FRANKLIN
PREMIER
RETURN FUND
PROSPECTUS MAY 1, 1995
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin Premier Return Fund (the "Fund") is a diversified, open-
end management investment company with the primary investment
objective of high current return and, secondarily, relative
stability of principal. The Fund will seek to achieve its primary
objective of high current return by investing in common stocks,
investment grade corporate and U.S. government bonds and short-
term money market instruments. For hedging purposes, in an effort
to stabilize principal fluctuations, the Fund may engage in
transactions in stock options, stock index options, financial
futures, and options thereon.
This Prospectus is intended to set forth in a clear and concise
manner information about the Fund that a prospective investor
should know before investing. After reading the Prospectus, it
should be retained for future reference; it contains information
about the purchase and sale of shares and other items which a
prospective investor will find useful to have.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. SHARES OF THE
FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
A Statement of Additional Information ("SAI") concerning the
Fund, dated May 1, 1995, as may be amended from time to time,
provides a further discussion of certain areas in this Prospectus
and other matters which may be of interest to some investors. It
has been filed with the Securities and Exchange Commission
("SEC") and is incorporated herein by reference. A copy is
available without charge from the Fund or the Fund's principal
underwriter, Franklin/Templeton Distributors, Inc.
("Distributors") at the address or telephone number shown above.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN
DESCRIBED IN ANY STATE IN WHICH THE OFFERING IS NOT AUTHORIZED.
NO SALES REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO
GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED
FROM THE UNDERWRITER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CONTENTS PAGE
Expense Table
Financial Highlights
About the Fund
Investment Objectives and
Policies of the Fund
Management of the Fund
Distributions to Shareholders
Taxation of the Fund and
Its Shareholders
How to Buy Shares of the Fund
Purchasing Shares of the Fund in
Connection with Retirement Plans
Involving Tax-Deferred Investments
Other Programs and Privileges
Available to Fund Shareholders
Exchange Privilege
How to Sell Shares of the Fund
Telephone Transactions
Valuation of Fund Shares
How to Get Information Regarding
an Investment in the Fund
Performance
General Information
Account Registrations
Important Notice Regarding
Taxpayer IRS Certifications
Portfolio Operations
EXPENSE TABLE
The purpose of this table is to assist an investor in
understanding the various costs and expenses that a shareholder
will bear directly or indirectly in connection with an investment
in the Fund. These figures are based on aggregate operating
expenses of the Fund for the fiscal year ended December 31, 1994.
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.50%
Deferred Sales Charge NONE*
Exchange Fee (per transaction) $5.00**
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.63%
Rule 12b-1 Fees 0.12%+
Other Expenses:
Shareholder Servicing Costs 0.08%
Professional Fees 0.11%
Registration Fees 0.07%
Reports to Shareholders 0.19%
Other 0.07%
Total Other Expenses 0.52%
Total Fund Operating Expenses 1.27%
*Investments of $1 million or more are not subject to a front-end
sales charge; however, a contingent deferred sales charge of 1%
is imposed on certain redemptions within 12 months of the
calendar month following such investments. See "How to Sell
Shares of the Fund - Contingent Deferred Sales Charge."
**$5.00 fee imposed only on Timing Accounts as described under
"Exchange Privilege." All other exchanges are processed without a
fee.
+Consistent with National Association of Securities Dealers,
Inc.'s rules, it is possible that the combination of front-end
sales charges and Rule 12b-1 fees could cause long-term
shareholders to pay more than the economic equivalent of the
maximum front-end sales charges permitted under those same rules.
See "Management of the Fund - Plan of Distribution."
Investors should be aware that the above table is not intended to
reflect in precise detail the fees and expenses associated with
an individual's own investment in the Fund. Rather the table has
been provided only to assist investors in gaining a more complete
understanding of fees, charges and expenses. For a more detailed
discussion of these matters, investors should refer to the
appropriate sections of this Prospectus.
EXAMPLE
As required by SEC regulations, the following example illustrates
the expenses, including the maximum front-end sales charge, that
apply to a $1,000 investment in the Fund over various time
periods assuming (1) a 5% annual rate of return and (2)
redemption at the end of each time period:
1 year 3 years 5 years 10 years
$57 $83 $112 $191
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES
SHOWN ABOVE AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE SHOWN.
The operating expenses are borne by the Fund and only indirectly
by shareholders as a result of their investment in the Fund. In
addition, federal securities regulations require the example to
assume an annual return of 5%, but the Fund's actual return may
be more or less than 5%.
FINANCIAL HIGHLIGHTS
Set forth below is a table containing financial highlights for a
share of the Fund outstanding throughout the ten fiscal years
ending December 31, 1994. The information for each of the five
fiscal years in the period ended December 31, 1994 has been
audited by Coopers & Lybrand L.L.P., independent auditors, whose
audit report appears in the financial statements in the Fund's
Annual Report to Shareholders dated December 31. The remaining
figures, which are also audited, are not covered by the auditors'
current report. See the discussion "Reports to Shareholders"
under "General Information."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE*
Net asset value at beginning of $ 6.22 $ 5.40 $ 4.88 $ 4.21 $ 5.19 $ 5.12 $ 4.95 $ 5.93 $ 6.59 $ 6.17
year -------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income................0.14 0.13 0.15 0.14 0.16 0.15 0.15 0.15 0.11 0.12
Net realized and unrealized
gains (losses) on securities...... .(0.110) 0.860 0.530 0.780 (0.595) 0.599 0.705 0.031 0.360 1.255
-------- -------- ------- ------- ------- ------- ------- ------- ------- ------
Total from investment operations.....0.030 0.990 0.680 0.920 (0.435) 0.749 0.855 0.181 0.470 1.375
-------- -------- ------- ------- ------- ------- ------- ------- ------- ------
Less Distributions:
Dividends from net investment
income.......................... (0.140) (0.170) (0.160) (0.135) (0.155) (0.157) (0.162) (0.166) (0.125) (0.180)
Distributions from realized
capital gains................... - - - (0.115) (0.390) (0.522) (0.523) (0.995) (1.005) (0.775)
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions............... (0.140) (0.170) (0.160) (0.250) (0.545) (0.679) (0.685) (1.161) (1.130) (0.955)
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value at end of year.....$ 6.11 $ 6.22 $ 5.40 $ 4.88 $ 4.21 $ 5.19 $ 5.12 $ 4.95 $ 5.93 $ 6.59
======== ======== ======== ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN**.................... 0.46% 18.38% 14.02% 22.06% (8.81)% 14.72% 17.68% 1.44% 7.53% 24.27%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
year (in 000's). $25,631 $22,877 $22,077 $28,189 $32,878 $44,516 $45,010 $39,790 $34,203 $11,312
Ratio of expenses to average
net assets....................... 1.27% 1.00% 0.92% 0.93% 0.85% 0.81% 0.83% 0.84% 0.95% 1.10%
Ratio of net investment income to
average net assets............... 2.29% 2.15% 2.81% 2.95% 3.27% 2.81% 3.00% 2.65% 2.32% 2.07%
Portfolio turnover rate............ 45.18% 20.49% 23.17% 62.25% 73.12% 163.55% 79.73% 176.36% 105.00% 156.00%
</TABLE>
*Selected data for a share of capital stock outstanding
throughout the year.
**Total return measures the change in value of an investment over
the periods indicated. It does not include the maximum front-end
sales charge and assumes reinvestment of dividends and capital
gains, if any, at net asset value.
ABOUT THE FUND
The Fund is a California corporation, originally incorporated in
Hawaii in 1951. It was reincorporated under the laws of the state
of California in 1983 and registered with the SEC under the 1940
Act. The Fund has only one class of capital stock, with no par
value. The Fund is a diversified, open-end management investment
company, commonly called a "mutual fund." On April 12, 1991
shareholders approved a change in the Fund's investment
objectives and policies and the adoption of the Fund's current
name. Formerly, the Fund was known as the Franklin Option Fund.
Shares of the Fund may be purchased (minimum investment of $100
initially and $25 thereafter) at the current public offering
price, which is equal to the Fund's net asset value (see
"Valuation of Fund Shares") plus a sales charge not exceeding
4.5% of the offering price. See "How to Buy Shares of the Fund."
INVESTMENT OBJECTIVES
AND POLICIES OF THE FUND
The investment objectives of the Fund are high current return
and, secondarily, relative stability of principal. The objectives
are fundamental policies of the Fund and may not be changed
without shareholder approval.
Current return, also known as "total return," is made up of
capital appreciation and income distributions. The Fund's primary
emphasis is growth of capital, with income a secondary
consideration. Distributions to shareholders are expected to be
derived primarily from common stock dividends, interest income,
and any net capital gains from the sale of securities.
The Fund will seek to achieve its primary objective of high
current return by investing in common stocks (a majority of which
fall within the Standard & Poor's ["S&P"] 500 or the S&P Mid-Cap
400), investment grade corporate and U.S. government bonds, short-
term money market instruments and securities of foreign issuers.
For hedging purposes, in an effort to stabilize principal
fluctuations, the Fund may engage in transactions in stock
options, stock index options, financial futures and options
thereon. As with any investment, however, there is no assurance
that the Fund's objectives will be attained.
THE FUND'S INVESTMENTS AND STRATEGIES
It is anticipated that the Fund will primarily invest in common
stock, investment grade fixed-income securities, and money market
instruments. The percentage of assets invested in these types of
securities will vary from time to time, with equity securities
representing a majority of the Fund's net assets.
The Fund's investment manager uses a top-down approach based on
the current and future outlook for the economy and the business
cycle to determine the Fund's asset allocation mix and sector
weightings. Quantitative, technical, and fundamental analysis are
all used to identify sectors, the industries within those
sectors, and the companies within those industries. Depending on
the stage of the business cycle, certain sectors perform better
than others. The investment manager attempts to position the Fund
in the sectors exhibiting strong price momentum. The same
analytical tools are used to screen for industries and companies.
Investments in debt securities will be in one of the four highest
ratings of either S&P or Moody's Investors Service ("Moody's").
The four highest rating categories are AAA, AA, A or BBB by S&P
or Aaa, Aa, A, or Baa by Moody's. Debt securities rated BBB by
S&P or Baa by Moody's are regarded as having an adequate capacity
to pay principal and interest but with greater vulnerability to
adverse economic conditions and some speculative characteristics.
As with other debt instruments, the price of the debt securities
in which the Fund invests are likely to decrease in times of
rising interest rates. Conversely, when rates fall, the value of
the Fund's debt investments may rise. Price changes of debt
securities held by the Fund have a direct impact on the net asset
value per share of the Fund. Transactions in options, futures,
and options on futures are generaly considered "derivative
securities." The Fund's investments in these derivative
securities will be for portfolio hedging purposes in an effort to
stabilize principal fluctuations to achieve the Fund's secondary
investment objective and not for speculation.
SHORT-TERM INVESTMENTS. The Fund may invest its cash, including
cash resulting from purchases and sales of Fund shares,
temporarily in short-term debt instruments, including high grade
commercial paper, repurchase agreements and other money market
equivalents. Such temporary investments will only be made with
cash held to maintain liquidity or pending investment. In
addition, for temporary defensive purposes in the event of or
when the investment manager anticipates a general decline in the
market prices of stocks in which the Fund invests, the Fund may
invest an unlimited amount of its assets in short-term debt
instruments.
CONVERTIBLE SECURITIES. A portion of the Fund's assets may be
invested in convertible securities. A convertible security is a
fixed-income security (a bond or preferred stock) which may be
converted at a stated price within a specified period of time
into a certain quantity of the common stock of the same or a
different issuer. Convertible securities are senior to common
stocks in a corporation's capital structure, but are usually
subordinated to similar nonconvertible debt securities. A
convertible security provides a fixed-income stream and the
opportunity, through its conversion feature, to participate in
the capital appreciation resulting from a market price advance in
the convertible security's underlying common stock. As a fixed-
income security, a convertible security tends to increase in
market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a
convertible security is also influenced by the market value of
the security's underlying common stock and tends to increase as
the market value of the underlying stock rises, whereas it tends
to decrease as the market value of the underlying stock declines.
SYNTHETIC CONVERTIBLES. The Fund may invest a portion of its
assets in "synthetic convertible" securities. A synthetic
convertible is created by combining distinct securities which
possess the two principal characteristics of a true convertible,
i.e., fixed income and the right to acquire the underlying equity
security. This combination is achieved by investing in
nonconvertible fixed-income securities and in warrants, stock or
stock index call options which grant the holder the right to
purchase a specified quantity of securities within a specified
period of time at a specified price or to receive cash in the
case of stock index options.
Synthetic convertible securities differ from the true convertible
security in several respects. The value of a synthetic
convertible is the sum of the values of its fixed-income
component and its convertibility component. Thus, the values of a
synthetic convertible and a true convertible security will
respond differently to market fluctuations. Further, although the
Fund's investment manager, Franklin Advisers, Inc. ("Advisers" or
"Manager"), expects normally to select synthetic convertibles
whose two components represent one issuer, the character of a
synthetic convertible allows the investment adviser to combine
components representing distinct issuers, or to combine a fixed-
income security with a call option on a stock index, when
Advisers determines that such a combination would better promote
the Fund's investment objectives. In addition, the component
parts of a synthetic convertible security may be purchased
simultaneously or separately; and the holder of a synthetic
convertible faces the risk that the price of the stock, or the
level of the market index underlying the convertibility
component, will decline.
The Fund may also invest in convertible preferred stocks that
offer enhanced yield features, such as Preferred Equity
Redemption Cumulative Stock ("PERCS"), which provide an investor,
such as the Fund, with the opportunity to earn higher dividend
income than is available on a company's common stock. A PERCS is
a preferred stock which generally features a mandatory conversion
date, as well as a capital appreciation limit which is usually
expressed in terms of a stated price. Most PERCS expire three
years from the date of issue, at which time they are exchangeable
for the issuer's common stock or cash, at the option of the
issuer. Under a typical arrangement, if after three years the
issuer's common stock is trading at a price below that set by the
capital appreciation limit, each PERCS would convert to one share
of common stock. If, however, the issuer's common stock is
trading at a price above that set by the capital appreciation
limit, the holder of the PERCS would receive less than one full
share of common stock. The amount of that fractional share of
common stock received by the PERCS' holder is determined by
dividing the price set by the capital appreciation limit of the
PERCS by the market price of the issuer's common stock. Some
PERCS provide that they can be called immediately if the issuer's
common stock is trading at or above a specified level.
An investment in PERCS or other similar convertible securities
may involve additional risks. The Fund may have difficulty
disposing of such securities because there may be a thin trading
market for a particular security at any given time. Reduced
liquidity may have an adverse impact on market price and the
Fund's ability to dispose of particular securities, when
necessary, to meet the Fund's liquidity needs or in response to a
specific economic event, such as the deterioration in the
creditworthiness of the issuer. Reduced liquidity in the
secondary market for certain securities may also make it more
difficult for the Fund to obtain market quotations based on
actual trades for purposes of valuing the Fund's portfolio. The
Fund, however, intends to acquire securities believed by the
investment manager to be liquid although, as with any investment,
there are no assurances that this will be achieved.
There are other convertible securities, including, but not
limited to, Dividend Enhancement Convertible Stock, Perpetual
Equity Participation Shares and Automatically Convertible Equity
Securities in which the Fund may invest, and which are similar to
the foregoing described convertible securities. There may be
additional types of convertible securities which are also similar
to the foregoing described convertible securities, in which the
Fund may invest in the future to the extent such investments are
consistent with the Fund's investment objective and policies.
OPTIONS AND FINANCIAL FUTURES. The Fund may write covered put and
call options and purchase put and call options which trade on
securities exchanges and in the over-the-counter market. The Fund
may purchase and sell futures and options on futures with respect
to securities and currencies. Additionally, the Fund may sell
futures and options to "close out" futures and options it may
have purchased. The Fund will not engage in futures transactions
for speculation but only as a hedge against changes resulting
from market conditions in the value of its securities or
securities which it intends to purchase. In addition, the Fund
will not enter into any futures contract or related options
(except for closing transactions) if, immediately thereafter, the
sum of the amount of its initial deposits and premiums on open
contracts and options would exceed 5% of the Fund's total assets
(taken at current value). The Fund will not engage in any stock
options or stock index options if the option premiums paid
regarding its open option positions exceed 5% of the value of the
Fund's total assets.
RISK FACTORS AND CONSIDERATIONS REGARDING
OPTIONS, FUTURES AND OPTIONS ON FUTURES
The Fund's options and futures investments involve certain risks.
Such risks include the risk that the effectiveness of an options
and futures strategy depends on the degree to which price
movements in the underlying index or securities correlate with
price movements in the relevant portion of the Fund's portfolio.
The Fund bears the risk that the prices of its portfolio
securities will not move in the same amount as the option or
future it has purchased, or that there may be a negative
correlation which would result in a loss on both such securities
and the option or futures contracts or investment.
The Fund's ability to hedge effectively all or a portion of its
securities through transactions in options on stock indexes,
stock index futures, financial futures and related options
depends on the degree to which price movements in the underlying
index or underlying debt securities correlate with price
movements in the relevant portion of the Fund's securities.
Inasmuch as such securities will not duplicate the components of
any index or such underlying debt securities, the correlation
will not be perfect. Consequently, the Fund bears the risk that
the prices of the securities being hedged will not move in the
same amount as the hedging instrument. It is also possible that
there may be a negative correlation between the index or other
securities underlying the hedging instrument and the hedged
securities which would result in a loss on both such securities
and the hedging instrument. Accordingly, successful use by the
Fund of options on stock indexes, stock index futures, financial
futures and related options will be subject to the Manager's
ability to predict correctly movements in the direction of the
securities markets generally or of a particular segment. This
requires different skills and techniques than predicting changes
in the price of individual stocks.
The Fund's option and futures investments may be limited by the
requirements of the Internal Revenue Code of 1986, as amended
(the "Code"), for qualification as a regulated investment company
and may reduce the portion of the Fund's dividends which is
eligible for the corporate dividends-received deduction. These
transactions are also subject to special tax rules that may
affect the amount, timing and character of certain distributions
to shareholders, more information about which is included in the
tax section of this Prospectus and the section entitled
"Additional information Regarding Taxation" in the SAI.
During the option period the Fund, as the writer of covered
calls, gives up the potential for capital appreciation above the
exercise price should the underlying security rise in value, and
retains the risk of loss, as the writer of puts, should the
underlying security decline in value. Substantial appreciation in
the value of the security underlying covered calls written by the
Fund would result in the security being "called away."
Substantial depreciation in the value of the security underlying
puts written by the Fund would result in the security being "put
to" the writer. If a covered call option written by the Fund
expires unexercised, the Fund will realize a gain in the amount
of the premium received. If the Fund has to sell the security
underlying the covered call because of the exercise of a call
option, it realizes a gain or loss from the sale of the
underlying security, with the proceeds being increased by the
amount of the premium. From time to time, under certain market
conditions, the Fund may receive little or no short-term capital
gains from its options transactions, which will reduce the Fund's
return.
If a put option written by the Fund expires unexercised, it will
realize a gain from the amount of the premium. If the Fund has to
buy the underlying security because of the exercise of the put
option, it will incur an unrealized loss to the extent that the
current market value of the underlying security is less than the
exercise price of the put option. However, this may be offset in
whole or in part by gain from the premium received.
Positions in exchange traded options and futures may be closed
out only on an exchange which provides a secondary market. There
may not always be a liquid secondary market for a futures or
option contract at a time when the Fund seeks to close out its
position. If the Fund were unable to close out a futures or
option position, and if prices moved adversely, the Fund would
have to continue to make daily cash payments to maintain its
required margin; if the Fund had insufficient cash, it might have
to sell portfolio securities at a disadvantageous time. In
addition, the Fund might be required to deliver the stocks
underlying futures or options contracts it holds. The Fund will
enter into an option or futures position only if there appears to
be a liquid secondary market for such option or futures.
Over-the-counter Options ("OTC" options) differ from exchange
traded options in certain material respects. OTC options are
arranged directly with dealers and not, as is the case with
exchanged traded options, with a clearing corporation. Thus,
there is a risk of non-performance by the dealer. Because there
is no exchange, pricing is typically done by reference to
information from market makers. However, OTC options are
available for a greater variety of securities and in a wider
range of expiration dates and exercise prices than exchange
traded options; and the writer of an OTC option is paid the
premium in advance by the dealer.
