YOUR FUND'S OBJECTIVE
The Franklin Premier Return Fund seeks high current return, and, secondarily,
relative stability of principal through investment in common stocks, investment
grade corporate and U.S. government bonds, short-term money market instruments
and securities of foreign issuers. 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. Managers
of the fund may adjust the balance of stocks, bonds and cash at any time in
their efforts to benefit from changing market opportunities.
February 15, 1995
Dear Shareholder:
We are pleased to bring you the annual report of the Franklin Premier Return
Fund for the period ended December 31, 1994.
The past fiscal year was one of transition for Federal Reserve Board policy and
the financial markets. Tremendous economic growth in the fourth quarter of 1993,
a quarter in which Gross Domestic Product increased at an annualized rate of
7.5%, prompted the Federal Reserve Board to begin raising short-term interest
rates in an effort to curb inflationary pressures.* Inflation generally occurs
when an economy grows too fast and the demand for goods exceeds supply. In order
to slow the demand for consumer goods by making the financing of them less
attractive, the Federal Reserve increased the federal funds rate (the interest
rate banks charge each other for overnight loans) on six different occasions
over the course of the year. These moves, which raised the rate from 3.0% to
5.5%, set a new tone for financial markets and sent a message that Federal
Reserve policy had become more restrictive and less accommodative.
During the period, we continued to employ a "top-down" investment approach,
first analyzing economic factors to determine the business cycle stage; then
allocating our assets among stocks, bonds and cash; and finally positioning the
equity portion in the sectors, industries and companies that we believed offered
the most attractive prospects for capital appreciation and income.
*Source: U.S. Commerce Dept.
<PAGE>
The fund began the fiscal year with an asset allocation mix of 62% equities, 12%
bonds and 26% cash and equivalents. As you can see from the chart on page 1, the
mix changed only slightly over the course of the year to 57% equities, 14% bonds
and 29% cash and equivalents. After the stock market reached its 1994 peak in
late January, we determined that it was approaching an overvaluation level and
felt that an increased cash position was prudent. Early in the year, we sold
positions and realized profits in areas that most likely would be affected by
rising interest rates, namely the consumer cyclical, capital goods, and
financial sectors. Holdings that were sold include Ford Motor Co., Deere & Co.,
Beneficial Corp., and Armstrong World Industries, Inc.
- - - - - ------------------------------------------------------
FRANKLIN PREMIER RETURN FUND
Top 10 Sectors on December 31, 1994
Based on Total Net Assets
<TABLE>
<CAPTION>
% OF TOTAL
SECTOR NET ASSETS
- - - - - ------------------------------------------------------
<S> <C>
Basic Industries 11.35%
- - - - - ------------------------------------------------------
Energy 6.99%
- - - - - ------------------------------------------------------
Business Services 6.98%
- - - - - ------------------------------------------------------
Technology 6.76%
- - - - - ------------------------------------------------------
Consumer Services 6.62%
- - - - - ------------------------------------------------------
Utilities 5.06%
- - - - - ------------------------------------------------------
Consumer Staples 4.66%
- - - - - ------------------------------------------------------
Capital Spending 3.85%
- - - - - ------------------------------------------------------
Financial Services 3.60%
- - - - - ------------------------------------------------------
Health Care 3.49%
- - - - - ------------------------------------------------------
</TABLE>
[GRAPHIC MATERIAL (1) OMITTED - SEE APPENDIX]
Fortunately, we had positioned the fund in the Basic Industries sector before
the Federal Reserve began raising interest rates in February. This sector
includes commodity-type industries such as paper, chemicals, gold and other
metals, which typically benefit from an increase in inflation. Throughout the
majority of the year, we maintained a relatively overweighted position in this
sector. Recently, however, we began reducing our exposure to these industries
and increasing our exposure to industries such as utilities, consumer staples
and healthcare. For example, we purchased shares of GTE Corp., AT&T Corp.,
CINergy Corp., and DPL, Inc. in the utility industry, Procter & Gamble Co. in
the household products industry, and Merck & Co., Inc. in the healthcare
industry. We recently purchased shares of two technology companies, Sybase, Inc.
and Silicon Graphics, Inc. All of these are considered premier companies within
their respective industry groups and offer consistent growth opportunities.
