions (17,119)
----------
(831,259)
Net unrealized depreciation
on investments (1,035,823)
----------
Net realized and
unrealized loss (1,867,082)
----------
Net decrease in net assets
resulting from operations $(1,918,156)
==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE> 13
FRANKLIN TEMPLETON JAPAN FUND
Financial Statements (cont.)
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment loss $ (51,074) $ (2,015)
Net realized gain (loss) on investment and foreign currency transactions (831,259) 119,620
Net unrealized appreciation (depreciation) (1,035,823) 35,226
---------- ----------
Net increase (decrease) in net assets resulting from operations (1,918,156) 152,831
Distributions to shareholders:
From net investment income
Class I -- (4,653)
From net realized gain
Class I (117,178) --
From return of capital
Class I (2,679) --
Fund share transactions (Note 2)
Class I 2,932,654 4,640,078
Advisor class 56,499 --
---------- ----------
Net increase in net assets 951,140 4,788,256
Net assets:
Beginning of year 6,231,771 1,443,515
---------- ----------
End of year $ 7,182,911 $6,231,771
========== ==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE> 14
FRANKLIN TEMPLETON JAPAN FUND
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
Franklin Templeton Japan Fund (the Fund) is an open-end, diversified management
investment company registered under the Investment Company Act of 1940. The Fund
seeks long-term capital growth by investing primarily in securities of companies
domiciled in Japan and traded in Japanese securities markets. The following
summarizes the Fund's significant accounting policies.
A. SECURITIES VALUATIONS:
Securities listed or traded on a recognized national or foreign exchange or
NASDAQ are valued at the last reported sales prices on the principal exchange on
which the securities are traded. Over-the-counter securities for which no sale
is reported are valued at the mean between the last current bid and asked
prices. Securities for which market quotations are not readily available are
valued at fair value as determined in good faith by management and approved by
the Board of Trustees.
B. FOREIGN CURRENCY TRANSACTIONS:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the rate of exchange of
such currencies against U.S. dollars on the date of valuation. Purchases and
sales of portfolio securities and income items denominated in foreign currencies
are translated into U.S. dollar amounts on the respective dates of such
transactions. When the Fund purchases or sells foreign securities it customarily
enters into a foreign exchange contract to minimize foreign exchange risk
between the trade date and the settlement date of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, the differences between the amounts
of dividends, interest, and foreign withholding taxes recorded on the Fund's
books, and the U.S. dollar equivalent of the amounts actually received or paid.
Net unrealized foreign exchange gains and losses arise from changes in the value
of assets and liabilities other than investments in securities at the end of the
fiscal period, resulting from changes in the exchange rates.
C. INCOME TAXES:
It is the Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable income to its shareholders. Therefore, no provision has been made for
income taxes.
D. UNAMORTIZED ORGANIZATION COSTS:
Organization costs are being amortized on a straight line basis over five years.
E. SECURITY TRANSACTIONS, INVESTMENT INCOME, DISTRIBUTIONS AND EXPENSES:
Security transactions are accounted for on a trade date basis. Dividend income
is recorded on the ex-dividend date. Certain dividend income on foreign
securities is recorded as soon as information is available to the Fund. Interest
income and estimated expenses are accrued daily. Distributions to shareholders,
which are determined in accordance with income tax regulations, are recorded on
the ex-dividend date.
F. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
14
<PAGE> 15
FRANKLIN TEMPLETON JAPAN FUND
Notes to Financial Statements (cont.)
- --------------------------------------------------------------------------------
2. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Effective January 2, 1997, the Fund offers two class of shares: Class I and
Advisor Class shares. Prior to this date, only Class I shares were offered.
Shares of each class are identical except for their initial sales load,
distribution fees, and voting rights on matters affecting a single class. At
March 31, 1997, there were an unlimited number of shares of beneficial interest
authorized ($0.01 par value). Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
CLASS I
----------------------------------------------
YEAR ENDED YEAR ENDED
MARCH 31, 1997 MARCH 31, 1996
--------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
-------- ---------- -------- -----------
<S> <C> <C> <C> <C>
Shares sold 1,104,095 $ 9,745,209 1,375,298 $13,696,032
Shares issued on reinvestment of distributions 10,075 104,173 236 2,326
Shares redeemed (757,577) (6,916,728) (918,913) (9,058,280)
--------- ----------- --------- -----------
Net increase 356,593 $ 2,932,654 456,621 $ 4,640,078
========= =========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
ADVISOR CLASS
---------------------
FOR THE PERIOD
JANUARY 2, 1997
THROUGH
MARCH 31, 1997
---------------------
SHARES AMOUNT
-------- ----------
<S> <C> <C>
Shares sold 24,789 $ 187,939
Shares redeemed (17,408) (131,440)
------- --------
Net increase 7,381 $ 56,499
======= ========
</TABLE>
3. INVESTMENT MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Certain officers of the Fund are also directors or officers of Templeton
Investment Counsel, Inc. (TICI), Franklin Templeton Services, Inc. (FTSI),
Franklin Templeton Distributors, Inc. (FTD), and Franklin Templeton Investor
Services (FTIS), the Fund's investment manager, administrative manager,
principal underwriter, and transfer agent, respectively.