There can be no assurance that a continuous liquid secondary
market will exist for any particular OTC option at any specific
time. Consequently, the Fund may be able to realize the value of
an OTC option it has purchased only by exercising it or entering
into a closing sale transaction with the dealer that issued it.
Similarly, when the Fund writes an OTC option, it generally can
close out that option prior to its expiration only by entering
into a closing purchase transaction with the dealer to which the
Fund originally wrote it. If a covered call option writer cannot
effect a closing transaction, it cannot sell the underlying
security until the option expires or the option is exercised.
Therefore, a covered call option writer of an OTC option may not
be able to sell an underlying security even though it might
otherwise be advantageous to do so. Likewise, a secured put
writer of an OTC option may be unable to sell the securities
pledged to secure the put for other investment purposes while it
is obligated as a put writer. Similarly, a purchaser of such put
or call option might also find it difficult to terminate its
position on a timely basis in the absence of a secondary market.
The Fund understands the current position of the staff of the SEC
to be that purchased OTC options are illiquid securities and that
the assets used to cover the sale of an OTC option are considered
illiquid. The Fund and Advisers disagree with this position.
Nevertheless, pending a change in the staff's position, the Fund
will treat OTC options and "cover" assets as subject to the
Fund's limitation on illiquid securities. (See "Investment
Objective and Policies Followed by the Fund - Illiquid
Investments" in this Prospectus.)
Futures contracts entail risks. Although the Fund believes that
use of such contracts will benefit the Fund, if the investment
adviser's investment judgment about the general direction of
interest rates is incorrect, the Fund's overall performance would
be poorer than if it had not entered into any such contract. For
example, if the Fund has hedged against the possibility of an
increase in interest rates which would adversely affect the price
of bonds held in its portfolio and interest rates decrease
instead, the Fund will lose part or all of the benefit of the
increased value of its bonds which it has hedged because it will
have offsetting losses in its futures positions. In addition, in
such situations, if the Fund has insufficient cash, it may have
to sell securities from its portfolio to meet daily variation
margin requirements. Such sales may be, but will not necessarily
be, at increased prices which reflect the rising market. The Fund
may have to sell securities at a time when it may be
disadvantageous to do so.
The Fund's sale of futures contracts and purchase of put options
on futures contracts will be solely to protect its investments
against declines in value. The Fund expects that in the normal
course of business it will purchase securities upon termination
of long futures contracts and long call options on future
contracts, but under unusual market conditions it may terminate
any of such positions without a corresponding purchase of
securities.
In addition, adverse market movements could cause the Fund to
lose up to its full investment in a call option contract and/or
to experience substantial losses on an investment in a futures
contract. There is also the risk of loss by the Fund of margin
deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a futures contract or option. (See
"Investment Restrictions and Policies" in the SAI for a more
complete discussion of the Fund's investments in options and
futures, including the risks associated with such activity.)
REPURCHASE AGREEMENTS. The Fund may engage in repurchase
transactions, in which the Fund purchases a U.S. government
security subject to resale to a bank or dealer at an agreed-upon
price and date. The transaction requires the collateralization of
the seller's obligation by the transfer of securities with an
initial market value, including accrued interest, equal to at
least 102% of the dollar amount invested by the Fund in each
agreement, with the value of the underlying security marked to
market daily to maintain coverage of at least 100%. A default by
the seller might cause the Fund to experience a loss or delay in
the liquidation of the collateral securing the repurchase
agreement. The Fund might also incur disposition costs in
liquidating the collateral. The Fund, however, intends to enter
into repurchase agreements only with financial institutions such
as broker-dealers and banks which are deemed creditworthy by the
Fund's investment manager. A repurchase agreement is deemed to be
a loan by the Fund under the 1940 Act. The U.S. government
security subject to resale (the collateral) will be held on
behalf of the Fund by a custodian approved by the Fund's Board
and will be held pursuant to a written agreement.
FOREIGN SECURITIES. The Fund will ordinarily purchase foreign
securities which are traded in the United States or purchase
American Depository Receipts ("ADRs"), which are certificates
issued by U.S. banks representing the right to receive securities
of a foreign issuer deposited with that bank or a correspondent
bank. However, the Fund may purchase the securities of foreign
issuers directly in foreign markets.
Investments in foreign securities where delivery takes place
outside the United States will involve risks that are different
from investments in U.S. securities. These risks may include
future unfavorable political and economic developments, possible
withholding taxes, seizure of foreign deposits, currency
controls, higher transactional costs due to a lack of negotiated
commissions, or other governmental restrictions which might
affect the amount and types of foreign investments made or the
payment of principal or interest on securities the Fund holds. In
addition, there may be less information available about these
securities and it may be more difficult to obtain or enforce a
court judgment in the event of a lawsuit. Fluctuations in
currency convertibility or exchange rates could result in
investment losses for the Fund. Investment in foreign securities
may also subject the Fund to losses due to nationalization,
expropriation or differing accounting practices and treatments.
Investments may be in securities of foreign issuers, whether
located in developed or undeveloped countries, but investments
will not be made in any securities issued without stock
certificates or comparable stock documents. Securities which are
acquired by the Fund outside the United States and which are
publicly traded in the United States or on a foreign securities
exchange or in a foreign securities market are not considered by
the Fund to be an illiquid asset so long as the Fund acquires and
holds the security with the intention of re-selling the security
in the foreign trading market, the Fund reasonably believes it
can readily dispose of the security for cash in the U.S. or
foreign market and current market quotations are readily
available. The Fund presently has no intention of investing more
than 25% of its net assets in foreign securities.
The Fund is subject to a number of additional investment
restrictions, some of which may be changed only with the approval
of shareholders, which limit its activities to some extent. For a
list of these restrictions and more information concerning the
policies discussed herein, please see the SAI.
The Fund anticipates that its annual portfolio turnover rate
generally will not exceed 150%, but this rate should not be
construed as a limiting factor in the operation of the Fund's
portfolio. The Fund's portfolio turnover rate for the prior two
years is included in the Financial Highlights table. Upon the
exercise of an option written by the Fund, the underlying
securities are sold; the Fund receives cash which it then
invests, thus increasing the portfolio turnover rate. High
portfolio turnover increases transaction costs which must be paid
by the Fund.
BORROWING. The Fund does not borrow money or mortgage or pledge
any of the assets of the Fund, except that borrowings for
temporary or emergency purposes may be made from banks in an
amount up to 10% of total asset value. No new investments will be
made while any such borrowings are in excess of 5% of total
assets.
ILLIQUID INVESTMENTS. It is the policy of the Fund that illiquid
securities (securities that cannot be disposed of within seven
days in the normal course of business at approximately the amount
at which the Fund has valued the securities) may not constitute,
at the time of purchase, more than 10% of the value of the total
net assets of the Fund.
HOW SHAREHOLDERS PARTICIPATE IN THE RESULTS OF THE FUND'S
ACTIVITIES
The assets of the Fund are invested in portfolio securities. If
the securities owned by the Fund increase in value, the value of
the shares of the Fund which the shareholder owns will increase.
If the securities owned by the Fund decrease in value, the value
of the shareholder's shares will also decline. In this way,
shareholders participate in any change in the value of the
securities owned by the Fund.
In addition to the factors which affect the value of individual
securities, as described in the preceding sections, a shareholder
may anticipate that the value of Fund shares will fluctuate with
movements in the broader equity and bond markets, as well.
To the extent the Fund's investments consist of debt securities,
changes in interest rates will affect the value of the Fund's
portfolio and thus its share price. Increased rates of interest
which frequently accompany higher inflation and/or a growing
economy are likely to have a negative effect on the value of Fund
shares. To the extent the Fund's investments consist of common
stocks, a decline in the market, expressed for example by a drop
in the Dow Jones Industrials or the Standard & Poor's 500 average
or any other equity based index, may also be reflected in
declines in the Fund's share price. History reflects both
increases and decreases in the prevailing rate of interest and in
the valuation of the market, and these may reoccur unpredictably
in the future.
MANAGEMENT OF THE FUND
The Board of Directors has the primary responsibility for the
overall management of the Fund and for electing the officers of
the Fund who are responsible for administering its day-to-day
operations.
Franklin Advisers, Inc. ("Advisers" or "Manager") serves as the
Fund's investment manager. Advisers is a wholly-owned subsidiary
of Franklin Resources, Inc. ("Resources"), a publicly owned
holding company, the principal shareholders of which are Charles
B. Johnson and Rupert H. Johnson, Jr., who own approximately 20%
and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services
industry through its various subsidiaries (the "Franklin
Templeton Group"). Advisers acts as investment manager or
administrator to 33 U.S. registered investment companies (111
separate series) with aggregate assets of over $74 billion.
Pursuant to the management agreement, the Manager supervises and
implements the Fund's investment activities and provides certain
administrative services and facilities which are necessary to
conduct the Fund's business.
During the fiscal year ended December 31, 1994, fees totaling
0.63% of the average monthly net assets of the Fund were paid to
Advisers.
Among the responsibilities of the Manager under the management
agreement is the selection of brokers and dealers through whom
transactions in the Fund's portfolio securities will be effected.
The Manager tries to obtain the best execution on all such
transactions. If it is felt that more than one broker is able to
provide the best execution, the Manager will consider the
furnishing of quotations and of other market services, research,
statistical and other data for the Manager and its affiliates, as
well as the sale of shares of the Fund, as factors in selecting a
broker. Further information is included under "The Fund's
Policies Regarding Brokers Used on Portfolio Transactions" in the
SAI.
Shareholder accounting and many of the clerical functions for the
Fund are performed by Franklin/Templeton Investor Services, Inc.
("Investor Services" or "Shareholder Services Agent"), in its
capacity as transfer agent and dividend-paying agent. Investor
Services is a wholly-owned subsidiary of Resources.
During the fiscal year ended December 31, 1994, expenses borne by
the Fund, including fees paid to Advisers and to Investor
Services, totaled 1.27% of the average monthly net assets of the
Fund.
PLAN OF DISTRIBUTION
The Fund has adopted a distribution plan (the "Plan") pursuant to
Rule 12b-1 under the 1940 Act. Under the Plan, the Fund may
reimburse Distributors or others for all expenses incurred by
Distributors or others in the promotion and distribution of the
Fund's shares. Such expenses may include, but are not limited to,
the printing of prospectuses and reports used for sales purposes,
expenses of preparing and distributing sales literature and
related expenses, advertisements, and other distribution-related
expenses, including a prorated portion of Distributors' overhead
expenses attributable to the distribution of Fund shares, as well
as any distribution or service fees paid to securities dealers or
their firms or others who have executed a servicing agreement
with the Fund, Distributors or its affiliates. The maximum amount
which the Fund may pay to Distributors or others for such
distribution expenses is 0.25% per annum of the average daily net
assets of the Fund, payable on a quarterly basis. All expenses of
distribution and marketing in excess of 0.25% per annum will be
borne by Distributors, or others who have incurred them, without
reimbursement from the Fund. The Plan also covers any payments to
or by the Fund, Advisers, Distributors, or other parties on
behalf of the Fund, Advisers, or Distributors, to the extent such
payments are deemed to be for the financing of any activity
primarily intended to result in the sale of shares issued by the
Fund within the context of Rule 12b-1. The payments under the
Plan are included in the maximum operating expenses which may be
borne by the Fund. For more information please see the SAI.
DISTRIBUTIONS TO SHAREHOLDERS
There are two types of distributions which the Fund may make to
its shareholders:
1. INCOME DIVIDENDS. The Fund receives income 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 such 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. These distributions, when made, will
generally be fully taxable to the Fund's shareholders. The Fund
may make more than 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.
DISTRIBUTION DATE
Although subject to change by the Board of Directors, without
prior notice to or approval by shareholders, the Fund's current
policy is to declare income dividends quarterly for shareholders
of record on the last business day of the months of March, June
and September, payable on or about the 15th day of the following
month. The Fund's December dividend will generally be declared
and paid during that month.
The amount of income dividend payments by the Fund is dependent
upon the amount of net income received by the Fund from its
portfolio holdings, is not guaranteed and is subject to the
discretion of the Board of Directors. Fund shares are quoted ex-
dividend on the first business day following the record date. THE
FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY FIXED RATE OF
RETURN ON AN INVESTMENT IN ITS SHARES.
In order to be entitled to a dividend, an investor must have
acquired Fund shares prior to the close of business on the record
date. An investor considering purchasing Fund shares shortly
before the record date of a distribution should be aware that
because the value of the Fund's shares is based directly on the
amount of its net assets, rather than on the principle of supply
and demand, any distribution of income or capital gain will
result in a decrease in the value of the Fund's shares equal to
the amount of the distribution. While a dividend or capital gain
distribution received shortly after purchasing shares represents,
in effect, a return of a portion of the shareholder's investment,
it may be taxable as dividend income or capital gain.
DIVIDEND REINVESTMENT
Unless requested otherwise, income dividends and capital gain
distributions, if any, will be automatically reinvested in the
shareholder's account in the form of additional shares, valued at
the closing net asset value (without sales charge) on the
dividend reinvestment date. Shareholders have the right to change
their election with respect to the receipt of distributions by
notifying the Fund, but any such change will be effective only as
to distributions for which the record date is seven or more
business days after the Fund has been notified. See the SAI for
more information.
Many of the Fund's shareholders receive their distributions in
the form of additional shares. This is a convenient way to
accumulate additional shares and maintain or increase the
shareholder's earnings base. Of course, any shares so acquired
remain at market risk.
DISTRIBUTIONS IN CASH
A shareholder may elect to receive income dividends, or both
income dividends and capital gain distributions, in cash. By
completing the "Special Payment Instructions for Distributions"
section of the Shareholder Application included with this
Prospectus, a shareholder may direct the selected distributions
to another fund in the Franklin Group of Funds(Registered
Trademark) or the Templeton Funds, to another person, or directly
to a checking account. If the bank at which the account is
maintained is a member of the Automated Clearing House, the
payments may be made automatically by electronic funds transfer.
If this last option is requested, the shareholder should allow at
least 15 days for initial processing. Dividends which may be paid
in the interim will be sent to the address of record. Additional
information regarding automated fund transfers may be obtained
from Franklin's Shareholder Services Department. Dividend and
capital gain distributions are eligible for investment in another
fund in the Franklin Group of Funds or the Templeton Funds at net
asset value. See "Purchases at Net Asset Value" under "How to Buy
Shares of the Fund."
TAXATION OF THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations
that affect mutual funds and their shareholders. Additional
information on tax matters relating to the Fund and its
shareholders is included in the section entitled, "Additional
Information Regarding Taxation" in the SAI.
The Fund is a regulated investment company under Subchapter M of
the Code. By distributing all of its income and meeting certain
other requirements relating to the sources of its income and
diversification of its assets, the Fund will not be liable for
federal income or excise taxes
For federal income tax purposes, any income dividends which the
shareholder receives from the Fund, as well as any distributions
derived from the excess of net short-term capital gain over net
long-term capital loss, are treated as ordinary income whether
the shareholder has elected to receive them in cash or in
additional shares.
Distributions derived from the excess of net long-term capital
gain over net short-term capital loss (net capital gain) are
treated as long-term capital gain regardless of the length of
time the shareholder has owned Fund shares and regardless of
whether such distributions are received in cash or in additional
shares.
Pursuant to the Code, certain distributions which are declared in
October, November or December but which, for operational reasons,
may not be paid to the shareholder until the following January,
will be treated for tax purposes as if received by the
shareholder on December 31 of the calendar year in which they are
declared.
For the fiscal year ended December 31, 1994, 72.28% of the net
income dividends paid by the Fund qualified for the corporate
dividends-received deduction, subject to certain holding period,
hedging and debt financing restrictions imposed under the Code on
the corporation claiming the deduction.
The Fund's transactions in options and futures contracts will
give rise to taxable income, gain or loss and will be subject to
special tax treatment under certain mark-to-market and straddle
rules, the effect of which may be to accelerate income to the
Fund, defer Fund losses, cause adjustments in the holding periods
of Fund securities, convert capital gains and losses into
ordinary income and losses, convert long-term capital gains into
short-term capital gains, and convert short-term capital losses
into long-term capital losses. Certain elections may be available
to the Fund to mitigate some of the unfavorable consequences of
the provisions described in this paragraph.
Shareholders who are not U.S. persons for purposes of federal
income taxation should consult with their financial or tax
advisors regarding the applicability of U.S. withholding or other
taxes on distributions received by them from the Fund and the
application of foreign tax laws to these distributions.
The Fund will inform shareholders of the source of their
dividends and distributions at the time they are paid and will,
promptly after the close of each calendar year, advise them of
the tax status for federal income tax purposes of such dividends
and distributions.
HOW TO BUY SHARES OF THE FUND
Shares of the Fund are continuously offered through securities
dealers which execute an agreement with Distributors, the
principal underwriter of the Fund's shares. The use of the term
"securities dealer" shall include other financial institutions
which, pursuant to an agreement with Distributors (directly or
through affiliates), handle customer orders and accounts with the
Fund. Such reference, however, is for convenience only and does
not indicate a legal conclusion of capacity. The minimum initial
investment is $100 and subsequent investments must be $25 or
more. These minimums may be waived when the shares are purchased
through plans established by the Franklin Templeton Group. The
Fund and Distributors reserve the right to refuse any order for
the purchase of shares.
PURCHASE PRICE OF FUND SHARES
Shares of the Fund are offered at the public offering price,
which is the net asset value per share plus a sales charge, next
computed (1) after the shareholder's securities dealer receives
the order which is promptly transmitted to the Fund, or (2) after
receipt of an order by mail from the shareholder directly in
proper form (which generally means a completed Shareholder
Application accompanied by a negotiable check). The sales charge
is a variable percentage of the offering price depending upon the
amount of the sale. The offering price will be calculated to two
decimal places using standard rounding criteria. A description of
the method of calculating net asset value per share is included
under the caption "Valuation of Fund Shares."
Set forth below is a table of total sales charges or underwriting
commissions and dealer concessions.
TOTAL SALES CHARGE
SIZE OF AS A PERCENTAGE AS A PERCENTAGE DEALER
TRANSACTION AT OF OFFERING OF NET AMOUNT CONCESSION AS A
OFFERING PRICE PRICE INVESTED PERCENTAGE OF
OFFERING
PRICE*, ***
Less than 4.50% 4.71% 4.00%
$100,000
$100,000 but 3.75% 3.90% 3.25%
less than
$250,000
$250,000 but 2.75% 2.83% 2.50%
less than
$500,000
$500,000 but 2.25% 2.30% 2.00%
less than
$1,000,000
$1,000,000 or none none (see below)**
more
*Financial institutions or their affiliated brokers may receive
an agency transaction fee in the percentages set forth above.
**The following commissions will be paid by Distributors, out of
its own resources, to securities dealers who initiate and are
responsible for purchases of $1 million or more: 1.00% on sales
of $1 million but less $2 million, plus 0.80% on sales of $2
million but less than $3 million, plus 0.50% on sales of $3
million but less than $50 million, plus 0.25% on sales of $50
million but less than $100 million, plus 0.15% on sales of $100
million or more. Dealer concession breakpoints are reset every 12
months for purposes of additional purchases.
***At the discretion of Distributors, all sales charges may at
times be allowed to the securities dealer. If 90% or more of the
sales commission is allowed, such securities dealer may be deemed
to be an underwriter as that term is defined in the Securities
Act of 1933, as amended.
No front-end sales charge applies on investments of $1 million or
more, but a contingent deferred sales charge of 1% is imposed on
certain redemptions of all or a portion of an investment of $1
million or more within 12 months of the calendar month following
such investment ("contingency period"). See "How to Sell Shares
of the Fund - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales
charge on the purchase of Fund shares is determined by adding the
amount of the shareholder's current purchase plus the cost or
current value (whichever is higher) of a shareholder's existing
investment in one or more of the funds in the Franklin Group of
Funds(Registered Trademark) and the Templeton Group of Funds.