In late 1993, we had anticipated a shift in consumer spending from high-priced
durable goods to soft goods, and purchased stocks of three retail apparel
companies. When we realized that the shift had not materialized as we expected,
we took a small loss in Charming Shoppes, Inc. to reduce our exposure in this
industry. However, we retained our holdings in Gap, Inc. and Limited, Inc., two
retail apparel leaders. Overall, the fund had 1.19% of its total net assets
invested in the retail apparel industry by the end of the reporting period.
Since many bond markets experienced significant declines in early 1994, the
fund's relatively low fixed-income exposure proved to be beneficial to its
overall performance. We believed these declines
2
<PAGE>
- - - - - ------------------------------------------------------
FRANKLIN PREMIER RETURN FUND
Top 10 Holdings on December 31, 1994
Based on Total Net Assets
<TABLE>
<CAPTION>
% OF TOTAL
COMPANY, INDUSTRY NET ASSETS
- - - - - ------------------------------------------------------
<S> <C>
Dun & Bradstreet Corp.; Publishing 4.29%
- - - - - ------------------------------------------------------
Boeing Co.; Aerospace/Defense 3.65%
- - - - - ------------------------------------------------------
Dow Chemical Co.; Chemicals - Major 2.62%
- - - - - ------------------------------------------------------
Procter & Gamble; Household Products 2.42%
- - - - - ------------------------------------------------------
Browning-Ferris Industries, Inc.;
Pollution Control 2.21%
- - - - - ------------------------------------------------------
Tribune Co.; Publishing - Newspaper 2.14%
- - - - - ------------------------------------------------------
Upjohn Co.; Health Care - Pharmaceuticals 1.80%
- - - - - ------------------------------------------------------
Chevron Corp.; Oil - Integrated
International 1.74%
- - - - - ------------------------------------------------------
BankAmerica Corp.; Finance -
Money Center Banks 1.54%
- - - - - ------------------------------------------------------
PET, Inc.; Food 1.54%
- - - - - ------------------------------------------------------
</TABLE>
FOR A COMPLETE LISTING OF PORTFOLIO HOLDINGS, PLEASE
SEE PAGE 6 OF THIS REPORT.
led to opportunities in the bond market, and we subsequently took advantage of
this weakness by increasing the fund's bond holdings by about 5%. Specifically,
we increased our exposure to government notes, focusing on two-, five-, and
10-year maturities. As the economy begins to show signs of slowing and the
Federal Reserve completes its process of raising interest rates, we will
consider further increasing the fund's bond holdings by adding positions in
30-year Treasury bonds.
The current economic expansion has lasted approximately 45 months, which is
several months longer than the average 39-month expansion exhibited this
century. However, the 1960s and 1980s witnessed extended economic expansions of
104 months and 94 months, respectively.* If the Federal Reserve succeeds in its
attempt to combine modest economic growth with low inflation, this expansion
could continue for quite some time. Such growth could prove beneficial for
stocks as business revenues and earnings continue to expand, although at a
slower pace than what was seen in 1994.
We believe that the fund's current asset allocation mix of stocks, bonds and
cash should result in less fluctuation in the fund's share price relative to
volatility in the financial markets. Our equity holdings are fairly balanced
among 10 different sectors and a number of industries within those sectors.
Portfolio diversification and a focus on premier companies should help stabilize
the fund if market volatility continues, and our relatively high cash position
should benefit the fund as market opportunities arise.
We appreciate your participation in the Franklin Premier Return Fund and look
forward to serving your investment needs in the months and years to come.
Sincerely,
Charles B. Johnson
Chairman of the Board
Franklin Premier Return Fund
*Source: Ned Davis Research, Inc.