The Fund pays monthly an investment management fee to TICI equal, on an annual
basis, to 0.75% of the average daily net assets of the Fund. The Fund pays FTSI
monthly an administrative fee of 0.15% per annum on the first $200 million of
the Fund's average daily net assets, 0.135% of the next $500 million, 0.10% of
the next $500 million, and 0.075% per annum of such average assets in excess of
$1.2 billion. TICI and FTSI have voluntarily agreed to reduce their respective
fees to the extent necessary to limit total expenses to an annual rate of 2.00%
and 1.65% of the Fund's average daily net assets of Class I and Advisor Class
shares, respectively, through August 1, 1997. The amount of reimbursement for
the year ended March 31, 1997 is set forth in the Statement of Operations. For
the year ended March 31, 1997, FTD received net commissions of $25,369 from the
sale of Fund's shares and FTIS received fees of $18,700.
Pursuant to a distribution plan, the Fund reimburses FTD monthly (subject to a
limit of 0.35% per annum of the average daily net assets of Class I shares) for
FTD's cost and expenses in connection with any activity that is primarily
intended to result in sales of Fund shares. Such distribution fees are set forth
in the Statement of Operations. Under the distribution plan, costs and
15
<PAGE> 16
FRANKLIN TEMPLETON JAPAN FUND
Notes to Financial Statements (cont.)
- --------------------------------------------------------------------------------
expenses exceeding the maximum may be reimbursed in subsequent periods. At March
31, 1997, unreimbursed expenses amounted to $13,668.
An officer of the Fund is a partner of Dechert Price & Rhoads, legal counsel for
the Fund, which firm received legal fees for the year ended March 31, 1997.
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding short-term securities) for the year
ended March 31, 1997 aggregated $1,311,800 and $1,681,404, respectively. The
cost of securities for federal income tax purposes is the same as that shown in
the Investment Portfolio. Realized gains and losses are reported on an
identified cost basis.
At March 31, 1997, the aggregate gross unrealized appreciation and depreciation
of portfolio securities, based on cost for federal income tax purposes, was as
follows:
<TABLE>
<S> <C>
Unrealized appreciation $ 59,924
Unrealized depreciation (1,058,867)
-----------
Net unrealized depreciation $ (998,943)
===========
</TABLE>
5. TAX LOSS CARRYOVER
At March 31, 1997 the Fund had a tax basis capital loss of $814,140 which may be
carried over to offset future capital gains. Such losses expire in 2005.
16
<PAGE> 17
FRANKLIN TEMPLETON JAPAN FUND
Independent Auditor's Report
- --------------------------------------------------------------------------------
The Board of Trustees and Shareholders
Franklin Templeton Japan Fund
We have audited the accompanying statement of assets and liabilities, including
the investment portfolio, of Franklin Templeton Japan Fund as of March 31, 1997,
and the related statement of operations for the year then ended, the statements
of changes in net assets for each of the two years in the period then ended, and
the financial highlights for the periods indicated in the accompanying financial
statements. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1997, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Franklin Templeton Japan Fund as of March 31, 1997, the results of its
operations, the changes in its net assets and the financial highlights for the
periods indicated, in conformity with generally accepted accounting principles.
McGladrey & Pullen, LLP
New York, New York
April 25, 1997
17
<PAGE> 18
NOTES
--------
<PAGE> 19
FRANKLIN TEMPLETON GROUP OF FUNDS
LITERATURE REQUEST - Call 1-800/DIAL BEN (1-800/342-5236) today for a free
descriptive brochure and prospectus on any of the funds listed below. The
prospectus contains more complete information, including fees, charges and
expenses, and should be read carefully before investing or sending money.