Included for these aggregation purposes are (a) the mutual funds
in the Franklin Group of Funds except Franklin Valuemark Funds
and Franklin Government Securities Trust (the "Franklin Funds"),
(b) other investment products underwritten by Distributors or its
affiliates (although certain investments may not have the same
schedule of sales charges and/or may not be subject to reduction)
and (c) 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 (the "Templeton Funds"). (Franklin Funds and
Templeton Funds are collectively referred to as the "Franklin
Templeton Funds.") Sales charge reductions based upon aggregate
holdings of (a), (b) and (c) above ("Franklin Templeton
Investments") may be effective only after notification to
Distributors that the investment qualifies for a discount.
Distributors, or one of its affiliates, may make payments, out of
its own resources, of up to 1% of the amount purchased to
securities dealers who initiate and are responsible for purchases
made at net asset value by certain designated retirement plans
(excluding IRA and IRA rollovers), certain non-designated plans,
certain trust companies and trust departments of banks and
certain retirement plans of organizations with collective
retirement plan assets of $10 million or more. See definitions
under "Description of Special Net Asset Value Purchases" and as
set forth in the SAI.
Distributors or one of its affiliates, out of its own resources,
may also provide additional compensation to securities dealers in
connection with sales of shares of the Franklin Templeton Funds.
Compensation may include financial assistance to securities
dealers in connection with conferences, sales or training
programs for their employees, seminars for the public,
advertising, sales campaigns and/or shareholder services and
programs regarding one or more of the Franklin Templeton Funds,
and other dealer-sponsored programs or events. In some instances,
this compensation may be made available only to certain
securities dealers whose representatives have sold or are
expected to sell significant amounts of shares of the Franklin
Templeton Funds. Compensation may include payment for travel
expenses, including lodging, incurred in connection with trips
taken by invited registered representatives and members of their
families to locations within or outside of the United States for
meetings or seminars of a business nature. Dealers may not use
sales of the Fund's shares to qualify for this compensation to
the extent such may be prohibited by the laws of any state or any
self-regulatory agency, such as the National Association of
Securities Dealers, Inc. None of the aforementioned additional
compensation is paid for by the Fund or its shareholders.
Certain officers and directors of the Fund are also affiliated
with Distributors. A detailed description is included in the SAI.
QUANTITY DISCOUNTS IN SALES CHARGES
Shares may be purchased under a variety of plans which provide
for a reduced sales charge. To be certain to obtain the reduction
of the sales charge, the investor or the dealer should notify
Distributors at the time of each purchase of shares which
qualifies for the reduction. In determining whether a purchase
qualifies for any of the discounts, investments in any Franklin
Templeton Investments may be combined with those of the
investor's spouse and children under the age of 21. In addition,
the aggregate investments of a trustee or other fiduciary account
(for an account under exclusive investment authority) may be
considered in determining whether a reduced sales charge is
available, even though there may be a number of beneficiaries of
the account.
In addition, an investment in the Fund may qualify for a
reduction in the sales charge under the following programs:
1. RIGHTS OF ACCUMULATION. The cost or current value (whichever
is higher) of existing investments in the Franklin Templeton
Investments may be combined with the amount of the current
purchase in determining the sales charge to be paid.
2. LETTER OF INTENT. An investor may immediately qualify for a
reduced sales charge on a purchase of shares of the Fund by
completing the Letter of Intent section of the Shareholder
Application (the "Letter of Intent" or "Letter"). By completing
the Letter, the investor expresses an intention to invest during
the next 13 months a specified amount which, if made at one time,
would qualify for a reduced sales charge and grants to
Distributors a security interest in the reserved shares and
irrevocably appoints Distributors as attorney-in-fact with full
power of substitution to surrender for redemption any or all
shares for the purpose of paying any additional sales charge due.
Purchases under the Letter will conform with the requirements of
Rule 22-d-1 under the 1940 Act. The investor or the investor's
securities dealer must inform Investor Services or Distributors
that this Letter is in effect each time a purchase is made.
AN INVESTOR (EXCEPT FOR CERTAIN EMPLOYEE BENEFIT PLANS WHICH ARE
LISTED UNDER "DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES")
ACKNOWLEDGES AND AGREES TO THE FOLLOWING PROVISIONS BY COMPLETING
THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION: Five
percent (5%) of the amount of the total intended purchase will be
reserved in shares of the Fund, registered in the investor's
name, to assure that the full applicable sales charge will be
paid if the intended purchase is not completed. The reserved
shares will be included in the total shares owned as reflected on
periodic statements; income and capital gain distributions on the
reserved shares will be paid as directed by the investor. The
reserved shares will not be available for disposal by the
investor until the Letter of Intent has been completed or the
higher sales charge paid. For more information, see "Additional
Information Regarding Purchases" in the SAI.
GROUP PURCHASES
An individual who is a member of a qualified group may also
purchase shares of the Fund at the reduced sales charge
applicable to the group as a whole. The sales charge is based
upon the aggregate dollar value of shares previously purchased
and still owned by the group, plus the amount of the current
purchase. For example, if members of the group had previously
invested and still held $80,000 of Fund shares and now were
investing $25,000, the sales charge would be 3.75%. Information
concerning the current sales charge applicable to a group may be
obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence for
more than six months, (ii) has a purpose other than acquiring
Fund shares at a discount and (iii) satisfies uniform criteria
which enable Distributors to realize economies of scale in its
costs of distributing shares. A qualified group must have more
than 10 members, be available to arrange for group meetings
between representatives of the Fund or Distributors and the
members, agree to include sales and other materials related to
the Fund in its publications and mailings to members at reduced
or no cost to Distributors, and seek to arrange for payroll
deduction or other bulk transmission of investments to the Fund.
If an investor selects a payroll deduction plan, subsequent
investments will be automatic and will continue until such time
as the investor notifies the Fund and the investor's employer to
discontinue further investments. Due to the varying procedures
used to prepare, process and forward the payroll deduction
information to the Fund, there may be a delay between the time of
the payroll deduction and the time the money reaches the Fund.
The investment in the Fund will be made at the offering price per
share determined on the day that both the check and payroll
deduction data are received in required form by the Fund.
PURCHASES AT NET ASSET VALUE
Shares of the Fund may be purchased without the imposition of
either a front-end sales charge ("net asset value") or a
contingent deferred sales charge by (1) officers, trustees,
directors and full-time employees of the Fund, any of the
Franklin Templeton Funds, or of the Franklin Templeton Group, and
by their spouses and family members, including subsequent
payments made by such parties after cessation of employment; (2)
companies exchanging shares with or selling assets pursuant to a
merger, acquisition or exchange offer; (3) insurance company
separate accounts for pension plan contracts; (4) accounts
managed by the Franklin Templeton Group; (5) Shareholders of
Templeton Institutional Funds, Inc. reinvesting redemption
proceeds from that fund under an employee benefit plan qualified
under Section 401 of the Code in shares of the Fund; (6) certain
unit investment trusts and unit holders of such trusts
reinvesting their distributions from the trusts in the Fund; (7)
registered securities dealers and their affiliates, for their
investment account only, and (8) registered personnel and
employees of securities dealers and by their spouses and family
members, in accordance with the internal policies and procedures
of the employing securities dealer.
Shares of the Fund may be purchased at net asset value by persons
who have redeemed, within the previous 120 days, their shares of
the Fund or another of the Franklin Templeton Funds which were
purchased with a front-end sales charge or assessed a contingent
deferred sales charge on redemption. An investor may reinvest an
amount not exceeding the redemption proceeds. While credit will
be given for any contingent deferred sales charge paid on the
shares redeemed and subsequently repurchased, a new contingency
period will begin. Shares of the Fund redeemed in connection with
an exchange into another fund (see "Exchange Privilege") are not
considered "redeemed" for this privilege. In order to exercise
this privilege, a written order for the purchase of shares of the
Fund must be received by the Fund or the Fund's Shareholder
Services Agent within 120 days after the redemption. The 120
days, however, do not begin to run on redemption proceeds placed
immediately after redemption in a Franklin Bank Certificate of
Deposit ("CD") until the CD (including any rollover) matures.
Reinvestment at net asset value may also be handled by a
securities dealer or other financial institution, who may charge
the shareholder a fee for this service. The redemption is a
taxable transaction but reinvestment without a sales charge may
affect the amount of gain or loss recognized and the tax basis of
the shares reinvested. If there has been a loss on the
redemption, the loss may be disallowed if a reinvestment in the
same fund is made within a 30-day period. Information regarding
the possible tax consequences of such a reinvestment is included
in the tax section of this Prospectus and the SAI.
Dividends and capital gains received in cash by the shareholder
may also be used to purchase shares of the Fund or another of the
Franklin Templeton Funds at net asset value and without the
imposition of a contingent deferred sales charge within 120 days
of the payment date of such distribution. To exercise this
privilege, a written request to reinvest the distribution must
accompany the purchase order. Additional information may be
obtained from Shareholder Services at 1-800/632-2301. See
"Distributions in Cash" under "Distributions to Shareholders."
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge by
investors who have, within the past 60 days, redeemed an
investment in a mutual fund which is not part of the Franklin
Templeton Funds and which charged the investor a contingent
deferred sales charge upon redemption and which has investment
objectives similar to those of the Fund.
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge by
broker-dealers who have entered into a supplemental agreement
with Distributors, or by registered investment advisers
affiliated with such broker-dealers, on behalf of their clients
who are participating in a comprehensive fee program (sometimes
known as a wrap fee program).
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge by
anyone who has taken a distribution from an existing retirement
plan already invested in the Franklin Templeton Funds (including
former participants of the Franklin Templeton Profit Sharing
401(k) plan), to the extent of such distribution. In order to
exercise this privilege a written order for the purchase of
shares of the Fund must be received by Franklin Templeton Trust
Company (the "Trust Company"), the Fund or Investor Services,
within 120 days after the plan distribution.
Shares of the Fund may also be purchased at net asset value and
without the imposition of a contingent deferred sales charge by
any state, county, or city, or any instrumentality, department,
authority or agency thereof which has determined that the Fund is
a legally permissible investment and which is prohibited by
applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any
registered management investment company ("an eligible
governmental authority"). SUCH INVESTORS SHOULD CONSULT THEIR OWN
LEGAL ADVISORS TO DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES
OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM. Municipal
investors considering investment of proceeds of bond offerings
into the Fund should consult with expert counsel to determine the
effect, if any, of various payments made by the Fund or its
investment manager on arbitrage rebate calculations. If an
investment by an eligible governmental authority at net asset
value is made through a securities dealer who has executed a
dealer agreement with Distributors, Distributors or one of its
affiliates may make a payment, out of their own resources, to
such securities dealer in an amount not to exceed 0.25% of the
amount invested. Contact Franklin's Institutional Sales
Department for additional information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES
Shares of the Fund may also be purchased at net asset value and
without the imposition of a contingent deferred sales charge by
certain designated retirement plans, including profit sharing,
pension, 401(k) and simplified employee pension plans
("designated plans"), subject to minimum requirements with
respect to number of employees or amount of purchase, which may
be established by Distributors. Currently those criteria require
that the employer establishing the plan have 200 or more
employees or that the amount invested or to be invested during
the subsequent 13-month period in the Fund or in any of the
Franklin Templeton Investments totals at least $1,000,000.
Employee benefit plans not designated above or qualified under
Section 401 of the Code ("non-designated plans") may be afforded
the same privilege if they meet the above requirements as well as
the uniform criteria for qualified groups previously described
under "Group Purchases" which enable Distributors to realize
economies of scale in its sales efforts and sales related
expenses.
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge by
trust companies and bank trust departments for funds over which
they exercise exclusive discretionary investment authority and
which are held in a fiduciary, agency, advisory, custodial or
similar capacity. Such purchases are subject to minimum
requirements with respect to amount of purchase, which may be
established by Distributors. Currently, those criteria require
that the amount invested or to be invested during the subsequent
13-month period in this Fund or any of the Franklin Templeton
Investments must total at least $1,000,000. Orders for such
accounts will be accepted by mail accompanied by a check or by
telephone or other means of electronic data transfer directly
from the bank or trust company, with payment by federal funds
received by the close of business on the next business day
following such order.
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge by
trustees or other fiduciaries purchasing securities for certain
retirement plans of organizations with collective retirement plan
assets of $10 million or more, without regard to where such
assets are currently invested.
Refer to the SAI for further information regarding net asset
value purchases.
GENERAL
Securities laws of states in which the Fund's shares are offered
for sale may differ from the interpretations of federal law, and
banks and financial institutions selling Fund shares may be
required to register as dealers pursuant to state law.
PURCHASING SHARES OF THE FUND IN CONNECTION WITH RETIREMENT PLANS
INVOLVING TAX-DEFERRED INVESTMENTS
Shares of the Fund may be used for individual or employer-
sponsored retirement plans involving tax-deferred investments.
The Fund may be used as an investment vehicle for an existing
retirement plan, or Franklin Templeton Trust Company (the "Trust
Company") may provide the plan documents and serve as custodian
or trustee. A plan document must be adopted for a retirement
plan to be in existence.
The Trust Company, an affiliate of Distributors, can serve as
custodian or trustee for retirement plans. Brochures for the
Trust Company plans contain important information regarding
eligibility, contribution and deferral limits and distribution
requirements. Please note that an application other than the one
contained in this Prospectus must be used to establish a
retirement plan account with the Trust Company. To obtain a
retirement plan brochure or application, call toll free 1-
800/DIAL BEN (1-800/342-5236).
Please see "How to Sell Shares of the Fund" for specific
information regarding redemptions from retirement plan accounts.
Specific forms are required to be completed for distributions
from Franklin Templeton Trust Company retirement plans.
Individuals and plan sponsors should consult with legal, tax or
benefits and pension plan consultants before choosing a
retirement plan. In addition, retirement plan investors should
consider consulting their investment representatives or advisers
concerning investment decisions within their plans.
OTHER PROGRAMS AND PRIVILEGES
AVAILABLE TO FUND SHAREHOLDERS
Certain of the programs and privileges described in this section
may not be available directly from the Fund to shareholders whose
shares are held, of record, by a financial institution or in a
"street name" account or networked account through the National
Securities Clearing Corporation ("NSCC") (see the section
captioned "Account Registrations" in this Prospectus).
SHARE CERTIFICATES
Shares for an initial investment, as well as subsequent
investments, including the reinvestment of dividends and capital
gain distributions, are generally credited to an account in the
name of an investor on the books of the Fund, without the
issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the
risk of loss or theft of a share certificate. A lost, stolen or
destroyed certificate cannot be replaced without obtaining a
sufficient indemnity bond. The cost of such a bond, which is
generally borne by the shareholder, can be 2% or more of the
value of the lost, stolen or destroyed certificate. A certificate
will be issued if requested in writing by the shareholder or by
the securities dealer.
CONFIRMATIONS
A confirmation statement will be sent to each shareholder
quarterly to reflect the dividends reinvested during that period
and after each other transaction which affects the shareholder's
account. This statement will also show the total number of shares
owned by the shareholder, including the number of shares in "plan
balance" for the account of the shareholder.
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, a shareholder may be able to
arrange to make additional purchases of shares automatically on a
monthly basis by electronic funds transfer from a checking
account, if the bank which maintains the account is a member of
the Automated Clearing House, or by preauthorized checks drawn on
the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Automatic Investment Plan
Application included with this Prospectus contains the
requirements applicable to this program. In addition,
shareholders may obtain more information concerning this program
from their securities dealers or from Distributors.
The market value of the Fund's shares is subject to fluctuation.
Before undertaking any plan for systematic investment, the
investor should keep in mind that such a program does not assure
a profit or protect against a loss.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a Systematic Withdrawal Plan and
receive regular periodic payments from the account, provided that
the net asset value of the shares held by the shareholder is at
least $5,000. There are no service charges for establishing or
maintaining a Systematic Withdrawal Plan. The minimum amount
which the shareholder may withdraw is $50 per withdrawal
transaction although this is merely the minimum amount allowed
under the plan and should not be mistaken for a recommended
amount. Retirement plans subject to mandatory distribution
requirements are not subject to the $50 minimum. The plan may be
established on a monthly, quarterly, semiannual or annual basis.
If the shareholder establishes a plan, any capital gain
distributions and income dividends paid by the Fund will be
reinvested for the shareholder's account in additional shares at
net asset value. Payments will then be made from the liquidation
of shares at net asset value on the day of the transaction (which
is generally the first business day of the month in which the
payment is scheduled) with payment generally received by the
shareholder three to five days after the date of liquidation. By
completing the "Special Payment Instructions for Distributions"
section of the Shareholder Application included with this
Prospectus, a shareholder may direct the selected withdrawals to
another of the Franklin Templeton Funds, to another person, or
directly to a checking account. If the bank at which the account
is maintained is a member of the Automated Clearing House, the
payments may be made automatically by electronic funds transfer.
If this last option is requested, the shareholder should allow at
least 15 days for initial processing. Payments which may be paid
in the interim will be sent to the address of record. Liquidation
of shares may reduce or possibly exhaust the shares in the
shareholder's account, to the extent withdrawals exceed shares
earned through dividends and distributions, particularly in the
event of a market decline. If the withdrawal amount exceeds the
total plan balance, the account will be closed and the remaining
balance will be sent to the shareholder. As with other
redemptions, a liquidation to make a withdrawal payment is a sale
for federal income tax purposes. Because the amount withdrawn
under the plan may be more than the shareholder's actual yield or
income, part of the payment may be a return of the shareholder's
investment.
The maintenance of a Systematic Withdrawal Plan concurrently with
purchases of additional shares of the Fund would be
disadvantageous because of the sales charge on the additional
purchases. The shareholder should ordinarily not make additional
investments of less than $5,000 or three times the annual
withdrawals under the plan during the time such a plan is in
effect. A Systematic Withdrawal Plan may be terminated on written
notice by the shareholder or the Fund, and it will terminate
automatically if all shares are liquidated or withdrawn from the
account, or upon the Fund's receipt of notification of the death
or incapacity of the shareholder. Shareholders may change the
amount (but not below the specified minimum) and schedule of
withdrawal payments, or suspend one such payment by giving
written notice to Investor Services at least seven business days
prior to the end of the month preceding a scheduled payment.
Share certificates may not be issued while a Systematic
Withdrawal Plan is in effect.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or
exchanging shares of the Fund available to institutional
accounts. For further information, contact Franklin's
Institutional Services Department at 1-800/321-8563.
EXCHANGE PRIVILEGE
The Franklin Templeton Funds consist of a number of mutual funds
with various investment objectives or policies. The shares of
most of these mutual funds are offered to the public with a sales
charge. If a shareholder's investment objective or outlook for
the securities markets changes, the Fund shares may be exchanged
for shares of other Franklin Templeton Funds which are eligible
for sale in the shareholder's state of residence and in
conformity with such fund's stated eligibility requirements and
investment minimums. Investors should review the prospectus of
the fund they wish to exchange from and the fund they wish to
exchange into for all specific requirements or limitations on
exercising the exchange privilege, for example, minimum holding
periods or applicable sales charges. Exchanges may be made in any
of the following ways:
EXCHANGES BY MAIL
Send written instructions signed by all account owners and
accompanied by any outstanding share certificates properly
endorsed. The transaction will be effective upon receipt of the
written instructions together with any outstanding share
certificates.
EXCHANGES BY TELEPHONE
SHAREHOLDERS, OR THEIR INVESTMENT REPRESENTATIVE OF RECORD, IF
ANY, MAY EXCHANGE SHARES OF THE FUND BY TELEPHONE BY CALLING
INVESTOR SERVICES AT 1-800/632-2301 OR THE AUTOMATED FRANKLIN
TELEFACTS SYSTEM (DAY OR NIGHT) AT 1-800/247-1753. IF THE
SHAREHOLDER DOES NOT WISH THIS PRIVILEGE EXTENDED TO A PARTICULAR
ACCOUNT, THE FUND OR INVESTOR SERVICES SHOULD BE NOTIFIED.
The Telephone Exchange Privilege allows a shareholder to effect
exchanges from the Fund into an identically registered account in
one of the other available Franklin Templeton Funds. The
Telephone Exchange Privilege is available only for uncertificated
shares or those which have previously been deposited in the
shareholder's account. The Fund and Investor Services will employ
reasonable procedures to confirm that instructions communicated
by telephone are genuine. Please refer to "Telephone Transactions
- - Verification Procedures."