3
<PAGE>
PERFORMANCE SUMMARY
The Franklin Premier Return Fund posted a total return of +0.48% for the
one-year period ended December 31, 1994. Of course, we believe it is important
for shareholders to view their investments with a long-term perspective. As you
can see from the table below, the Fund delivered a cumulative total return of
over 51% for the five-year period ended December 31, 1994. Total return measures
the change in value of an investment, assuming reinvestment of dividends and
capital gains, and does not include the initial sales charge.
The fund's share price, as measured by net asset value, decreased from $6.22 on
Decem- ber 31, 1993 to $6.11 on December 31, 1994. During the reporting period,
shareholders received distributions of 14 cents ($0.14) per share in income
dividends. Of course, distributions will vary depending on income earned by the
fund, and past performance is not indicative of future results.
- - - - - --------------------------------------------------------------------------------
FRANKLIN PREMIER RETURN FUND
Periods ended December 31, 1994
<TABLE>
<CAPTION>
SINCE
OBJECTIVE
CHANGE
ONE-YEAR (05/01/91) FIVE-YEAR TEN-YEAR
-------- ---------- --------- --------
<S> <C> <C> <C> <C>
Cumulative
Total Return(1) 0.48% 46.00% 51.69% 179.10%
Average Annual
Total Return(2) -4.00% 9.48% 7.71% 10.30%
30-Day Standardized Yield(3): 2.73%
</TABLE>
1. Cumulative total returns show the change in value of an investment over the
periods indicated and do not include the current, maximum 4.5% initial sales
charge. See note below.
2. Average annual total returns represent the average annual change in value of
an investment over the periods indicated and have been restated to reflect the
current, maximum 4.5% initial sales charge. See note below.
3. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio during the 30 days ended December 31, 1994.
Note: Prior to July 1, 1994, fund shares were offered at a lower initial sales
charge, with dividends reinvested at the offering price. Thus, actual total
returns for purchasers of shares during that period would have been different
than noted above. Effective May 1, 1994, the fund eliminated the sales charge on
reinvested dividends and implemented a plan of distribution under Rule 12b-1,
which will affect future performance. All total return figures assume
reinvestment of dividends and capital gains at net asset value, and take into
account the effect of the 12b-1 plan from the date of its implementation.
Investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares. Past performance cannot
guarantee future results.
- - - - - --------------------------------------------------------------------------------
4
<PAGE>
The graph below compares the fund's performance over the past 10 years with the
performance of the Standard & Poor's 500 Stock Index (S&P 500)(R). It also shows
that an investment in the fund has kept your purchasing power well-ahead of
inflation, as measured by the Consumer Price Index (CPI).
[GRAPHIC MATERIAL (2) OMITTED - SEE APPENDIX]
*Total return includes all sales charges and represents the change in value of
an investment over the period shown, assuming reinvestment of dividends and
capital gains. Past performance is not predictive of future results.
**Source: U.S. Bureau of Labor Statistics
As you can see from the graph to the right, the fund's performance has been more
consistent with the performance of the S&P 500 since the investment objective
changed in May 1991. In fact, the fund has outperformed this index since
September 1993. Please remember that the fund's performance differs from that of
the index because the index does not contain cash (the fund generally carries a
certain percentage of cash at any given time) or fixed-income securities and
includes no sales charges or management expenses. Of course, one cannot invest
directly in an index.
[GRAPHIC MATERIAL (3) OMITTED - SEE APPENDIX]
*Total return includes all sales charges and represents the change in value of
an investment over the period shown, assuming reinvestment of dividends and
capital gains. Past performance is not predictive of future results.