GLOBAL GROWTH
Franklin Global Health Care Fund
Franklin Templeton Japan Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton Global Infrastructure Fund
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund
Templeton Greater European Fund
Templeton Growth Fund
Templeton Latin America Fund
Templeton Pacific Growth Fund
Templeton World Fund
GLOBAL GROWTH AND INCOME
Franklin Global Utilities Fund
Franklin Templeton German Government Bond Fund
Franklin Templeton Global Currency Fund
Mutual European Fund
Templeton Global Bond Fund
Templeton Growth and Income Fund
GLOBAL INCOME
Franklin Global Government Income Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Templeton Americas Government Securities Fund
GROWTH
Franklin Blue Chip Fund
Franklin California Growth Fund
Franklin DynaTech Fund
Franklin Equity Fund
Franklin Gold Fund
Franklin Growth Fund
Franklin MidCap Growth Fund
Franklin Small Cap Growth Fund
Mutual Discovery Fund
GROWTH AND INCOME
Franklin Asset Allocation Fund
Franklin Balance Sheet Investment Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Franklin MicroCap Value Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Rising Dividends Fund
Franklin Strategic Income Fund
Franklin Utilities Fund
Franklin Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Shares Fund
Templeton American Trust, Inc.
FUND ALLOCATOR SERIES:
Franklin Templeton Conservative Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
INCOME
Franklin Adjustable Rate Securities Fund
Franklin Adjustable U.S. Government Securities Fund
Franklin's AGE High Income Fund
Franklin Investment Grade Income Fund
Franklin Short-Intermediate U.S. Government Securities Fund
Franklin U.S. Government Securities Fund
Franklin Money Fund
Franklin Federal Money Fund
FOR NON-U.S. INVESTORS:
Franklin Tax-Advantaged High Yield Securities Fund
Franklin Tax-Advantaged International Bond Fund
Franklin Tax-Advantaged U.S. Government Securities Fund
FOR CORPORATIONS:
Franklin Corporate Qualified Dividend Fund
FRANKLIN FUNDS SEEKING
TAX-FREE INCOME
Federal Intermediate-Term Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund
Puerto Rico Tax-Free Income Fund
Tax-Exempt Money Fund
FRANKLIN STATE-SPECIFIC
FUNDS SEEKING
TAX-FREE INCOME
Alabama
Arizona*
Arkansas**
California*
Colorado
Connecticut
Florida*
Georgia
Hawaii**
Indiana
Kentucky
Louisiana
Maryland
Massachusetts***
Michigan*
Minnesota***
Missouri
New Jersey
New York*
North Carolina
Ohio***
Oregon
Pennsylvania
Tennessee**
Texas
Virginia
Washington**
VARIABLE ANNUITIES+
Franklin Valuemark(R)
Franklin Templeton Valuemark Income Plus (an immediate annuity)
*TWO OR MORE FUND OPTIONS AVAILABLE: LONG-TERM PORTFOLIO, INTERMEDIATE-TERM
PORTFOLIO, A PORTFOLIO OF INSURED MUNICIPAL SECURITIES, AND/OR A HIGH YIELD
PORTFOLIO (CA) AND A MONEY MARKET PORTFOLIO (CA AND NY).
**THE FUND MAY INVEST UP TO 100% OF ITS ASSETS IN BONDS THAT PAY INTEREST
SUBJECT TO THE FEDERAL ALTERNATIVE MINIMUM TAX.
***PORTFOLIO OF INSURED MUNICIPAL SECURITIES.
+FRANKLIN VALUEMARK AND FRANKLIN TEMPLETON VALUEMARK INCOME PLUS ARE ISSUED BY
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA OR BY ITS WHOLLY OWNED
SUBSIDIARY, PREFERRED LIFE INSURANCE COMPANY OF NEW YORK, AND DISTRIBUTED BY
NALAC FINANCIAL PLANS, LLC.
FGF 02/97
<PAGE> 20
Franklin Templeton Japan
Fund
Auditors
McGladrey & Pullen, LLP
555 Fifth Avenue
New York, New York 10017-2416
Principal Underwriter:
Franklin Templeton
Distributors, Inc.
700 Central Avenue
St. Petersburg,
Florida 33701-3628
Shareholder Services
1-800-632-2301
Fund Information
1-800-342-5236
This report must be preceded or accompanied by the current prospectus of
Franklin Templeton Japan Fund, which contains more complete information
including charges and expenses. Like any investment in securities, the value of
the Fund's portfolio will be subject to the risk of loss from market, currency,
economic, political and other factors, as well as investment decisions by the
Investment Manager, which will not always be profitable or wise. The Fund and
its investors are not protected from such losses by the Investment Manager.
Therefore, investors who cannot accept this risk should not invest in shares of
the Fund.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded, and accessed. These calls can be
determined by the presence of a regular beeping tone.
FRANKLIN
TEMPLETON
JAPAN
FUND
Annual Report
March 31, 1997
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