During periods of drastic economic or market changes, it is
possible that the Telephone Exchange Privilege may be difficult
to implement and the TeleFACTS option may not be available. In
this event, shareholders should follow the other exchange
procedures discussed in this section, including the procedures
for processing exchanges through securities dealers.
EXCHANGES THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the Fund's
shares, Investor Services will accept exchange orders from
securities dealers who execute a dealer or similar agreement with
Distributors. See also "Exchanges By Telephone" above. Such a
dealer-ordered exchange will be effective only for uncertificated
shares on deposit in the shareholder's account or for which
certificates have previously been deposited. A securities dealer
may charge a fee for handling an exchange.
ADDITIONAL INFORMATION REGARDING EXCHANGES
A contingent deferred sales charge will not be imposed on
exchanges. If, however, the exchanged shares were subject to a
contingent deferred sales charge in the original fund purchased,
and shares are subsequently redeemed within the contingency
period, a contingent deferred sales charge will be imposed. The
contingency period will be tolled (or stopped) for the period
such shares are exchanged into and held in a Franklin or
Templeton money market fund. See also "How to Sell Shares of the
Fund - Contingent Deferred Sales Charge."
Exchanges are made on the basis of the net asset values of the
funds involved, except as set forth below. Exchanges of shares of
the Fund which were purchased without a sales charge will be
charged a sales charge in accordance with the terms of the
prospectus of the fund being purchased, unless the investment on
which no sales charge was paid was transferred in from a fund on
which the investor paid a sales charge. Exchanges of shares of
the Fund which were purchased with a lower sales charge to a fund
which has a higher sales charge will be charged the difference,
unless the shares were held in the Fund for at least six months
prior to executing the exchange. When an investor requests the
exchange of the total value of the Fund account, declared but
unpaid income dividends and capital gain distributions will be
transferred to the fund being exchanged into and will be invested
at net asset value. Because the exchange is considered a
redemption and purchase of shares, the shareholder may realize a
gain or loss for federal income tax purposes. Backup withholding
and information reporting may also apply. Information regarding
the possible tax consequences of such an exchange is included in
the tax section in this Prospectus and in the SAI.
There are differences among the Franklin Templeton Funds. Before
making an exchange, a shareholder should obtain and review a
current prospectus of the fund into which the shareholder wishes
to transfer.
If a substantial portion of the Fund's shareholders should,
within a short period, elect to redeem their shares of the Fund
pursuant to the exchange privilege, the Fund might have to
liquidate 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 should occur, it is the
general policy of the Fund to initially invest this money in
short-term, interest-bearing money market instruments, unless it
is felt that attractive investment opportunities consistent with
the Fund's investment objectives exist immediately. Subsequently,
this money will be withdrawn from such short-term money market
instruments and invested in portfolio securities in as orderly a
manner as is possible when attractive investment opportunities
arise.
The Exchange Privilege may be modified or discontinued by the
Fund at any time upon 60 days' written notice to shareholders.
RETIREMENT PLANS
Franklin Templeton IRA and 403(b) retirement plan accounts may
accomplish exchanges directly. Certain restrictions may apply,
however, to other types of retirement plans. See "Restricted
Accounts" under "Telephone Transactions."
TIMING ACCOUNTS
Accounts which are administered by allocation or market timing
services to purchase or redeem shares based on predetermined
market indicators ("Timing Accounts") will be charged a $5.00
administrative service fee per each such exchange. All other
exchanges are without charge.
RESTRICTIONS ON EXCHANGES
In accordance with the terms of their respective prospectuses,
certain funds do not accept or may place differing limitations
than those below on exchanges by Timing Accounts.
The Fund reserves the right to temporarily or permanently
terminate the exchange privilege or reject any specific purchase
order for any Timing Account or any person whose transactions
seem to follow a timing pattern who: (i) makes an exchange
request out of the Fund within two weeks of an earlier exchange
request out of the Fund, or (ii) makes more than two exchanges
out of the Fund per calendar quarter, or (iii) exchanges shares
equal in value to at least $5 million, or more than 1% of the
Fund's net assets. Accounts under common ownership or control,
including accounts administered so as to redeem or purchase
shares based upon certain predetermined market indicators, will
be aggregated for purposes of the exchange limits.
The Fund also reserves the right to refuse the purchase side of
an exchange request by any Timing Account, person, or group if,
in the Manager's judgment, the Fund would be unable to invest
effectively in accordance with its investment objectives and
policies, or would otherwise potentially be adversely affected. A
shareholder's purchase exchanges may be restricted or refused if
the Fund receives or anticipates simultaneous orders affecting
significant portions of the Fund's assets. In particular, a
pattern of exchanges that coincide with a "market timing"
strategy may be disruptive to the Fund and therefore may be
refused.
The Fund and Distributors also, as indicated in "How to Buy
Shares of the Fund," reserve the right to refuse any order for
the purchase of shares.
HOW TO SELL SHARES OF THE FUND
A shareholder may at any time liquidate shares owned and receive
from the Fund the value of the shares. Shares may be redeemed in
any of the following ways:
REDEMPTIONS BY MAIL
Send a written request, signed by all registered owners, to
Investor Services, at the address shown on the back cover of this
Prospectus, and any share certificates which have been issued for
the shares being redeemed, properly endorsed and in order for
transfer. The shareholder will then receive from the Fund the
value of the shares based upon the net asset value per share next
computed after the written request in proper form is received by
Investor Services. Redemption requests received after the time at
which the net asset value is calculated (at the scheduled close
of the New York Stock Exchange ["Exchange"] which is generally
1:00 p.m. Pacific Time) each day that the Exchange is open for
business will receive the price calculated on the following
business day. Shareholders are requested to provide a telephone
number(s) where they may be reached during business hours, or in
the evening if preferred. Investor Services' ability to contact a
shareholder promptly when necessary will speed the processing of
the redemption.
To be considered in proper form, signature(s) must be guaranteed
if the redemption request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other
than the registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address
other than the shareholder's address of record,
preauthorized bank account or brokerage firm account;
(4) share certificates, if the redemption proceeds are in excess
of $50,000; or
(5) the Fund or Investor Services believes that a signature
guarantee would protect against potential claims based on
the transfer instructions, including, for example, when (a)
the current address of one or more joint owners of an
account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c)
the Fund has been notified of an adverse claim, (d) the
instructions received by the Fund are given by an agent, not
the actual registered owner, (e) the Fund determines that
joint owners who are married to each other are separated or
may be the subject of divorce proceedings, or (f) the
authority of a representative of a corporation, partnership,
association, or other entity has not been established to the
satisfaction of the Fund.
Signature(s) must be guaranteed by an "eligible guarantor
institution" as defined under Rule 17Ad-15 under the Securities
Exchange Act of 1934. Generally, eligible guarantor institutions
include (1) national or state banks, savings associations,
savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national
securities exchanges, registered securities associations and
clearing agencies; (3) securities dealers which are members of a
national securities exchange or a clearing agency or which have
minimum net capital of $100,000; or (4) institutions that
participate in the Securities Transfer Agent Medallion Program
("STAMP") or other recognized signature guarantee medallion
program. A notarized signature will not be sufficient for the
request to be in proper form.
Where shares to be redeemed are represented by share
certificates, the request for redemption must be accompanied by
the share certificate and a share assignment form signed by the
registered shareholders exactly as the account is registered,
with the signature(s) guaranteed as referenced above.
Shareholders are advised, for their own protection, to send the
share certificate and assignment form in separate envelopes if
they are being mailed in for redemption.
Liquidation requests of corporate, partnership, trust and
custodianship accounts, and accounts under court jurisdiction
require the following documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from
the authorized officer(s) of the corporation, and (2) a corporate
resolution.
Partnership - (1) Signature guaranteed letter of instruction from
a general partner, and (2) pertinent pages from the partnership
agreement identifying the general partners or a certification for
a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the
trustee(s), and (2) a copy of the pertinent pages of the trust
document listing the trustee(s) or a Certification for Trust if
the trustee(s) are not listed on the account registration.
Custodial (other than a retirement account) - Signature
guaranteed letter of instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the
applicable state law since these accounts have varying
requirements, depending upon the state of residence.
Payment for redeemed shares will be sent to the shareholder
within seven days after receipt of the request in proper form.
REDEMPTIONS BY TELEPHONE
Shareholders who complete the Franklin Templeton Telephone
Redemption Authorization Agreement (the "Agreement"), included
with this Prospectus, may redeem shares of the Fund by telephone,
subject to the Restricted Account exception noted under
"Telephone Transactions - Restricted Accounts." INFORMATION MAY
ALSO BE OBTAINED BY WRITING TO THE FUND OR INVESTOR SERVICES AT
THE ADDRESS SHOWN ON THE COVER OR BY CALLING 1-800/632-2301. THE
FUND AND INVESTOR SERVICES WILL EMPLOY REASONABLE PROCEDURES TO
CONFIRM THAT INSTRUCTIONS GIVEN BY TELEPHONE ARE GENUINE.
SHAREHOLDERS, HOWEVER, BEAR THE RISK OF LOSS IN CERTAIN CASES AS
DESCRIBED UNDER "TELEPHONE TRANSACTIONS - VERIFICATION
PROCEDURES."
For shareholder accounts with the completed Agreement on file,
redemptions of uncertificated shares or shares which have
previously been deposited with the Fund or Investor Services may
be made for up to $50,000 per day per Fund account. Telephone
redemption requests received prior to the scheduled close of the
Exchange (generally 1:00 p.m. Pacific time) on any business day
will be processed that same day. The redemption check will be
sent within seven days, made payable to all the registered owners
on the account, and will be sent only to the address of record.
Redemption requests by telephone will not be accepted within 30
days following an address change by telephone. In that case, a
shareholder should follow the other redemption procedures set
forth in this Prospectus. Institutional accounts (certain
corporations, bank trust departments, government entities, and
qualified retirement plans which qualify to purchase shares at
net asset value pursuant to the terms of this Prospectus) which
wish to execute redemptions in excess of $50,000 must complete an
Institutional Telephone Privileges Agreement which is available
from Franklin's Institutional Services Department by telephoning
1-800/321-8563.
REDEEMING SHARES THROUGH SECURITIES DEALERS
The Fund will accept redemption orders from securities dealers
who have entered into an agreement with Distributors. This is
known as a repurchase. The only difference between a normal
redemption and a repurchase is that if the shareholder redeems
shares through a dealer, the redemption price will be the net
asset value next calculated after the shareholder's dealer
receives the order which is promptly transmitted to the Fund,
rather than on the day the Fund receives the shareholder's
written request in proper form. The documents, as described in
the preceding section, are required even if the shareholder's
securities dealer has placed the repurchase order. After receipt
of a repurchase order from the dealer, the Fund will still
require a signed letter of instruction and all other documents
set forth above. A shareholder's letter should reference the
Fund, the account number, the fact that the repurchase was
ordered by a dealer and the dealer's name. Details of the dealer-
ordered trade, such as trade date, confirmation number, and the
amount of shares or dollars, will help speed processing of the
redemption. The seven-day period within which the proceeds of the
shareholder's redemption will be sent will begin when the Fund
receives all documents required to complete ("settle") the
repurchase in proper form. The redemption proceeds will not earn
dividends or interest during the time between receipt of the
dealer's repurchase order and the date the redemption is
processed upon receipt of all documents necessary to settle the
repurchase. Thus, it is in a shareholder's best interest to have
the required documentation completed and forwarded to the Fund as
soon as possible. The shareholder's dealer may charge a fee for
handling the order. The SAI contains more information on the
redemption of shares.
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers on
investments of $1 million or more, a contingent deferred sales
charge of 1% applies to redemptions of those investments within
the contingency period of 12 months of the calendar month
following their purchase. The charge is 1% of the lesser of the
value of the shares redeemed (exclusive of reinvested dividends
and capital gain distributions) or the total cost of such shares,
and is retained by Distributors. In determining if a charge
applies, shares not subject to a contingent deferred sales charge
are deemed to be redeemed first, in the following order: (i)
shares representing amounts attributable to capital appreciation
of those shares held less than 12 months; (ii) shares purchased
with reinvested dividends and capital gain distributions; and
(iii) other shares held longer than 12 months; and followed by
any shares held less than 12 months, on a "first in, first out"
basis.
The contingent deferred sales charge is waived for: exchanges;
any account fees; distributions to participants or their
beneficiaries in Trust Company qualified retirement plan accounts
due to death, disability or attainment of age 59 1/2; tax-free
returns of excess contributions to employee benefit plans;
distributions from employee benefit plans, including those due to
plan termination or plan transfer; redemptions through a
Systematic Withdrawal Plan set up for shares prior to February 1,
1995 and, for Systematic Withdrawal Plans set up thereafter,
redemptions of up to 1% monthly of an account's net asset value
(3% quarterly, 6% semiannually or 12% annually); and redemptions
initiated by the Fund due to a shareholder's account falling
below the minimum specified account size; and redemptions
following the death of the shareholder or the beneficial owner.
Requests for redemptions for a SPECIFIED DOLLAR amount will
result in additional shares being redeemed to cover any
applicable contingent deferred sales charge while requests for
redemption of a SPECIFIC NUMBER of shares will result in the
applicable contingent deferred sales charge being deducted from
the total dollar amount redeemed.
ADDITIONAL INFORMATION REGARDING REDEMPTIONS
The Fund may delay the mailing of the redemption check, or a
portion thereof, until the clearance of the check used to
purchase Fund shares, which may take up to 15 days or more.
Although the use of a certified or cashier's check will generally
reduce this delay, shares purchased with these checks will also
be held pending clearance. Shares purchased by federal funds wire
are available for immediate redemption. In addition, the right of
redemption may be suspended or the date of payment postponed if
the Exchange is closed (other than customary closing) or upon the
determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it, by
order, for the protection of shareholders. Of course, the amount
received may be more or less than the amount invested by the
shareholder, depending on fluctuations in the market value of
securities owned by the Fund.
RETIREMENT PLAN ACCOUNTS
Retirement plan account liquidations require the completion of
certain additional forms to ensure compliance with IRS
regulations. To liquidate a retirement plan account, a
shareholder or securities dealer may call Franklin's Retirement
Plans Department to obtain the necessary forms.
Tax penalties will generally apply to any distribution from such
plans to a participant under age 59 1/2, unless the distribution
meets one of the exceptions set forth in the Code.
OTHER
For any information required about a proposed liquidation, a
shareholder may call Franklin's Shareholder Services Department
or the securities dealer may call Franklin's Dealer Services
Department.
TELEPHONE TRANSACTIONS
Shareholders of the Fund and their investment representative of
record, if any, may be able to execute various transactions by
calling Investor Services at 1-800/632-2301. All shareholders
will be able to: (i) effect a change in address, (ii) change a
dividend option (see "Restricted Accounts" below), (iii) transfer
Fund shares in one account to another identically registered
account in the Fund, and (iv) exchange Fund shares as described
in this Prospectus by telephone. In addition, shareholders who
complete and file an Agreement as described under "How to Sell
Shares of the Fund - Redemptions by Telephone" will be able to
redeem shares of the Fund.
VERIFICATION PROCEDURES
The Fund and Investor Services will employ reasonable procedures
to confirm that instructions communicated by telephone are
genuine. These will include: recording all telephone calls
requesting account activity by telephone, requiring that the
caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call
for the purpose of establishing the caller's identification, and
by sending a confirmation statement on redemptions to the address
of record each time account activity is initiated by telephone.
So long as the Fund and Investor Services follow instructions
communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their
affiliates will be liable for any loss to the shareholder caused
by an unauthorized transaction. The Fund and Investor Services
may be liable for any losses due to unauthorized or fraudulent
instructions in the event such reasonable procedures are not
followed. Shareholders are, of course, under no obligation to
apply for or accept telephone transaction privileges. In any
instance where the Fund or Investor Services is not reasonably
satisfied that instructions received by telephone are genuine,
the requested transaction will not be executed, and neither the
Fund nor Investor Services will be liable for any losses which
may occur because of a delay in implementing a transaction.
RESTRICTED ACCOUNTS
Telephone redemptions and dividend option changes may not be
accepted on Franklin Templeton retirement accounts. To assure
compliance with all applicable regulations, special forms are
required for any distribution, redemption, or dividend payment.
While the telephone exchange privilege is extended to Franklin
Templeton IRA and 403(b) retirement accounts, certain
restrictions may apply to other types of retirement plans.
Changes to dividend options must also be made in writing.
To obtain further information regarding distribution or transfer
procedures, including any required forms, retirement account
shareholders may call to speak to a Retirement Plan Specialist at
1-800/527-2020 for Franklin accounts or 1-800/354-9191 (press "2"
when prompted to do so) for Templeton accounts.
GENERAL
During periods of drastic economic or market changes, it is
possible that the telephone transaction privileges will be
difficult to execute because of heavy telephone volume. In such
situations, shareholders may wish to contact their investment
representative for assistance, or to send written instructions to
the Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any
losses resulting from the inability of a shareholder to execute a
telephone transaction.
The telephone transaction privilege may be modified or
discontinued by the Fund at any time upon 60 days' written notice
to shareholders.
VALUATION OF FUND SHARES
The net asset value per share of the Fund is determined as of the
scheduled close of the Exchange (generally 1:00 p.m. Pacific
time) each day that the Exchange is open for trading. Many
newspapers carry daily quotations of the prior trading day's
closing "bid" (net asset value) and "ask" (offering price, which
includes the maximum front-end sales charge of the Fund).
The net asset value per share of the Fund is determined in the
following manner: The aggregate of all liabilities is deducted
from the aggregate gross value of all assets, and the difference
is divided by the number of shares of the Fund outstanding at the
time.
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. 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 Exchange on
each day on which the Exchange is open. Trading in European or
Far Eastern securities generally, or in a particular country or
countries, may not take place on every Exchange business day.
Furthermore, trading takes place in various foreign markets on
days which are not business days for the Exchange and on which
the Fund's net asset value is not calculated. The Fund calculates
net asset value per share, and therefore effects sales and
redemptions of its shares, as of the close of the Exchange each
day on which the Exchange is open. Such calculation does not take
place contemporaneously with the determination of the prices of
many of the portfolio securities used in such calculation and, if
events occur which materially affect the value of these foreign
securities, they will be valued at fair market value as
determined by the management and approved in good faith by the
Board of Directors.
Portfolio securities which 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
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
sales 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, the options are valued
within the range of the current closing bid and ask prices if
such valuation is believed to fairly reflect the contract's
market value. 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 of Directors. With the
approval of directors, the Fund may utilize a pricing service,
bank or securities dealer to perform any of the above described
functions.
HOW TO GET INFORMATION REGARDING
AN INVESTMENT IN THE FUND
Any questions or communications regarding a shareholder's account
should be directed to Investor Services at the address shown on
the back cover of this Prospectus.
From a touch-tone phone, shareholders may access an automated
system (day or night) which offers the following features. By
calling the Franklin TeleFACTS(Registered Trademark) system at 1-
800/247-1753, shareholders may obtain current price, yield or
other performance information specific to a Franklin fund;
process an exchange into an identically registered Franklin
account; obtain account information and request duplicate
confirmation or year-end statements, money fund checks, if
applicable, and deposit slips. Share prices and account
information specific to a Templeton fund may also be accessed on
TeleFACTS by Franklin shareholders. Information about the Fund
may be accessed by entering Fund Code 02 followed by the # sign,
when requested to do so by the automated operator. The system's
automated operator will prompt the caller with easy to follow
step-by-step instructions from the main menu. Other features may
be added in the future.
To assist shareholders and securities dealers wishing to speak
directly with a representative, the following is a list of the
various Franklin departments, telephone numbers and hours of
operation to call. The same numbers may be used when calling from
a rotary phone:
HOURS OF OPERATION
(PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m.
(Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing 1-800/851-0637 6:00 a.m. to 5:00 p.m.
impaired)
In order to ensure that the highest quality of service is being
provided, telephone calls placed to or by representatives in
Franklin's service departments may be accessed, recorded and
monitored. These calls can be determined by the presence of a
regular beeping tone.
PERFORMANCE
Advertisements, sales literature and communications to
shareholders may contain various measures of the Fund's
performance, including current yield, various expressions of
total return and current distribution rate. They may occasionally
cite statistics to reflect its volatility or risk.