**Source: U.S. Bureau of Labor Statistics
5
<PAGE>
FRANKLIN PREMIER RETURN FUND
STATEMENT OF INVESTMENTS IN SECURITIES, OPEN OPTIONS AND NET ASSETS, DECEMBER
31, 1994
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- - - - - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 54.8%
AEROSPACE/DEFENSE 3.7%
20,000 Boeing Co. ........................................................................ $ 935,000
----------
CHEMICALS 4.1%
10,000 Dow Chemical Co. .................................................................. 672,500
3,000 Du Pont (E.I.) De Nemours & Co. ................................................... 168,750
5,000 Goodrich (B.F.) Co. ............................................................... 216,875
----------
1,058,125
----------
COMMERCIAL SERVICES .6%
7,500 Ogden Corp. ....................................................................... 140,625
----------
COMPUTER SYSTEMS/SOFTWARE 2.4%
5,000 (a)Silicon Graphics, Inc. ............................................................ 155,000
2,500 (a)Sybase, Inc. ...................................................................... 130,000
20,000 (a)Tandem Computers, Inc. ............................................................ 342,500
----------
627,500
----------
ELECTRICAL EQUIPMENT .5%
10,000 Westinghouse Electric Corp. ....................................................... 122,500
----------
ENERGY 6.1%
10,000 Anadarko Petroleum Corp. .......................................................... 385,000
5,000 Apache Corp. ...................................................................... 125,000
5,000 Burlington Resources, Inc. ........................................................ 175,000
10,000 Chevron Corp. ..................................................................... 446,250
5,000 Exxon Corp. ....................................................................... 303,750
2,500 Schlumberger, Ltd. ................................................................ 125,938
----------
1,560,938
----------
ENGINEERING/CONSTRUCTION 1.2%
10,000 Foster Wheeler Corp. .............................................................. 297,500
----------
ENTERTAINMENT/MEDIA 2.0%
10,000 Time Warner, Inc. ................................................................. 351,250
10,000 Turner Broadcasting System, Class B ............................................... 163,750
----------
515,000
----------
FINANCE 3.6%
10,000 BankAmerica Corp. ................................................................. 395,000
10,000 Chemical Banking Corp. ............................................................ 358,750
5,227 Travelers Corp. ................................................................... 169,878
----------
923,628
----------
FOOD 1.5%
20,000 PET, Inc. ......................................................................... 395,000
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
FRANKLIN PREMIER RETURN FUND
STATEMENT OF INVESTMENTS IN SECURITIES, OPEN OPTIONS AND NET ASSETS, DECEMBER
31, 1994 (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- - - - - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
GOLD/MISCELLANEOUS METAL 1.6%
5,000 Inco, Ltd. ........................................................................ $ 143,125
6,000 Placer Dome, Inc. ................................................................. 130,500
10,000 (a)Santa Fe Pacific Gold Corp. ....................................................... 128,750
----------
402,375
----------
HOTELS/MOTELS 1.3%
5,000 Hilton Hotels Corp. ............................................................... 336,875
----------
HOUSEHOLD PRODUCTS 2.4%
10,000 Procter & Gamble Co. .............................................................. 620,000
----------
MANUFACTURING .9%
5,000 Illinois Tool Works, Inc. ......................................................... 218,750
----------
MEDICAL PRODUCTS & SUPPLIES .6%
5,000 Allergan, Inc. .................................................................... 141,250
----------
PAPER & FOREST PRODUCTS 2.1%
10,000 Champion International Corp. ...................................................... 365,000
10,200 (a)Stone Container Corp. ............................................................. 175,950
----------
540,950
----------
PHARMACEUTICALS 2.9%
5,000 Glaxo Holding, Plc., ADR .......................................................... 101,875
5,000 Merck & Co., Inc. ................................................................. 190,625
15,000 Upjohn Co. ........................................................................ 461,250