Average annual total return figures as prescribed by the SEC
represent the average annual percentage change in value of $1,000
invested at the maximum public offering price (offering price
includes sales charge) for one-, five- and ten-year periods, or
portion thereof, to the extent applicable, through the end of the
most recent calendar quarter, assuming reinvestment of all
distributions. The Fund may also furnish total return quotations
for other periods, or based on investments at various sales
charge levels or at net asset value. For such purposes total
return equals the total of all income and capital gain paid to
shareholders, assuming reinvestment of all distributions, plus
(or minus) the change in the value of the original investment,
expressed as a percentage of the purchase price.
Current yield reflects the income per share earned by the Fund's
portfolio investments; it is calculated by dividing the Fund's
net investment income per share during a recent 30-day period by
the maximum public offering price on the last day of that period
and annualizing the result.
Yield which is calculated according to a formula prescribed by
the SEC (see the SAI) is not indicative of the dividends or
distributions which were or will be paid to the Fund's
shareholders. Dividends or distributions paid to shareholders are
reflected in the current distribution rate, which may be quoted
to shareholders. The current distribution rate is computed by
dividing the total amount of dividends per share paid by the Fund
during the past 12 months by a current maximum offering price.
Under certain circumstances, such as when there has been a change
in the amount of dividend payout, or a fundamental change in
investment policies, it might be appropriate to annualize the
dividends paid during the period such policies were in effect,
rather than using the dividends during the past 12 months. The
current distribution rate differs from the current yield
computation because it may include distributions to shareholders
from sources other than dividends and interest, such as premium
income from option writing and short-term capital gain, and is
calculated over a different period of time.
In each case performance figures are based upon past performance,
reflect all recurring charges against Fund income and will assume
the payment of the maximum sales charge on the purchase of
shares. When there has been a change in the sales charge
structure, the historical performance figures will be restated to
reflect the new rate. The investment results of the Fund, like
all other investment companies, will fluctuate over time; thus,
performance figures should not be considered to represent what an
investment may earn in the future or what the Fund's yield,
distribution rate or total return may be in any future period.
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS
The Fund's fiscal year ends December 31. Annual Reports
containing audited financial statements of the Fund, including
the auditors' report, and Semi-Annual Reports containing
unaudited financial statements are automatically sent to
shareholders. Copies may be obtained by investors or
shareholders, without charge, upon request to the Fund at the
telephone number or address set forth on the cover page of this
Prospectus.
Additional information on Fund performance is included in the
Fund's Annual Report to Shareholders and the SAI.
ORGANIZATION
The Fund's authorized capital stock consists of 5,000,000,000
shares of common stock. All shares are of one class, have one
vote and, when issued, are fully paid and nonassessable. All
shares have equal voting, participation and liquidation rights,
but have no subscription, preemptive or conversion rights.
VOTING RIGHTS
Shares of the Fund have cumulative voting rights which means that
in all elections of directors, each shareholder has the right to
cast a number of votes equal to the number of shares owned,
multiplied by the number of directors to be elected at such
election, and each shareholder may cast the whole number of votes
for one candidate or distribute such votes among two or more
candidates.
The California Corporations Code does not require corporations
registered as management investment companies under the 1940 Act
to hold routine annual meetings of shareholders and the Fund does
not intend to hold annual shareholders' meetings. The Fund may,
however, hold a special meeting for such purposes as changing
fundamental investment restrictions, approving a new management
agreement or any other matters which are required to be acted on
by shareholders under the 1940 Act. A meeting may also be called
by a majority of the Board of Directors or by shareholders
holding at least ten percent of the shares entitled to vote at
the meeting. Shareholders may receive assistance in communicating
with other shareholders in connection with the election or
removal of directors such as that provided in Section 16(c) of
the 1940 Act.
REDEMPTIONS BY THE FUND
The Fund reserves the right to redeem, at net asset value, shares
of any shareholder whose account has a value of less than $50,
but only where the value of such account has been reduced by the
shareholder's prior voluntary redemption of shares and has been
inactive (except for the reinvestment of distributions) for a
period of at least six months, provided advance notice is given
to the shareholder. More information is included in the SAI.
OTHER INFORMATION
Distribution or redemption checks sent to shareholders do not
earn interest or any other income during the time such checks
remain uncashed and neither the Fund nor its affiliates will be
liable for any loss to the shareholder caused by the
shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check, draft
or wire. The Fund has no facility to receive, or pay out, cash in
the form of currency.
ACCOUNT REGISTRATIONS
An account registration should reflect the investor's intentions
as to ownership. Where there are two co-owners on the account,
the account will be registered as "Owner 1" and "Owner 2"; the
"or" designation is not used except for money market fund
accounts. If co-owners wish to have the ability to redeem or
convert on the signature of only one owner, a limited power of
attorney may be used.
Accounts should not be registered in the name of a minor, either
as sole or co-owner of the account. Transfer or redemption for
such an account may require court action to obtain release of the
funds until the minor reaches the legal age of majority. The
account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform
Transfer or Gifts to Minors Act.
A trust designation such as "trustee" or "in trust for" should
only be used if the account is being established pursuant to a
legal, valid trust document. Use of such a designation in the
absence of a legal trust document may cause difficulties and
require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint
tenants or "Jt Ten" shall mean as "joint tenants with rights of
survivorship" and not as "tenants in common."
Except as indicated, a shareholder may transfer an account in the
Fund carried in "street" or "nominee" name by the shareholder's
securities dealer to a comparably registered Fund account
maintained by another securities dealer. Both the delivering and
receiving securities dealers must have executed dealer agreements
on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not
process the transfer and will so inform the shareholder's
delivering securities dealer. To effect the transfer, a
shareholder should instruct the securities dealer to transfer the
account to a receiving securities dealer and sign any documents
required by the securities dealer(s) to evidence consent to the
transfer. Under current procedures the account transfer may be
processed by the delivering securities dealer and the Fund after
the Fund receives authorization in proper form from the
shareholder's delivering securities dealer. In the future it may
be possible to effect such transfers electronically through the
services of the NSCC.
The Fund may conclusively accept instructions from an owner or
the owner's nominee listed in publicly available nominee lists,
regardless of whether the account was initially registered in the
name of, or by the owner, the nominee, or both. If a securities
dealer or other representative is of record on an investor's
account, the investor will be deemed to have authorized the use
of electronic instructions on the account, including, without
limitation, those initiated through the services of the NSCC, to
have adopted as instruction and signature any such electronic
instructions received by the Fund and the Shareholder Services
Agent, and to have authorized them to execute the instructions
without further inquiry. At the present time, such services which
are available include the NSCC's "Networking," "Fund/SERV," and
"ACATS" systems.
Any questions regarding an intended registration should be
answered by the securities dealer handling the investment, or by
calling Franklin's Fund Information Department.
IMPORTANT NOTICE REGARDING
TAXPAYER IRS CERTIFICATIONS
Pursuant to the Code and U.S. Treasury regulations, the Fund may
be required to report to the Internal Revenue Service ("IRS") any
taxable dividend, capital gain distribution, or other reportable
payment (including share redemption proceeds) and withhold 31% of
any such payments made to individuals and other non-exempt
shareholders who have not provided a correct taxpayer
identification number ("TIN") and made certain required
certifications that appear in the Shareholder Application. A
shareholder may also be subject to backup withholding if the IRS
or a securities dealer notifies the Fund that the number
furnished by the shareholder is incorrect or that the shareholder
is subject to backup withholding for previous under-reporting of
interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for
any person failing to provide a TIN along with the required
certifications and (2) close an account by redeeming its shares
in full at the then current net asset value upon receipt of
notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a
shareholder who has completed an "awaiting TIN" certification to
provide the Fund with a certified TIN within 60 days after
opening the account.
PORTFOLIO OPERATIONS
The following persons are primarily responsible for the day-to-
day management of the Fund's portfolio: Lisa Costa and R. Martin
Wiskemann since inception.
Lisa Costa, Portfolio Manager of Advisers, holds a bachelor of
science degree in finance from California State University at
Hayward and a master's degree in business administration and
finance from Golden Gate University, San Francisco. She has been
with Advisers since 1980. Ms. Costa is a member of several
securities industry-related committees and associations.
R. Martin Wiskemann, Senior Vice President of Advisers, holds a
degree in business administration from the Handelsschule of the
State of Zurich, Switzerland. He has been with Advisers since
1972 and, prior thereto, he was a securities analyst at Laird,
Bissell & Meed and an investment manager with Winfield & Company.
Mr. Wiskemann is a member of several securities industry-related
committees and associations.
FRANKLIN
PREMIER
RETURN FUND
STATEMENT OF
ADDITIONAL INFORMATION
MAY 1, 1995
777 MARINERS ISLAND BLVD., P.O.BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
CONTENTS PAGE
About the Fund (See also the
Prospectus "About the Fund" and
"General Information")
The Fund's Investment Restrictions
and Policies (See also the Prospectus
"Investment Objectives and
Policies of the Fund")
Officers and Directors
Investment Advisory and Other Services
(See also the Prospectus
"Management of the Fund")
The Fund's Policies Regarding Brokers
Used on Portfolio Transactions
Additional Information Regarding Fund Shares (See also the
Prospectus "How to Buy Shares of the Fund," "How to Sell
Shares of the Fund," and "Valuation of Fund Shares")
Additional Information
Regarding Taxation
The Fund's Underwriter
General Information
Financial Statements
A Prospectus for the Fund, dated May 1, 1995, as may be amended
from time to time, provides the basic information an investor
should know before investing in the Fund, and may be obtained
without charge from the Fund or from its principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors"), at the
address shown above.
This Statement of Additional Information (the "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 investors with additional information regarding the
activities and operations of the Fund, and should be read in
conjunction with the Fund's Prospectus.
ABOUT THE FUND
The Fund is a diversified, open-end management investment
company, commonly called a "mutual fund." It was incorporated in
Hawaii on December 5, 1951, and reincorporated in California on
April 27, 1983, pursuant to a statutory merger with a corporation
formed on April 18, 1983. On April 12, 1991 shareholders approved
a change in the Fund's investment objective and policies and the
adoption of the Fund's current name. The Fund has only one class
of capital stock with no par value.
THE FUND'S INVESTMENT
RESTRICTIONS AND POLICIES
TRANSACTIONS IN OPTIONS, FUTURES
AND OPTIONS ON FINANCIAL FUTURES
CALL AND PUT OPTIONS ON SECURITIES. The Fund intends to write
covered put and call options and purchase put and call options
which trade on securities exchanges and in the over-the-counter
market.
WRITING CALL AND PUT OPTIONS. A call option gives the option
holder the right to buy the underlying securities from the option
writer at a stated exercise price. A put option gives the option
holder the right to sell the underlying security at the option
exercise price at any time during the option period.
Call options written by the Fund give the holder the right to buy
the underlying securities from the Fund at a stated exercise
price; put options written by the Fund give the holder the right
to sell the underlying security to the Fund at a stated exercise
price. A call option written by the Fund is "covered" if the Fund
owns the underlying security which is subject to 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 is also covered if the Fund holds a call on the
same security 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 and high grade debt
securities in a segregated account with its custodian. A put
option written by the Fund is "covered" if the Fund maintains
cash and high grade debt 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 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 premium paid by the purchaser of an option will
reflect, among other things, the relationship of the exercise
price to the market price and volatility of the underlying
security, the remaining term of the option, supply and demand and
interest rates.
The writer of an option may have no control over when the
underlying securities must be sold, in the case of a call option,
or purchased, in the case of a put option, since, with regard to
certain options, the writer may be assigned an exercise notice at
any time prior to the termination of the obligation. Whether or
not an option expires unexercised, the writer retains the amount
of the premium. This amount, of course, may, in the case of a
covered call option, be offset by a decline in the market value
of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from
the sale of the underlying security. If a put option is
exercised, the writer must fulfill the obligation to purchase the
underlying security at the exercise price, which will usually
exceed the then market value of the underlying security.
The writer of an option who wishes to terminate its obligation
may effect a "closing purchase transaction." This is accomplished
by buying an option of the same series as the option previously
written. The effect of the purchase is that the writer's position
will be canceled by the clearing corporation. However, a writer
may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who
is the holder of an option may liquidate its position by
effecting a "closing sale transaction." This is accomplished by
selling an option of the same series as the option previously
purchased. There is no guarantee that either a closing purchase
or a closing sale transaction will be available to be effected at
the time desired by the Fund.
Effecting a closing transaction in the case of a written call
option will permit the Fund to write another call option on the
underlying security with either a different exercise price or
expiration date or both, or in the case of a written put option
will permit the Fund to write another put option to the extent
that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will
permit the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other Fund
investments. If the Fund desires to sell a particular security
from its portfolio on which it has written a call option, it will
effect a closing transaction prior to or concurrent with the sale
of the security.
The Fund will realize a profit from a closing transaction if the
price of the transaction is less than the premium received from
writing the option or is more than the premium paid to purchase
the option; the Fund will realize a loss from a closing
transaction if the price of the transaction is more than the
premium received from writing the option or is less than the
premium paid to purchase the option. Because increases in the
market price of a call option will generally reflect increases in
the market price of the underlying security, any loss resulting
from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned
by the Fund.
The writing of covered put options involves certain risks. For
example, if the market price of the underlying security rises or
otherwise is above the exercise price, the put option will expire
worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines
or otherwise is below the exercise price, the Fund may elect to
close the position or take delivery of the security at the
exercise price and the Fund's return will be the premium received
from the put options minus the amount by which the market price
of the security is below the exercise price.
PURCHASING CALL AND PUT OPTIONS. The Fund may purchase call
options on securities which it intends to purchase in order to
limit the risk of a substantial increase in the market price of
such security before the purchase is effected. The Fund may also
purchase call options on securities held in its portfolio and on
which it has written call options. Prior to its expiration, a
call option may be sold in a closing sale transaction. Profit or
loss from such a sale will depend on whether the amount received
is more or less than the premium paid for the call option plus
the related transaction costs.
The Fund may purchase put options on particular securities in
order to protect against a decline in the market value of the
underlying security below the exercise price less the premium
paid for the option. The ability to purchase put options will
allow the Fund to protect the unrealized gain in an appreciated
security in its portfolio without actually selling the security.
In addition, the Fund will continue to receive interest or
dividend income on the security. The Fund may sell a put option
which it has previously purchased prior to the sale of the
securities underlying such option. Such sales will result in a
net gain or loss depending on whether the amount received on the
sale is more or less than the premium and other transaction costs
paid for the put option that is sold. Such gain or loss may be
wholly or partially offset by a change in the value of the
underlying security which the Fund owns or has the right to
acquire.
OVER-THE-COUNTER OPTIONS ("OTC" OPTIONS). The Fund intends to
write covered put and call options and purchase put and call
options which trade in the over-the-counter market to the same
extent that it will engage in exchange traded options. Just as
with exchange traded options, OTC call options give the option
holder the right to buy an underlying security from an option
writer at a stated exercise price; OTC put options give the
holder the right to sell an underlying security to an option
writer at a stated exercise price. However, OTC options differ
from exchange traded options in certain material respects.
OTC options are arranged directly with dealers and not, as is the
case with exchange traded options, with a clearing corporation.
Thus, there is a risk of non-performance by the dealer. Because
there is no exchange, pricing is typically done by reference to
information from market makers. However, OTC options are
available for a greater variety of securities, and in a wider
range of expiration dates and exercise prices, than exchange
traded options; and the writer of an OTC option is paid the
premium in advance by the dealer.
There can be no assurance that a continuous liquid secondary
market will exist for any particular option at any specific time.
Consequently, the Fund may be able to realize the value of an OTC
option it has purchased only by exercising it or by entering into
a closing sale transaction with the dealer that issued it.
Similarly, when the Fund writes an OTC option, it generally can
close out that option prior to its expiration only by entering
into a closing purchase transaction with the dealer to which the
Fund originally wrote it.
OPTIONS ON STOCK INDICES. The Fund may also purchase call options
on stock indices in order to hedge against the risk of market or
industry-wide stock price fluctuations. Call and put options on
stock indices are similar to options on securities except that,
rather than the right to purchase or sell stock at a specified
price, options on a stock index give the holder the right to
receive, upon exercise of the option, an amount of cash if the
closing level of the underlying stock index is greater than (or
less than, in the case of puts) the exercise price of the option.
This amount of cash is equal to the difference between the
closing price of the index and the exercise price of the option
expressed in dollars multiplied by a specified number. Thus,
unlike stock options, all settlements are in cash, and gain or
loss depends on price movements in the stock market generally (or
in a particular industry or segment of the market) rather than
price movements in individual stocks.
When the Fund writes an option on a stock index, the Fund will
establish a segregated account containing cash or high quality
fixed-income securities with its custodian in an amount at least
equal to the market value of the underlying stock index and will
maintain the account while the option is open or it will
otherwise cover the transaction.
FUTURES CONTRACTS. The Fund may enter into contracts for the
purchase or sale for future delivery of securities and in such
contracts based upon financial indices ("financial futures").
Financial futures contracts are commodity contracts that obligate
the long or short holder to take or make delivery of a specified
quantity of a financial instrument, such as a security, or the
cash value of a securities index during a specified future period
at a specified price. A "sale" of a futures contract means the
acquisition of a contractual obligation to deliver the securities
called for by the contract at a specified price on a specified
date. A "purchase" of a futures contract means the acquisition of
a contractual obligation to acquire the securities called for by
the contract at a specified price on a specified date. Futures
contracts have been designed by exchanges which have been
designated "contracts markets" by the Commodity Futures Trading
Commission and must be executed through a futures commission
merchant, or brokerage firm, which is a member of the relevant
contract market.
At the same time a futures contract is purchased or sold, the
Fund must allocate cash or securities as a deposit payment
("initial deposit"). Daily thereafter, the futures contract is
valued and the payment of "variation margin" may be required,
since each day the Fund would provide or receive cash that
reflects any decline or increase in the contract's value.
Although futures contracts by their terms call for the actual
delivery or acquisition of securities, in most cases the
contractual obligation is fulfilled before the date of the
contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a
commodities exchange an identical futures contract calling for
delivery in the same month. Such a transaction, which is effected
through a member of an exchange, cancels the obligation to take
delivery of the securities. Since all transactions in the futures
market are made, offset or fulfilled through a clearinghouse
associated with the exchange on which the contracts are traded,
the Fund will incur brokerage fees when it purchases or sells
futures contracts.
The Commodities Futures Trading Commission and the various
exchanges have established limits referred to as "speculative
position limits" on the maximum net long or net short position
which any person may hold or control in a particular futures
contract. Trading limits are imposed on the maximum number of
contracts which any person may trade on a particular trading day.
An exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or
restrictions. The Fund does not believe that these trading and
positions limits will have an adverse impact on the Fund's
strategies for hedging its securities.
The ordinary spreads between prices in the cash and futures
markets, due to differences in the natures of those markets, are
subject to distortions. First, all participants in the futures
market are subject to initial deposit and variation margin
requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through
offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the
liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus
producing distortion. Third, from the point of view of
speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the
securities market. Therefore, increased participation by
speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct
forecast of general interest rate trends by the investment
adviser may still not result in a successful transaction.
The Fund will not engage in transactions in futures contracts or
related options for speculation but only as a hedge against
changes resulting from market conditions in the values of its
securities or securities which it intends to purchase. The Fund
will not enter into any stock index or financial futures contract
or related option if, immediately thereafter, more than one-third
of the Fund's net assets would be represented by futures
contracts or related options. In addition, the Fund may not
purchase or sell futures contracts or purchase or sell related
options if, immediately thereafter, the sum of the amount of
margin deposits on its existing futures and related options
positions, and premiums paid for related options, would exceed 5%
of the market value of the Fund's total assets. In instances
involving the purchase of futures contracts or related call
options, cash, cash equivalents, or high quality debt securities
at least equal to the market value of the futures contract or
related options on futures will be deposited in a segregated
account with the custodian to collateralize such long positions.
The purpose of the acquisition or sale of a futures contract is
to attempt to protect the Fund from fluctuations in price of
portfolio securities without actually buying or selling the
underlying security. To the extent the Fund enters into futures
contracts, (to the extent required by the rules of the Securities
and Exchange Commission), it will maintain with its custodian
assets in a segregated account to cover its obligations with
respect to such contract which will consist of cash, cash
equivalents or high quality debt securities from its portfolio in
an amount equal to the difference between the fluctuating market
value of such futures contract and the aggregate value of the
initial and variation margin payments made by the Fund with
respect to such futures contracts.
STOCK INDEX FUTURES AND
OPTIONS ON STOCK INDEX FUTURES
The Fund may purchase and sell stock index futures contracts and
options on stock index futures contracts.
STOCK INDEX FUTURES. A stock index futures contract obligates the
seller to deliver (and the purchaser to take) an amount of cash
equal to a specific dollar amount times the difference between
the value of a specific stock index at the close of the last
trading day of the contract and the price at which the agreement
is made. No physical delivery of the underlying stocks in the
index is made.
The Fund may sell stock index futures contracts in anticipation
of or during a market decline to attempt to offset the decrease
in market value of its equity securities that might otherwise
result. When the Fund is not fully invested in stocks and it
anticipates a significant market advance, it may purchase stock
index futures in order to gain rapid market exposure that may in
part or entirely offset increases in the cost of stocks that it
intends to purchase.
OPTIONS ON STOCK INDEX FUTURES. The Fund may purchase and sell
call and put options on stock index futures to hedge against
risks of market-side price movements. The need to hedge against
such risks will depend on the extent of diversification of the
Fund's common stock portfolio and the sensitivity of such
investments to factors influencing the stock market as a whole.
Call and put options on stock index futures are similar to
options on securities except that, rather than the right to
purchase stock at a specified price, options on stock index
futures give the holder the right to receive cash. Upon exercise
of the option, the delivery of the futures position by the writer
of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market
price of the futures contract, at exercise, exceeds, in the case
of a call, or is less than, in the case of a put, the exercise
price of the option on the futures contract. If an option is
exercised on the last trading day prior to the expiration date of
the option, the settlement will be made entirely in cash equal to
the difference between the exercise price of the option and the
closing price of the futures contract on the expiration date.
BOND INDEX FUTURES AND OPTIONS ON SUCH CONTRACTS. The Fund may
purchase and sell futures contracts based on an index of debt
securities and options on such futures contracts to the extent
they currently exist and, in the future, may be developed. The
Fund reserves the right to conduct futures and options
transactions based on an index which may be developed in the
future to correlate with price movements in certain categories of
debt securities. The Fund's investment strategy in employing
futures contracts based on an index of debt securities will be
similar to that used by it in other financial futures
transactions.
The Fund also may purchase and write put and call options on such
index futures and enter into closing transactions with respect to
such options.
FUTURE DEVELOPMENTS. The Fund may take advantage of opportunities
in the area of options and futures contracts and options on
futures contracts and any other derivative investments which are
not presently contemplated for use by the Fund or which are not
currently available but which may be developed, to the extent
such opportunities are both consistent with the Fund's investment
objective and legally permissible for the Fund. Prior to
investing in any such investment vehicle, the Fund will
supplement its prospectus, if appropriate.
RISK FACTORS AND CONSIDERATIONS REGARDING
OPTIONS, FUTURES AND OPTIONS ON FUTURES
The Fund's ability to hedge effectively all or a portion of its
securities through transactions in options on stock indices,
stock index futures, financial futures and related options
depends on the degree to which price movements in the underlying
debt index or underlying debt securities correlate with price
movements in the relevant portion of the Fund's portfolio.
Inasmuch as such securities will not duplicate the components of
the index or such underlying securities, the correlation will not
be perfect. Consequently, the Fund bears the risk that the prices
of the securities being hedged will not move in the same amount
as the hedging instrument. It is also possible that there may be
a negative correlation between the index or other securities
underlying the hedging instrument and the hedged securities which
would result in a loss on both such securities and the hedging
instrument. Accordingly, successful use by the Fund of options on
stock indices, stock index futures, financial futures and related
options will be subject to the investment manager's ability to
predict correctly movements in the direction of the securities
markets generally or a particular segment. This requires
different skills and techniques than predicting changes in the
price of individual stocks.
Positions in stock index options, stock index futures and
financial futures and related options may be closed out only on
an exchange which provides a secondary market. There can be no
assurance that a liquid secondary market will exist for any
particular stock index option or futures contract or related
option at any specific time. Thus, it may not be possible to
close such an option or futures position. The inability to close
options or futures positions also could have an adverse impact on
the Fund's ability to effectively hedge its securities. The Fund
will enter into an option or futures position only if there
appears to be a liquid secondary market for such options or
futures.
There can be no assurance that a continuous liquid secondary
market will exist for any particular OTC option at any specific
time. Consequently, the Fund may be able to realize the value of
an OTC option it has purchased only by exercising it or entering
into a closing sale transaction with the dealer that issued it.
Similarly, when the Fund writes an OTC option, it generally can
close out that option prior to its expiration only by entering
into a closing purchase transaction with the dealer to which the
Fund originally wrote it. If a covered call option writer cannot
effect a closing transaction, it cannot sell the underlying
security until the option expires or the option is exercised.
Therefore, a covered call option writer of an OTC option may not
be able to sell an underlying security even though it might
otherwise be advantageous to do so. Likewise, a secured put
writer of an OTC option may be unable to sell the securities
pledged to secure the put for other investment purposes while it
is obligated as a put writer. Similarly, a purchaser of such put
or call option might also find it difficult to terminate its
position on a timely basis in the absence of a secondary market.
The Commodities Futures Trading Commission and the various
exchanges have established limits, referred to as "speculative
position limits," on the maximum net long or net short position
which any person may hold or control in a particular futures
contract. Trading limits are imposed on the maximum number of
contracts which any person may trade on a particular trading day.
An exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or
restrictions. The Fund does not believe that these trading and
positions limits will have an adverse impact on the Fund's
strategies for hedging its securities.
The ordinary spreads between prices in the cash and futures
markets, due to differences in the natures of those markets, are
subject to distortions. First, all participants in the futures
market are subject to initial deposit and variation margin
requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through
offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the
liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus
producing distortion. Third, from the point of view of
speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the
securities market. Therefore, increased participation by
speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct
forecast of general interest rate trends by the investment
adviser may still not result in a successful transaction.
In addition, futures contracts entail risks. Although the Fund
believes that use of such contracts will benefit the Fund, if the
investment adviser's investment judgment about the general
direction of interest rates is incorrect, the Fund's overall
performance would be poorer than if it had not entered into any
such contract. For example, if the Fund has hedged against the
possibility of an increase in interest rates which would
adversely affect the price of bonds held in its portfolio and
interest rates decrease instead, the Fund will lose part or all
of the benefit of the increased value of its bonds which it has
hedged because it will have offsetting losses in its futures
positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities from its
portfolio to meet daily variation margin requirements. Such sales
may be, but will not necessarily be, at increased prices which
reflect the rising market. The Fund may have to sell securities
at a time when it may be disadvantageous to do so.
The Fund's sale of futures contracts and purchase of put options
on futures contracts will be solely to protect its investments
against declines in value. The Fund expects that in the normal
course it will purchase securities upon termination of long
futures contracts and long call options on future contracts, but
under unusual market conditions it may terminate any of such
positions without a corresponding purchase of securities.
In addition to the objectives and policies discussed in the
Prospectus, the Fund has adopted the following restrictions as
fundamental policies. The Fund MAY not:
1. Purchase the securities of any one issuer (except securities
issued by the United States of America or any instrumentality
thereof) if, immediately after and as a result of such purchase,
the market value of the holdings of the Fund in the securities of
such issuer would exceed 5% of the market value of the Fund's
total net assets.
2. Purchase the securities of any issuer if such purchase would
cause more than 10% of the outstanding voting securities of such
issuer, or more than 10% of the outstanding voting securities of
any one class of such issuer, to be held in the Fund's portfolio.
3. Concentrate investments in any particular industry;
therefore, the Fund will not purchase a security if, as a result
of such purchase, more than 25% of its assets will be invested in
a particular industry.
4. Purchase any securities on margin or sell securities short.
5. Purchase or retain the securities of any regulated investment
company; except to the extent the Fund invests its uninvested
daily cash balances in shares of Franklin Money Fund and other
money market funds in the Franklin Group of Funds provided (i)
its purchases and redemptions of such money market fund shares
may not be subject to any purchase or redemption fees, (ii) its
investments may not be subject to duplication of management fees,
nor to any charge related to the expense of distributing the
Fund's shares (as determined under Rule 12b-1, as amended under
the federal securities laws) and (iii) provided aggregate
investments by the Fund in any such money market fund do not
exceed (A) the greater of (i) 5% of the Fund's total net assets
or (ii) $2.5 million, or (B) more than 3% of the outstanding
shares of any such money market fund.
6. Invest more than 15% of the Fund's total assets in the
securities of all issuers in the aggregate, the respective
businesses of which have been in continuous operation for less
than three years. As a non-fundamental policy, the Fund has
determined to limit such investments to 5% of its total assets.
7. Purchase or retain investments in securities of any issuer in
which directors or officers of the Fund have a substantial
financial interest. The Fund, as a non-fundamental policy, will
not purchase the securities of any issuer if any officer,
director or employee of the Fund is an officer, director or
security holder of such issuer and owns beneficially more than
1/2 of 1% of the securities of such issuer, and if all of such
persons owning more than 1/2 of 1% own more than 5% of the
outstanding securities of such issuer.
8. Borrow money, except as a temporary measure for extraordinary
purposes, and then not in excess of 10% of the total assets of
the Fund taken at cost or value, whichever is less, and provided
that immediately after any such borrowing there is an asset
coverage (meaning the ratio which the value of the total assets
of the Fund, less all liabilities and indebtedness of the Fund
not represented by such borrowing, bears to the aggregate amount
of such borrowing) of at least 300% for all borrowings of the
Fund.
9. Lend any money or assets of the Fund, except through the
purchase of a portion of an issue of debt securities distributed
privately by federal, state or municipal government agencies, and
then not in excess of 10% of the total assets of the Fund taken
at cost or value, whichever is less, or to the extent the entry
into a repurchase agreement may be deemed a loan. For the purpose
of this policy, the purchase by the Fund of a portion of an issue
of publicly distributed corporate or governmental bonds,
debentures or other debt securities shall not be deemed to be the
lending of money by the Fund.
10. Mortgage or pledge any of the Fund's assets. The escrow
arrangements involved in the Fund's option writing activities are
not deemed to be a mortgage or pledge of its assets.
11. Act as a securities underwriter or investor in real estate or
commodities, other than the Fund's investments in derivative
securities, including financial futures and options on financial
futures.
12. Purchase or sell any securities other than shares of the Fund
from or to the manager or any officer or director of the manager
of the Fund.
13. Invest in the securities of companies for the purpose of
exercising control.
14. Issue securities senior to the Fund's presently authorized
common stock.
So long as the percentage restrictions above are observed by the
Fund at the time it purchases any security, changes in values of
particular Fund assets or the assets of the Fund as a whole will
not cause a violation of any of the foregoing restrictions.
In order to change any of these restrictions which are
fundamental policies, approval is needed by the lesser of (i) 67%
or more of the Fund's voting securities present at a meeting, if
the holders of more than 50% of the Fund's voting securities are
represented at that meeting or (ii) more than 50% of the Fund's
outstanding voting securities.
In addition to these fundamental policies, it is the Fund's
present policy (which may be changed without the approval of the
Fund's shareholders) not to: invest in oil, gas or other mineral
exploration or development programs; engage in joint or joint and
several trading accounts in securities, except that a Fund order
to purchase or sell securities may be combined with other orders
to obtain lower brokerage commissions; invest in any security
which would be restricted from sale to the public without
registration under the Securities Act of 1933 if, as a result of
such purchase, more than 5% of the Fund's total assets would be
invested in such securities; or invest more than 10% of its
assets in securities, including restricted securities, which are
not readily marketable. The Fund's investments in warrants, if
any, other than those acquired by the Fund as a part of a unit,
valued at the lower of cost or market, will not exceed 5% of the
value of the Fund's net assets, including not more than 2% which
are not listed on the New York or American Stock Exchange.
The exchanges on which options are traded have established
limitations governing the maximum number of options in each class
which may be written by a single investor or group of investors
acting in concert (regardless of whether the options are written
on the same or different exchanges or are held or written in one
or more accounts or through one or more brokers). It is possible
that the Fund and other clients of the Manager may be considered
to be such a group. An exchange may order the liquidation of
positions found to be in violation of these limits, and it may
impose certain other sanctions. These position limits may
restrict the number of options which the Fund will be able to
write on a particular security.
OFFICERS AND DIRECTORS
The Board of Directors has the responsibility for the overall
management of the Fund, including general supervision and review
of its investment activities. The directors, in turn, elect the
officers of the Fund who are responsible for administering day-to-
day operations of the Fund. The affiliations of the officers and
directors and their principal occupations for the past five years
are listed below. Directors who are deemed to be "interested
persons" of the Fund, as defined in the Investment Company Act of
1940 (the "1940 Act"), are indicated by an asterisk (*).
Frank H. Abbott, III (74)
1045 Sansome St.
San Francisco, CA 94111
Director
President and Director, Abbott Corporation (an investment
company); and director, trustee or managing general partner, as
the case may be, of 30 of the investment companies in the
Franklin Group of Funds.
S. Joseph Fortunato (62)
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Director
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director
of General Host Corporation; director, trustee or managing
general partner, as the case may be, of 56 of the investment
companies in the Franklin Templeton Group of Funds.
David W. Garbellano (80)
111 New Montgomery St., #402
San Francisco, CA 94105
Director
Private Investor; Assistant Secretary/Treasurer and Director,
Berkeley Science Corporation (a venture capital company); and
director, trustee or managing general partner, as the case may
be, of 29 of the investment companies in the Franklin Group of
Funds.
*Edward B. Jamieson (46)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Director
Senior Vice President and Portfolio Manager, Franklin Advisers,
Inc.; and officer and/or director or trustee of five of the
investment companies in the Franklin Group of Funds.
*Charles B. Johnson (62)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Director
President and Director, Franklin Resources, Inc.; Chairman of the
Board and Director, Franklin Advisers, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton
Investor Services, Inc. and General Host Corporation; and officer
and/or director, trustee or managing general partner, as the case
may be, of most other subsidiaries of Franklin Resources, Inc.
and of 55 of the investment companies in the Franklin Templeton
Group of Funds.
Hayato Tanaka (77)
277 Haihai Street
Hilo, HI 96720
Director
Retired, former owner of The Jewel Box Orchids; and director or
trustee, as the case may be, of two of the Franklin Group of
Funds.
*R. Martin Wiskemann (68)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Director
Senior Vice President, Portfolio Manager and Director, Franklin
Advisers, Inc.; Senior Vice President, Franklin Management, Inc.;
Vice President, Treasurer and Director, ILA Financial Services,
Inc. and Arizona Life Insurance Company of America; and officer
and/or director, as the case may be, of 19 of the investment
companies in the Franklin Group of Funds.
Harmon E. Burns (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President, Secretary and Director, Franklin
Resources, Inc.; Executive Vice President and Director, Franklin
Templeton Distributors, Inc.; Executive Vice President, Franklin
Advisers, Inc.; Director, Franklin/Templeton Investor Services,
Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee of 41 of the investment companies in the
Franklin Templeton Group of Funds.
Kenneth V. Domingues (62)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President - Financial Reporting and Accounting Standards
Senior Vice President, Franklin Resources, Inc., Franklin
Advisers, Inc., and Franklin Templeton Distributors, Inc.;
officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of 36 of the
investment companies in the Franklin Group of Funds.
Martin L. Flanagan (34)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer,
Franklin Resources, Inc.; Executive Vice President, Templeton
Worldwide, Inc.; Senior Vice President and Treasurer, Franklin
Advisers, Inc. and Franklin Templeton Distributors, Inc.; Senior
Vice President, Franklin/Templeton Investor Services, Inc.;
officer of most other subsidiaries of Franklin Resources, Inc.;
and officer of 60 of the investment companies in the Franklin
Templeton Group of Funds.
Deborah R. Gatzek (46)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President - Legal, Franklin Resources, Inc. and
Franklin Templeton Distributors, Inc.; Vice President, Franklin
Advisers, Inc. and officer of 36 of the investment companies in
the Franklin Group of Funds.
Rupert H. Johnson, Jr. (54)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President and Director, Franklin Resources, Inc.
and Franklin Templeton Distributors, Inc.; President and
Director, Franklin Advisers, Inc.; Director, 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 of 42 of the
investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (56)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 36 of the
investment companies in the Franklin Group of Funds.
Edward V. McVey (57)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President/National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 31 of the investment companies
in the Franklin Group of Funds.
Directors not affiliated with the investment manager
("nonaffiliated directors") are currently paid fees of $100 per
meeting attended. During the fiscal year ended December 31, 1994,
fees totaling $2,000 were paid to nonaffiliated directors of the
Fund. As indicated above, certain of the directors and officers
hold positions with other companies in the Franklin Group of
Funds and the Templeton Funds ("Franklin Templeton Funds"). The
following table shows the fees paid by the Fund to its
nonaffiliated directors and the total fees paid to such directors
by the Fund and other Franklin Templeton Funds for which they
serve as directors, trustees or managing general partners.
TOTAL
COMPENSATI
ON FROM
NUMBER OF FRANKLIN
FRANKLIN TEMPLETON
AGGREGATE TEMPLETON FUNDS FUNDS,
COMPENSATION BOARDS ON WHICH INCLUDING
NAME FROM FUND * EACH SERVES THE FUND**
Frank H. Abbott, III $600 30 $176,870
S. Joseph Fortunato 500 56 336,065
David Garbellano 500 29 153,300
Hayato Tanaka 400 2 400
*For the fiscal year ended December 31, 1994
**For the calendar year ended December 31, 1994
Nonaffiliated directors are also reimbursed for expenses incurred
in connection with attending Board meetings, paid pro rata by
each Franklin Templeton fund in which they serve. No officer or
director received any other compensation directly from the Fund.
As of February 7, 1995, the directors and officers, as a group,
owned of record and beneficially approximately 56,346 outstanding
shares of the Fund. In addition, many of the Fund's directors own
shares in various of the other funds in the Franklin Templeton
Funds. Certain officers or directors who are shareholders of
Franklin Resources, Inc. ("Resources") may be deemed to receive
indirect remuneration by virtue of their participation, if any,
in the fees paid to its subsidiaries. Charles B. Johnson and
Rupert H. Johnson, Jr. are brothers.
From time to time, the number of Fund shares held in the "street
name" accounts of various securities dealers for the benefit of
their clients or in centralized securities depositories may
exceed 5% of the total shares outstanding. To the best knowledge
of the Fund, no other person holds beneficially or of record more
than 5% of the Fund's outstanding shares.
INVESTMENT ADVISORY AND OTHER SERVICES
The investment manager of the Fund is Franklin Advisers, Inc.
("Advisers" or "Manager"). Advisers is a wholly-owned subsidiary
of Resources, a publicly owned holding company whose shares are
listed on the New York Stock Exchange ("Exchange"). Resources
owns several other subsidiaries which are involved in investment
management and shareholder services. The Manager and other
subsidiary companies of Resources currently manage over $118
billion in assets for more than 3.8 million shareholders. The
preceding table indicates those officers and directors who are
also affiliated persons of Distributors and Advisers.
Pursuant to the management agreement, the Manager provides
investment research and portfolio management services, including
the selection of securities for the Fund to purchase, hold or
sell and the selection of brokers through whom the Fund's
portfolio transactions are executed. The Manager's activities are
subject to the review and supervision of the Fund's Board of
Directors to whom the Manager renders periodic reports of the
Fund's investment activities. The Manager, at its own expense,
furnishes the Fund with office space and office furnishings,
facilities and equipment required for managing the business
affairs of the Fund; maintains all internal bookkeeping,
clerical, secretarial and administrative personnel and services;
and provides certain telephone and other mechanical services. The
Manager is covered by fidelity insurance on its officers,
directors, and employees for the protection of the Fund. The Fund
bears all of its expenses not assumed by the Manager. See the
Statement of Operations in the financial statements included in
the Fund's Annual Report to Shareholders dated December 31, 1994.