----------
753,750
----------
PHOTOGRAPHY .6%
5,000 Polaroid Corp. .................................................................... 162,500
----------
POLLUTION CONTROL 2.2%
20,000 Browning-Ferris Industries, Inc. .................................................. 567,500
----------
PUBLISHING 6.4%
20,000 Dun & Bradstreet Corp. ............................................................ 1,100,000
10,000 Tribune Co. ....................................................................... 547,500
----------
1,647,500
----------
RETAIL 3.0%
7,000 GAP, Inc. ......................................................................... 213,500
5,000 Limited, Inc. ..................................................................... 90,625
6,000 (a)Toys R Us, Inc. ................................................................... 183,000
10,000 Vons Companies, Inc. .............................................................. 180,000
5,000 Wal-Mart Stores, Inc. ............................................................. 106,250
----------
773,375
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
FRANKLIN PREMIER RETURN FUND
STATEMENT OF INVESTMENTS IN SECURITIES, OPEN OPTIONS AND NET ASSETS, DECEMBER
31, 1994 (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- - - - - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
TELECOMMUNICATIONS/TELEPHONE UTILITIES 2.5%
5,000 AT&T Corp. ........................................................................ $ 251,250
10,000 GTE Corp. ......................................................................... 303,750
2,000 Telefonos de Mexico, ADR .......................................................... 82,000
-----------
637,000
-----------
UTILITIES/NATURAL GAS 2.6%
7,600 CINergy Corp. ..................................................................... 177,650
7,300 DPL, Inc. ......................................................................... 149,650
5,000 Enron Corp. ....................................................................... 152,500
6,500 Transco Energy Co. ................................................................ 108,063
2,800 Williams Cos., Inc. ............................................................... 70,350
-----------
658,213
-----------
TOTAL COMMON STOCKS (COST $17,240,900) ...................................... 14,035,854
-----------
CONVERTIBLE PREFERRED STOCKS 2.1%
15,000 James River Corp., 9.00% cvt. pfd. Series P ....................................... 303,750
5,000 (b)Parker & Parsley, 6.25%, cvt. pfd. ................................................ 230,000
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $504,750) .......................... 533,750
-----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
------
<S> <C> <C>
BONDS 13.9%
CORPORATE BONDS 2.7%
$ 350,000 AMR Corp., sub. deb., 6.125%, 11/01/24 ............................................ 283,500
250,000 Dayton Hudson Co., 8.60%, 01/15/12 ................................................ 246,514
100,000 Georgia Pacific Corp., 9.125%, 07/01/22 ........................................... 97,234
100,000 (b)SynOptics, Inc., cvt., 5.25%, 05/15/03 ............................................ 75,750
-----------
TOTAL CORPORATE BONDS (COST $731,390) ....................................... 702,998
-----------
U.S. GOVERNMENT SECURITIES 11.2%
250,000 U.S. Treasury Bonds, 8.00%, 11/15/21 .............................................. 250,859
2,750,000 U.S. Treasury Notes, 5.875% - 7.25%, 06/30/96 - 02/15/04 .......................... 2,619,062
-----------
TOTAL U.S. GOVERNMENT SECURITIES (COST $2,935,696) .......................... 2,869,921
-----------
TOTAL BONDS (COST $3,667,086) ............................................... 3,572,919
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
FRANKLIN PREMIER RETURN FUND
STATEMENT OF INVESTMENTS IN SECURITIES, OPEN OPTIONS AND NET ASSETS, DECEMBER
31, 1994 (CONT.)
<TABLE>
<CAPTION>
SHARES EXPIRATION EXERCISE VALUE
OPTIONED DATE PRICE (NOTE 1)
- - - - - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PUT OPTIONS .1%
INDEX .1%
2,500 Standard & Poor's ........................................ March, 95 460 $ 22,813
-----------
MEDICAL PRODUCTS & SUPPLIES
5,000 Allergan, Inc. ........................................... January, 95 25 1,250
-----------
PHARMACEUTICALS
5,000 Merck & Co., Inc. ........................................ April, 95 35 2,500
-----------
TOTAL PUT OPTIONS (COST $27,763) ............................................ 26,563
-----------
TOTAL COMMON STOCKS, CONVERTIBLE PREFERRED STOCKS,