Pursuant to the management agreement, the Fund is obligated to
pay the Manager a fee computed at the close of business on the
last business day of each month equal to a monthly rate of 5/96
of 1% (approximately 5/8 of 1% per year) for the first $100
million of net assets of the Fund; 1/24 of 1% (approximately 1/2
of 1% per year) on net assets of the Fund in excess of $100
million up to $250 million; and 9/240 of 1% (approximately 45/100
of 1% per year) of net assets of the Fund in excess of $250
million. The management agreement specifies that the management
fee will be reduced to the extent necessary to comply with the
most stringent limits on the expenses which may be borne by the
Fund as prescribed by any state in which the Fund's shares are
offered for sale. The most stringent current limit requires the
Manager to reduce or eliminate its fee to the extent that
aggregate operating expenses of the Fund (excluding interest,
taxes, brokerage commissions and extraordinary expenses such as
litigation costs) would otherwise exceed in any fiscal year 2
1/2% of the first $30 million of average net assets of the Fund,
2% of the next $70 million of average net assets of the Fund and
1 1/2% of average net assets of the Fund in excess of $100
million. Expense reductions have not been necessary based on
state requirements. Management fees for the fiscal years ended
December 31, 1992, 1993 and 1994 were $147,863, $139,233, and
$155,985, respectively.
The management agreement is in effect until April 30, 1996.
Thereafter, it may continue in effect for successive annual
periods providing such continuance is specifically approved at
least annually by a vote of the Fund's Board of Directors 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
Fund's directors who are not parties to the management agreement
or interested persons of any such party (other than as directors
of the Fund), cast in person at a meeting called for that
purpose. The management agreement may be terminated without
penalty at any time by the Fund or by the Manager on 30 days'
written notice and will automatically terminate in the event of
its assignment, as defined in the 1940 Act.
Franklin/Templeton Investor Services, Inc. ("Investor Services"
or "Shareholder Services Agent"), a wholly-owned subsidiary of
Resources, is the shareholder servicing agent for the Fund 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.
Bank of America NT & SA, 555 California Street, 4th Floor, San
Francisco, California 94104, acts as custodian of the securities
and other assets of the Fund. Citibank Delaware, One Penn's Way,
New Castle, Delaware 19720, acts as custodian in connection with
transfer services through bank automated clearing houses. The
custodians do not participate in decisions relating to the
purchase and sale of portfolio securities.
Coopers & Lybrand L.L.P., 333 Market Street, San Francisco,
California 94105, are the Fund's independent auditors. During the
fiscal year ended December 31, 1994, their auditing services
consisted of rendering an opinion on the financial statements of
the Fund included in the Fund's Annual Report to Shareholders
dated December 31, 1994.
THE FUND'S POLICIES REGARDING
BROKERS USED ON PORTFOLIO TRANSACTIONS
Under the current management agreement with Advisers, the
selection of brokers and dealers to execute transactions in the
Fund's portfolio is made by the Manager in accordance with
criteria set forth in the management agreement and any directions
which the Fund's Board of Directors may give.
When placing a portfolio transaction, the Manager attempts to
obtain the best net price and execution of the transaction. On
portfolio transactions which are done on a securities exchange,
the amount of commission paid by the Fund is negotiated between
the Manager and the broker executing the transaction. The Manager
seeks to obtain the lowest commission rate available from brokers
which are felt to be capable of efficient execution of the
transactions. 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 such transactions. These opinions are
formed on the basis of, among other things, the experience of
these individuals in the securities industry and information
available to them concerning the level of commissions being paid
by other institutional investors of comparable size. The Manager
will ordinarily place orders for the purchase and sale of over-
the-counter securities on a principal rather than agency basis
with a principal market maker unless, in the opinion of the
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 Fund seeks to obtain prompt execution of
orders at the most favorable net price.
The amount of commission is not the only relevant factor to be
considered in the selection of a broker to execute a trade. If it
is felt to be in the Fund's best interests, the Manager may place
portfolio transactions with brokers who provide the types of
services described below, even if it means the Fund will have to
pay a higher commission than would be the case if no weight were
given to the broker's furnishing of these services. This will be
done only if, in the opinion of the 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 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 data may also be useful to the Manager in advising other
clients.
When it is felt that several brokers are equally able to provide
the best net price and execution, the Manager may decide to
execute transactions through brokers who provide quotations and
other services to the Fund, specifically including the quotations
necessary to determine the value of the Fund's net assets, in
such amount of total brokerage as may reasonably be required in
light of such services, and through brokers who supply research,
statistical and other data to the Fund and Manager in such amount
of total brokerage as may reasonably be required.
It is not possible to place a dollar value on the special
executions or on the research services received by Advisers from
dealers effecting transactions in portfolio securities. The
allocation of transactions in order to obtain additional research
services permits Advisers 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 Manager and its
affiliates may use this research and data in their investment
advisory capacities with other clients. Provided that the Fund's
officers are satisfied that the best execution is obtained, the
sale of Fund shares may also be considered as a factor in the
selection of broker dealers to execute the Fund's portfolio
transactions.
Because Distributors is a member of the National Association of
Securities Dealers, it is sometimes entitled to obtain 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 management fee payable to
Advisers under the management agreement will be reduced by the
amount of any fees received by Distributors in cash, less any
costs and expenses incurred in connection therewith.
If purchases or sales of securities of the Fund and one or more
other investment companies or clients supervised by the Manager
are considered at or about the same time, transactions in such
securities will be allocated among the several investment
companies and clients in a manner deemed equitable to all by the
Manager, taking into account the respective sizes of the funds
and the amount of securities to be purchased or sold. It is
recognized that in some cases this procedure could possibly 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 fiscal years ended December 31, 1992, 1993 and 1994,
the Fund paid total brokerage commissions of $47,902, $26,048,
and $26,798, respectively.
As of December 31, 1994, the Fund held equity securities of Bank
of America NT & SA valued in the aggregate at $395,000 and debt
securities of Nikko Securities Co. Intl., Inc. valued in the
aggregate at $3,000,000. Except as stated above, the Fund did not
own securities of its regular broker-dealers.
ADDITIONAL INFORMATION
REGARDING FUND SHARES
All checks, drafts, wires and other payment mediums used for
purchasing or redeeming shares of the Fund must be denominated in
U.S. dollars. The Fund reserves the right, in its sole
discretion, to either (a) reject any order for the purchase or
sale of shares denominated in any other currency, or (b) to honor
the transaction or make adjustments to a shareholder's account
for the transaction as of a date and with a foreign currency
exchange factor determined by the drawee bank.
In connection with exchanges (see Prospectus "Exchange
Privilege"), it should be noted that since the proceeds from the
sale of shares of an investment company generally are not
available until the fifth business day following the redemption,
the funds into which the Fund's shareholders are seeking to
exchange reserve the right to delay issuing shares pursuant to an
exchange until said fifth business day. The redemption of shares
of the Fund to complete an exchange for shares of any of the
investment companies will be effected at the close of business on
the day the request for exchange is received in proper form at
the net asset value then effective.
Dividend checks which are returned to the Fund marked "unable to
forward" by the postal service will be deemed to be a request by
the shareholder to change the dividend option, and the proceeds
will be reinvested in additional shares at net asset value until
new instructions are received.
The Fund may impose a $10 charge for each returned item ,
against any shareholder account which, in connection with the
purchase of Fund shares, submits a check or a draft which is
returned unpaid to the Fund.
The Fund may deduct from a shareholder's account the costs of its
efforts to locate a shareholder if mail is returned as
undeliverable or the Fund is otherwise unable to locate the
shareholder or verify the current mailing address. These costs
may include a percentage of the account when a search company
charges a percentage fee in exchange for their location services.
Under agreements with certain banks in Taiwan, Republic of China,
the Fund's shares are available to such banks' discretionary
trust funds at net asset value. The banks may charge service fees
to their customers who participate in the discretionary trusts.
Pursuant to agreements, a portion of such service fees may be
paid to Distributors, or an affiliate of Distributors, 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 firms known locally as Securities Investment
Consulting Enterprises. In conformity with local business
practices in Taiwan, shares of the Fund will be offered with the
following schedule of sales charges:
SIZE OF PURCHASE IN U.S. SALES CHARGE
DOLLARS
Up to $100,000 3%
$100,000 to $1,000,000 2%
Over $1,000,000 1%
PURCHASES AND REDEMPTIONS
THROUGH SECURITIES DEALERS
Orders for the purchase of shares of the Fund received in proper
form prior to the scheduled close of the Exchange (generally 1:00
p.m. Pacific time) any business day that the Exchange is open for
trading and promptly transmitted to the Fund will be based upon
the public offering price determined that day. Purchase orders
received by securities dealers or other financial institutions
after the scheduled close of the Exchange will be effected at the
Fund's public offering price on the day it is next calculated.
The use of the term "securities dealer" herein shall include
other financial institutions which, pursuant to an agreement with
Distributors (directly or through affiliates), handle customer
orders and accounts with the Fund. Such reference, however, is
for convenience only and does not indicate a legal conclusion of
capacity.
Orders for the redemption of shares are effected at net asset
value subject to the same conditions concerning time of receipt
in proper form. It is the securities dealer's responsibility to
transmit the order in a timely fashion and any loss to the
customer resulting from failure to do so must be settled between
the customer and the securities dealer.
SPECIAL NET ASSET VALUE PURCHASES
As discussed in the Prospectus under "How to Buy Shares of the
Fund - Description of Special Net Asset Value Purchases," certain
categories of investors may purchase shares of the Fund without a
front-end sales charge ("net asset value") or a contingent
deferred sales charge. Distributors or one of its affiliates may
make payments, out of its own resources, to securities dealers
who initiate and are responsible for such purchases, as indicated
below. 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
securities dealer, in the event of investor redemptions made
within 12 months of the calendar month following purchase. Other
conditions may apply. All terms and conditions may be imposed by
an agreement between Distributors, or its affiliates, and the
securities dealer.
The following amounts may be paid by Distributors or one of its
affiliates, out of its own resources, to securities dealers who
initiate and are responsible for (i) purchases of most equity and
taxable-income Franklin Templeton Funds made at net asset value
by certain designated retirement plans (excluding IRA and IRA
rollovers): 1.00% on sales of $1 million but less than $2
million, plus 0.80% on sales of $2 million but less than $3
million, plus 0.50% on sales of $3 million but less than $50
million, plus 0.25% on sales of $50 million but less than $100
million, plus 0.15% on sales of $100 million or more; and (ii)
purchases of most taxable income Franklin Templeton Funds made at
net asset value by non-designated retirement plans: 0.75% on
sales of $1 million but less than $2 million, plus 0.60% on sales
of $2 million but less than $3 million, plus 0.50% on sales of $3
million but less than $50 million, plus 0.25% on sales of $50
million but less than $100 million, plus 0.15% on sales of $100
million or more. These payment breakpoints are reset every 12
months for purposes of additional purchases. With respect to
purchases made at net asset value by certain trust companies and
trust departments of banks and certain retirement plans of
organizations with collective retirement plan assets of $10
million or more, Distributors, or one of its affiliates, out of
its own resources, may pay up to 1% of the amount invested.
LETTER OF INTENT
An investor may qualify for a reduced sales charge on the
purchase of shares of the Fund, as described in the prospectus.
At any time within 90 days after the first investment which the
investor wants to qualify for the reduced sales charge, a signed
Shareholder Application, with the Letter of Intent section
completed, may be filed with the Fund. After the Letter of Intent
is filed, each additional investment will be entitled to the
sales charge applicable to the level of investment indicated on
the Letter of Intent. Sales charge reductions based upon
purchases in more than one of the Franklin Templeton Funds will
be effective only after notification to Distributors that the
investment qualifies for a discount. The shareholder's holdings
in the Franklin Templeton Funds acquired more than 90 days before
the Letter of Intent is filed will be counted towards completion
of the Letter of Intent but will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions made by
the shareholder, other than by a designated benefit plan during
the 13-month period will be subtracted from the amount of the
purchases for purposes of determining whether the terms of the
Letter of Intent have been completed. If the Letter of Intent is
not completed within the 13-month period, there will be an upward
adjustment of the sales charge, depending upon the amount
actually purchased (less redemptions) during the period. The
upward adjustment does not apply to designated benefit plans. An
investor who executes a Letter of Intent prior to a change in the
sales charge structure for the Fund will be entitled to complete
the Letter of Intent at the lower of (i) the new sales charge
structure; or (ii) the sales charge structure in effect at the
time the Letter of Intent was filed with the Fund.
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 THE INVESTOR'S NAME, UNLESS THE INVESTOR IS A
DESIGNATED BENEFIT PLAN. If the total purchases, less
redemptions, equal the amount specified under the Letter of
Intent, the reserved shares will be deposited to an account in
the name of the investor or delivered to the investor or the
investor's order. If the total purchases, less redemptions,
exceed the amount specified under the Letter of Intent and is an
amount which 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 of Intent (to reflect such further quantity discount)
on purchases made within 90 days before and on those made after
filing the Letter of Intent. 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
of Intent, the investor 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 which would have
applied to the aggregate purchases if the total of such purchases
had been made at a single time. The shareholder will receive a
written notification from Distributors requesting the remittance.
Upon such remittance the reserved shares held for the investor's
account will be deposited to an account in the name of the
investor or delivered to the investor or to the investor's order.
If within 20 days after written request such difference in sales
charge is not paid, the redemption of an appropriate number of
reserved shares to realize such difference will be made. In the
event of a total redemption of the account prior to fulfillment
of the Letter of Intent, the additional sales charge due will be
deducted from the proceeds of the redemption, and the balance
will be forwarded to the investor.
If a Letter of Intent is executed on behalf of a benefit plan
(such plans are described under "Purchases at Net Asset Value" in
the Prospectus), the level and any reduction in sales charge for
these designated benefit plans will be based on actual plan
participation and the projected investments in the Franklin
Templeton Funds under the Letter of Intent. Benefit plans are not
subject to the requirement to reserve 5% of the total intended
purchase, or to any penalty as a result of the early termination
of a plan, nor are benefit plans entitled to receive retroactive
adjustments in price for investments made before executing the
Letter of Intent.
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 such period. Such commitment is irrevocable without
the prior approval of the Securities and Exchange Commission
("SEC"). In the case of requests for redemption in excess of such
amounts, the directors reserve the right to make payments in
whole or in part in securities or other assets of the Fund from
which the shareholder is redeeming, 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 such circumstances,
the securities distributed would be valued at the price used to
compute the Fund's net assets. Should the Fund do so, a
shareholder may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities
in kind; however, should it happen, shareholders may not be able
to timely recover their investment and may also incur brokerage
costs in selling such securities.
REDEMPTIONS BY THE FUND
Due to the relatively high cost of handling small investments,
the Fund reserves the right to redeem, involuntarily, at net
asset value, the shares of any shareholder whose account has a
value of less than one-half of the initial minimum investment
required for that shareholder, but only where the value of such
account has been reduced by the shareholder's prior voluntary
redemption of shares. Until further notice, it is the present
policy of the Fund not to exercise this right with respect to any
shareholder whose account has a value of $50 or more. In any
event, before the Fund redeems such shares and sends the proceeds
to the shareholder, it will notify the shareholder that the value
of the shares in the account is less than the minimum amount and
allow the shareholder 30 days to make an additional investment in
an amount which will increase the value of the account to at
least $100.
CALCULATION OF NET ASSET VALUE
As noted in the Prospectus, the Fund generally calculates net
asset value as of the scheduled close of the Exchange (generally
1:00 p.m. Pacific time) each day that the Exchange is open for
trading. As of the date of this SAI, the Fund is informed that
the Exchange observes the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
The Fund's portfolio securities are valued as stated in the
Prospectus. Generally, trading in corporate bonds, U.S.
government securities and money market instruments is
substantially completed each day at various times prior to the
close of the Exchange. The values of such securities used in
computing the net asset value of the Fund's shares are determined
as of such times. Occasionally, events affecting the values of
such securities may occur between the times at which they are
determined and the scheduled close of the Exchange which will not
be reflected in the computation of the Fund's net asset value. If
events materially affecting the value of such securities occur
during such period, then these securities will be valued at their
fair value as determined in good faith by the Board of Directors.
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 "ex-dividend
date"). The processing date for the reinvestment of dividends may
vary from month to month, and does not affect the amount or value of
the shares acquired.
REPORTS TO SHAREHOLDERS
The Fund sends annual and semi-annual reports to its shareholders
regarding the Fund's performance and its portfolio holdings.
Shareholders who would like to receive an interim quarterly
report may phone Fund Information at 1-800 DIAL/BEN.
SPECIAL SERVICES
Franklin Institutional Services Corporation, a subsidiary of
Resources, provides specialized services, including
recordkeeping, for institutional investors of the Fund. The cost
of these services is not borne by the Fund.
Investor Services may pay certain financial institutions which
maintain omnibus accounts with the Fund on behalf of numerous
beneficial owners for recordkeeping operations performed with
respect to such beneficial owners. For each beneficial owner in
the omnibus account, the Fund may reimburse Investor Services an
amount not to exceed the per account fee which the Fund normally
pays Investor Services. Such financial institutions may also
charge a fee for their services directly to their clients.
ADDITIONAL INFORMATION REGARDING TAXATION
As stated in the Prospectus, the Fund intends to be treated as a
regulated investment company under Subchapter M of the Internal
Revenue Code of 1986 (The "Code"). The Directors reserve the
right not to maintain the qualification of the Fund as a
regulated investment company if they determine such course of
action to be beneficial to the shareholders. In such 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 ordinary dividend income to the extent of
the Fund's available earnings and profits.
Subject to the limitations discussed below, all or a portion of
the income distributions paid by a Fund may be treated by
corporate shareholders as qualifying dividends for purposes of
the dividends-received deduction under federal income tax law. If
the aggregate qualifying dividends received by the Fund
(generally, dividends from U.S. domestic corporations, the stock
in which is not debt-financed by the Fund and is held for at
least a minimum holding period) is less than 100% of its
distributable income, then the amount of the Fund's dividends
paid to corporate shareholders which may be designated as
eligible for such deduction will not exceed the aggregate
qualifying dividends received by the Fund for the taxable year.
The amount or percentage of income qualifying for the corporate
dividends-received deduction will be declared by the Fund
annually in a notice to shareholders mailed shortly after the end
of the Fund's fiscal year.
Corporate shareholders should note that dividends paid by a Fund
from sources other than the qualifying dividends it receives will
not qualify for the dividends-received deduction. For example,
any interest income and net short-term capital gain (in excess of
any net long-term capital loss or capital loss carryover)
included in investment company taxable income and distributed by
a Fund as a dividend will not qualify for the dividends-received
deduction. Corporate shareholders should also note that
availability of the corporate dividends-received deduction is
subject to certain restrictions. For example, the deduction is
eliminated unless the Fund shares have been held (or deemed held)
for at least 46 days in a substantially unhedged manner. The
dividends-received deduction may also be reduced to the extent
interest paid or accrued by a corporate shareholder is directly
attributable to its investment in Fund shares. The entire
dividend, including the portion which is treated as a deduction,
is includable in the tax base on which the alternative minimum
tax is computed and may also result in a reduction in the
shareholder's tax basis in its Fund shares, under certain
circumstances, if the shares have been held for less than two
years. Corporate shareholders whose investment in the Fund is
"debt financed" for these tax purposes should consult with their
tax advisors concerning the availability of the dividends-
received deduction.
The Code requires all funds to distribute at least 98% of their
taxable ordinary income earned during the calendar year and at
least 98% of their capital gain net income earned during the
twelve-month period ending October 31 of each year (in addition
to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in
order to avoid the imposition of a federal excise tax. The Fund
intends as a matter of policy to declare such dividends, if any,
in December and to pay these dividends in December or January to
avoid the imposition of this tax, but does not guarantee that its
distributions will be sufficient to avoid any or all federal
excise taxes. Under these rules, certain distributions which are
declared in October, November or December but which, for
operational reasons, may not be paid to the shareholder until the
following January, will be treated for tax purposes as if paid by
the Fund and received by the shareholder on December 31 of the
calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on
which a shareholder may realize a gain or loss. Any loss incurred
on sale or exchange of the Fund's shares, held for six months or
less, will be treated as a long-term capital loss to the extent
of capital gain dividends received with respect to such shares.
All or a portion of the sales charge incurred in purchasing
shares of the Fund will not be included in the federal tax basis
of such shares sold or exchanged within ninety (90) days of their
purchase (for purposes of determining gain or loss with respect
to such shares) if the sales proceeds are reinvested in the Fund
or in another fund in the Franklin Group of Funds and a sales
charge which would otherwise apply to the reinvestment is reduced
or eliminated. Any portion of such sales charge excluded from the
tax basis of the shares sold will be added to the tax basis of
the shares acquired in the reinvestment. Shareholders should
consult with their tax advisors concerning the tax rules
applicable to the redemption or exchange of Fund shares.
All or a portion of a loss realized upon a redemption of shares
will be disallowed to the extent other shares of the Fund are
purchased (through reinvestment of dividends or otherwise) within
30 days before or after such redemption. Any loss disallowed
under these rules will be added to the tax basis of the shares
purchased.
The Fund's investment in options and futures contracts are
subject to many complex and special tax rules. For example, over-
the-counter options on debt securities and equity options,
including options on stock and on narrow-based stock indexes,
will be subject to tax under Section 1234 of the Code, generally
producing a long-term or short-term capital gain or loss upon
exercise, lapse, or closing out of the option or sale of the
underlying stock or security. The Fund treatment of certain other
options, futures and forward contracts entered into by the Fund
is generally governed by Section 1256 of the Code. These "Section
1256" positions generally include listed options on debt
securities, options on broad-based stock indexes, options on
securities indexes, options on futures contracts, regulated
futures contracts and certain foreign currency contracts and
options thereon.
Absent a tax election to the contrary, each such Section 1256
position held by the Fund will be marked-to-market (i.e., treated
as if it were sold for fair market value) on the last business
day of the Fund's fiscal year, and all gain or loss associated
with fiscal year transactions and mark-to-market positions at
fiscal year end (except certain foreign currency gain or loss
covered by Section 988 of the Code) will generally be treated as
60% long-term capital gain or loss and 40% short-term capital
gain or loss. The effect of Section 1256 mark-to-market rules may
be to accelerate income or to convert what otherwise would have
been long-term capital gains into short-term capital gains or
short-term capital losses into long-term capital losses within
the Fund. The acceleration of income on Section 1256 positions
may require the Fund to accrue taxable income without the
corresponding receipt of cash. In order to generate cash to
satisfy the distribution requirements of the Code, the Fund may
be required to dispose of portfolio securities that it otherwise
would have continued to hold or to use cash flows from other
sources such as the sale of Fund shares. In these ways, any or
all of these rules may affect both the amount, character and time
of income distributed to shareholders by the Fund.
When the Fund holds an option or contract which substantially
diminishes the Fund's risk of loss with respect to another
position of the Fund (as might occur in some hedging
transactions), this combination of positions could be treated as
a "straddle" for tax purposes, resulting in possible deferral of
losses, adjustments in the holding periods of Fund securities and
conversion of short-term capital losses into long-term capital
losses. Certain tax elections exist for mixed straddles i.e.,
straddles comprised of at least one Section 1256 position and at
least one non-Section 1256 position which may reduce or eliminate
the operation of these straddle rules.
As discussed in the Prospectus, the Fund may invest in "synthetic
convertible securities," i.e., two or more financial instruments
that will produce an economic effect that is similar to holding a
convertible security. Generally, each instrument included in a
synthetic position is treated as a separate property for tax
purposes. Thus, the conversion of a "synthetic" convertible
position may result in one or more taxable transactions with
respect to the separate properties, in contrast to the conversion
of a true convertible instrument, which may be tax-free. Gains or
losses recognized may affect the amount, timing and character of
the fund's distributions.
As a regulated investment company, the Fund is also subject to
the requirement that less than 30% of its annual gross income be
derived from the sale or other disposition of securities and
certain other investments held for less than three months ("short-
short income").
This requirement may limit the Fund's ability to engage in
options, hedging transactions and futures contracts because these
transactions are often consummated in less than three months, may
require the sale of portfolio securities held less than three
months and may, as in the case of short sales of portfolio
securities reduce the holding periods of certain securities
within the Fund, resulting in additional short-short income for
the Fund.
The Fund will monitor its transactions in such options and
contracts and may make certain other tax elections in order to
mitigate the effect of the above rules and to prevent
disqualification of the Fund as a regulated investment company
under Subchapter M of the Code.
Gains realized by the Fund from any transactions entered into
after April 30, 1993 that are deemed to constitute "conversion
transactions" under the Code and which would otherwise produce
capital gain may be recharacterized as ordinary income to the
extent that such gain does not exceed an amount defined by the
Code as the "applicable imputed income amount". A conversion
transaction is any transaction in which substantially all of the
Fund's expected return is attributable to the time value of the
Fund's net investment in such transaction and any one of the
following criteria are met: 1) there is an acquisition of
property with a substantially contemporaneous agreement to sell
the same or substantially identical property in the future; 2)
the transaction is an applicable straddle; 3) the transaction was
marketed or sold to the Fund on the basis that it would have the
economic characteristics of a loan but would be taxed as capital
gain; or 4) the transaction is specified in Treasury regulations
to be promulgated in the future. The applicable imputed income
amount, which represents the deemed return on the conversion
transaction based upon the time value of money, is computed using
a yield equal to 120 percent the applicable federal rate, reduced
by any prior recharacterizations under this provision or Section
263(g) of the Code concerning capitalized carrying costs.
As a regulated investment company, the Fund is also subject to
the requirement that less than 30% of its annual gross income be
derived from the sale or other disposition of securities and
certain other investments held for less than three months ("short-
short income"). This requirement may limit the Fund's ability to
engage in options, straddles, hedging transactions and forward or
futures contracts because these transactions are often
consummated in less than three months, may require the sale of
portfolio securities held less than three months and may, as in
the case of short sales of portfolio securities reduce the
holding periods of certain securities within the Fund, resulting
in additional short-short income for the Fund. The Fund will
monitor its transactions in such options and contracts and may
make certain other tax elections in order to mitigate the effect
of the above rules and to prevent disqualification of the Fund as
a regulated investment company under Subchapter M of the Code.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement in effect until April 30,
1996, Distributors acts as principal underwriter in a continuous
public offering for shares of the Fund.
Distributors pays the expenses of 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.
The underwriting agreement will continue in effect for successive
annual periods provided that its continuance is specifically
approved at least annually by a vote of the Fund's Board of
Directors, 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 Fund's directors who are not parties to the
underwriting agreement or interested persons of any such party
(other than as directors of the Fund), 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 90 days' written notice.
Until April 30, 1994, income dividends were reinvested at the
offering price (which includes the sales charge) and Distributors
allowed 50% of the entire commission to the securities dealer of
record, if any, on an account. Starting with any income dividends
paid after April 30, 1994, such reinvestment is at net asset
value.
In connection with the offering of the Fund's shares, aggregate
underwriting commissions for the fiscal years ended December 31,
1992, 1993 and 1994 were $45,152, $54,031, and $93,593,
respectively. After allowances to dealers, Distributors retained
$7,642, $7,353, and $6,627 during the fiscal years ended December
31, 1992, 1993 and 1994, respectively. Distributors may be
entitled to reimbursement under the distribution plan of the Fund
as discussed under "Distribution Plan" below. Except as noted,
Distributors received no other compensation from the Fund for
acting as underwriter.
DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1
under the 1940 Act (the "Plan") whereby the Fund may pay up to a
maximum of 0.25% per annum of its average daily net assets for
expenses incurred in the promotion and distribution of its
shares.
In implementing the Plan, the Board has determined that the
annual fees payable thereunder will be equal to the sum of: (i)
the amount obtained by multiplying 0.25% by the average daily net
assets represented by shares of the Fund that were acquired by
investors on or after May 1, 1994 (the "Effective Date" of the
Plan) ("New Assets"), and (ii) the amount obtained by multiplying
0.15% by the average daily net assets represented by shares of
the Fund that were acquired before the Effective Date of the Plan
("Old Assets"). Such fees will be paid to the current securities
dealer of record on the shareholder's account. In addition, until
such time as the maximum payment of 0.25% is reached on a yearly
basis, up to an additional 0.05% will be paid to Distributors
under the Plan. The payments to be made to Distributors will be
used by Distributors to defray other marketing expenses that have
been incurred in accordance with the Plan, such as advertising.
The fee is a Fund expense so that all shareholders regardless of
when they purchased their shares will bear 12b-1 expenses at the
same rate. That rate initially will be at least 0.20% (0.15%
plus 0.05%) of such average daily net assets and, as Fund shares
are sold on or after the Effective Date, will increase over time.
Thus, as the proportion of Fund shares purchased on or after the
Effective Date increases in relation to outstanding Fund shares,
the expenses attributable to payments under the proposed Plan
will also increase (but will not exceed 0.25% of average daily
net assets). While this is the currently anticipated calculation
for fees payable under the Plan, the Plan permits the Fund's
directors to allow the Fund to pay a full 0.25% on all assets at
any time. The approval of the Fund's Board of Directors would be
required to change the calculation of the payments to be made
under the Plan.
Pursuant to the Plan, Distributors or others will be entitled to
be reimbursed each quarter (up to the maximum as stated above)
for actual expenses incurred in the distribution and promotion of
the Fund's shares, including, but not limited to, the printing of
prospectuses and reports used for sales purposes, expenses of
preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses,
including a prorated portion of Distributors' overhead expenses
attributable to the distribution of Fund shares, as well as any
distribution or service fees paid to securities dealers or their
firms or others who have executed a servicing agreement with the
Fund, Distributors or its affiliates.
In addition to the payments to which Distributors or others are
entitled under the Plan, the Plan also provides that to the
extent the Fund, the Manager or Distributors or other parties on
behalf of the Fund, the Manager or Distributors, make payments
that are deemed to be payments for the financing of any activity
primarily intended to result in the sale of shares of the Fund
within the context of Rule 12b-1 under the 1940 Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which
include payments made under the Plan, plus any other payments
deemed to be made pursuant to the Plan, exceed the amount
permitted to be paid pursuant to the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., Article
III, Section 26(d)4.
The terms and provisions of the Plan relating to required
reports, term, and approval are consistent with Rule 12b-1. The
Plan does not permit unreimbursed expenses incurred in a
particular year to be carried over to or reimbursed in subsequent
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. Such banking institutions, however, are permitted to
receive fees under the Plan for administrative servicing or for
agency transactions. If a bank were prohibited from providing
such services, its customers who are shareholders would be
permitted to remain shareholders of the Fund, and alternate means
for continuing the servicing of such shareholders would be
sought. In such an event, changes in the services provided might
occur and such shareholders might no longer be able to avail
themselves of any automatic investment or other services then
being provided by the bank. It is not expected that shareholders
would suffer any adverse financial consequences as a result of
any of these changes. Securities laws of states in which the
Fund's shares are offered for sale may differ from the
interpretations of federal law expressed herein, and banks and
financial institutions selling shares of the Fund may be required
to register as dealers pursuant to state law.
The Plan has been approved by shareholders and by the directors
of the Fund, including those directors who are not interested
persons, as defined in the 1940 Act. The Plan is effective
through April 30, 1996 and renewable annually by a vote of the
Fund's Board of Directors, including a majority vote of the
directors who are non-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 directors
be done by the non-interested directors. The Plan and any related
agreement may be terminated at any time, without any penalty, by
vote of a majority of the non-interested directors 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 Underwriting Agreement with Distributors, 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
directors, 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 of
Directors 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 of Directors with such other information
as may reasonably be requested in order to enable the Board of
Directors to make an informed determination of whether the Plan
should be continued.
For the fiscal year ended December 31, 1994, the total amount
paid by the Fund pursuant to the Plan was $30,623, which was used
for the following purposes.
DOLLAR AMOUNT
Advertising $ 5,206
Printing and mailing of
prospectuses to other than current
shareholders $ 9,799
Payments to underwriters $ 613
Payments to brokers or dealers $15,005
GENERAL INFORMATION
PERFORMANCE
As noted in the Prospectus, the Fund may from time to time quote
various performance figures to illustrate the Fund's past
performance. It may occasionally cite statistics to reflect its
volatility or risk.
Performance quotations by investment companies are subject to
rules adopted by the SEC. 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
compounded total return quotations used by the Fund are based on
the standardized methods of computing performance mandated by the
SEC. An explanation of those and other methods used by the Fund
to compute or express performance follows.
TOTAL RETURN
The average annual total return is determined by finding the
average annual compounded rates of return over one-, five- and
ten-year periods 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 order, and income dividends and capital
gains 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 on the sales charge structure,
historical performance information will be restated to reflect
the maximum front-end sales charge in effect currently.
In considering the quotations of total return by the Fund,
investors should remember 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 an investor's investment in the Fund. The actual
performance of an investment will be affected less by this charge
the longer an investor retains the investment in the Fund. The
average annual compounded rates of return for the Fund for the
one-, five- and ten-year periods ended on the date of the
financial statements included in the Fund's Annual Report to
Shareholders dated December 31, 1994 were (4.00%), 7.7.% and
10.30%, respectively.
These figures were calculated according to the SEC formula:
n
P(1+T) = 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 one-, five- or ten-year
periods at the end of the one-, five- or ten-year periods.
As discussed in the Prospectus, the Fund may quote total rates of
return in addition to its average annual total return. Such
quotations are computed in the same manner as the Fund's average
annual compounded rate, except that such quotations will be based
on the Fund's actual return for a specified period rather than on
its average return over one-, five- and ten-year periods. The
total rates of return for the Fund for the one-, five- and ten-
year periods ended on December 31, 1994 were (4.00%), 44.98% and
166.57%, respectively.
YIELD
Current yield reflects the income per share earned by the Fund's
portfolio investments.
Current yield is determined by dividing the net investment income
per share earned during a 30-day base period by the maximum
offering price per share on the last day of the period and
annualizing the result. Expenses accrued for the period include
any fees charged to all shareholders during the base period. The
yield for the Fund for the 30-day period ended on December 31,
1994 was 2.73%.
These figures were obtained using the following SEC formula:
6
Yield = 2 [( a-b + 1 ) - 1]
----
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period.
CURRENT DISTRIBUTION RATE
Yield which is calculated according to a formula prescribed by
the SEC is not indicative of the amounts which were or will be
paid to the Fund's shareholders. Amounts paid to shareholders are
reflected in the quoted "current distribution rate." The current
distribution rate is computed by dividing the total amount of
dividends per share paid by the Fund during the past 12 months by
a current maximum offering price. Under certain circumstances,
such as when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it might
be appropriate to annualize the dividends paid over the period
such policies were in effect, rather than using the dividends
during the past 12 months. The current distribution rate differs
from the current yield computation because it may include
distributions to shareholders from sources other than dividends
and interest, such as premium income from option writing and
short-term capital gains, and is calculated over a different
period of time.
VOLATILITY
Occasionally statistics may be used to specify Fund volatility or
risk. Measures of volatility or risk are generally used to
compare Fund net asset value or performance relative 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 the
Standard & Poor's 500 Stock Index. 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 premise is that greater volatility connotes greater risk
undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
With respect to those categories of investors who are permitted
to purchase shares of the Fund at net asset value, sales
literature pertaining to the Fund may quote a current
distribution rate, yield, 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.
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.
The Fund may include in its advertising or sales material
information relating to investment objectives and performance
results of funds belonging to the Templeton Group of Funds.
Resources is the parent company of the advisers and underwriter
of both the Franklin Group of Funds and Templeton Group of Funds.
COMPARISONS
To help investors better evaluate how an investment in the Fund
might satisfy their investment objective, advertisements and
other materials regarding the Fund may discuss various 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. Such comparisons may include,
but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an
unmanaged index composed of 30 blue-chip industrial corporation
stocks (Dow Jones Industrial Average), 15 utilities company
stocks (Dow Jones Utilities Average), and 20 transportation
company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's 500 Stock Index or its component indices -
an unmanaged index composed of 400 industrial stocks, 40
financial stocks, 40 utilities stocks, and 20 transportation
stocks. Comparisons of performance assume reinvestment of
dividends.
c) The New York Stock Exchange composite or component indices -
unmanaged indices of all industrial, utilities, transportation,
and finance stocks listed on the New York Stock Exchange.
d) Wilshire 5000 Equity Index - represents the return on the
market value of all common equity securities for which daily
pricing is available. Comparisons of performance assume
reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed
Income Fund Performance Analysis - measure total return and
average current yield for the mutual fund industry. Rank
individual mutual fund performance over specified time periods,
assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment
Technologies, Inc. - analyzes price, current yield, risk, total
return, and average rate of return (average annual compounded
growth rate) over specified time periods for the mutual fund
industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. -
analyzes price, yield, risk, and total return for equity funds.
h) Financial publications: The Wall Street Journal and Business
Week, Changing Times, Financial World, Forbes, Fortune and Money
magazines - provide performance statistics over specified time
periods.
i) Consumer Price Index (or Cost of Living Index), published by
the U.S. Bureau of Labor Statistics - a statistical measure of
change, over time, in the price of goods and services in major
expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson
Associates - historical measure of yield, price, and total return
for common and small company stock, long-term government bonds,
Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in
the U.S. Savings & Loan League Fact Book.
l) Historical data supplied by the research departments of First
Boston Corporation, the J. P. Morgan companies, Salomon Brothers
Merrill Lynch, Pierce, Fenner & Smith, Lehman Brothers and
Bloomberg L.P.
m) Standard & Poor's 100 Stock Index - an unmanaged index based
on the prices of 100 blue-chip stocks, including 92 industrials,
one utility, two transportation companies, and 5 financial
institutions. The S&P 100 Stock Index is a smaller, more flexible
index for options trading.
From time to time, advertisements or information for the Fund may
include a discussion of certain attributes or benefits to be
derived by an investment in the Fund. Such advertisements or
information may include symbols, headlines, or other material
which highlight or summarize the information discussed in more
detail in the communication.
Advertisements or information may also compare the Fund's
performance to the return on certificates of deposit or other
investments. Investors 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 certificate of deposit issued by a bank. For example, as the
general level of interest rates rise, the value of the Fund's
fixed-income investments, as well as the value of its shares
which 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. Certificates of deposit 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 such comparisons of performance, an investor should
keep in mind that the composition of the investments in the
reported indices and averages is not identical to the Fund's
portfolio, that the indices and averages are generally unmanaged,
and that the items included in the calculations of such 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 this performance as compared to such other
averages.
OTHER FEATURES AND BENEFITS
The Fund may help investors achieve various investment goals such
as accumulating money for retirement, saving for a down payment
on a home, college cost and/or other long-term goals. The
Franklin College Costs Planner may assist an investor 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 an investor through the
steps to start a retirement savings program. Of course, an
investment in the Fund cannot guarantee that such goals will be
met.
MISCELLANEOUS INFORMATION
The Fund is a member of the Franklin Templeton Group, one of the
largest mutual fund organizations in the United States 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 47 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 $118 billion in assets under
management for more than 3.8 million shareholder accounts and
offers 111 U.S.-based mutual funds. The Fund may identify itself
by its NASDAQ or CUSIP number.
The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin
number one in service quality for five of the past seven years.
Access persons of the Franklin Templeton Group, as defined in SEC
Rule 17(j) under the 1940 Act, who are employees of Resources or
its subsidiaries, are permitted to engage in personal securities
transactions subject to the following general restrictions and
procedures: (1) The trade must receive advance clearance from a
Compliance Officer and must be completed within 24 hours after
this clearance; (2) Copies of all brokerage confirmations must be
sent to the Compliance Officer and within 10 days after the end
of each calendar quarter, a report of all securities transactions
must be provided to the Compliance Officer; (3) In addition to
items (1) and (2), access persons involved in preparing and
making investment decisions must file annual reports of their
securities holdings each January and also inform the Compliance
Officer (or other designated personnel) if they own a security
that is being considered for a fund or other client 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.
OWNERSHIP AND AUTHORITY DISPUTES
In the event of disputes involving multiple claims of ownership
or authority to control a shareholder's account, the Fund has the
right (but has no obligation) to: (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 Internal Revenue Service in response to a
Notice of Levy.
FINANCIAL STATEMENTS
The financial statements contained in the Annual Report to
Shareholders of the Fund dated December 31, 1994 are incorporated
herein by reference.