BONDS AND OPTIONS (COST $21,440,499) ....................................... 18,169,086
-----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
------
<S> <C> <C>
SHORT TERM INVESTMENTS
(C)RECEIVABLES FROM REPURCHASE AGREEMENTS 26.3%
$ 3,863,675 (d)Joint Repurchase Agreement, 5.838%, 01/03/95 (Maturity Value $3,745,276)
Collateral: U.S. Treasury Notes, 3.875% - 11.50%, 02/15/95 - 09/30/99 ............ 3,742,848
3,092,000 Nikko Securities Co. International, Inc., 5.75%, 01/03/95 (Maturity Value $3,001,917)
Collateral: U.S. Treasury Notes, 7.125%, 09/30/99 ................................ 3,000,000
-----------
TOTAL RECEIVABLES FROM REPURCHASE AGREEMENTS (COST $6,742,848) .............. 6,742,848
-----------
TOTAL INVESTMENTS (COST $28,183,347) 97.2% ............................. 24,911,934
OPEN CALL OPTIONS WRITTEN (PREMIUMS RECEIVED $34,474) (.2%)**........... (37,500)
OTHER ASSETS AND LIABILITIES, NET 3.0% ................................. 756,299
-----------
NET ASSETS 100.0% ...................................................... $25,630,733
===========
</TABLE>
**Open call options written at December 31, 1994 were as follows:
<TABLE>
<CAPTION>
SHARES EXPIRATION STRIKE VALUE
OPTIONED DATE PRICE (NOTE 1)
- - - - - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AEROSPACE/DEFENSE
5,000 Boeing Co. .............................................. February, 95 45 $ 13,750
-----------
COMPUTER SYSTEMS/SOFTWARE
5,000 Silicon Graphics, Inc. .................................. January, 95 30 8,750
2,500 Sybase, Inc. ............................................ March, 95 50 13,281
-----------
22,031
-----------
MEDICAL PRODUCTS & SUPPLIES
5,000 Allergan, Inc. .......................................... January, 95 30 1,719
-----------
TOTAL CALL OPTIONS (PREMIUMS RECEIVED $34,474) .............................. 37,500
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
FRANKLIN PREMIER RETURN FUND
STATEMENT OF INVESTMENTS IN SECURITIES, OPEN OPTIONS AND NET ASSETS, DECEMBER
31, 1994 (CONT.)
<TABLE>
<CAPTION>
VALUE
(NOTE 1)
- - - - - ------------------------------------------------------------------------------------------------------------------
<S> <C>
At December 31, 1994 the net unrealized depreciation based on the
cost of investments for income tax purposes of $28,183,347 was as
follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost .................................................. $ 334,319
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value .................................................. (3,605,732)
Unrealized depreciation on call options ........................................ (3,026)
-----------
Net unrealized depreciation ..................................................... $(3,274,439)
===========
</TABLE>
(a) Non-income producing.
(b) See Note 6 regarding Rule 144A securities.
(c) Face amount for repurchase agreements is for the underlying collateral.
(d) See Note 1(f) regarding Joint Repurchase Agreement.
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
FRANKLIN PREMIER RETURN FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
<TABLE>
<S> <C>
Assets:
Investments in securities, at value
(identified cost $21,440,499) $18,169,086
Receivables from repurchase
agreements, at value and cost 6,742,848
Cash 15,158
Receivables:
Investment securities sold 676,902
Dividends and interest 104,470
Capital shares sold 7,066
----------
Total assets 25,715,530
==========
Liabilities:
Open covered call options written, at value
(premiums received $34,474) 37,500
Payables:
Management fees 13,342
Distribution fees 7,630
Shareholder servicing costs 1,679
Accrued expenses and other liabilities 24,646
-----------
Total liabilities 84,797
-----------
Net assets, at value $25,630,733
===========
Net assets consist of:
Undistributed net investment income $ 34,261
Unrealized depreciation on investments (3,274,439)
Accumulated net realized loss (711,713)
Capital shares 29,582,624
-----------
Net assets, at value $25,630,733
===========
Computation of net asset value and
offering price per share:
Net asset value and redemption
price per share:
($25,630,733 / 4,193,484
shares outstanding) $6.11
===========
Maximum offering price
(100/95.5 of $6.11) $6.40
===========
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Investment income:
Dividends $ 428,132
Interest 453,742
-----------
Total income $ 881,874
Expenses:
Management fees (Note 5) 155,985
Distribution fees (Note 5) 30,623
Shareholder servicing costs
(Note 5) 20,420
Reports to shareholders 47,516
Professional fees 28,500
Registration fees 17,902
Directors' fees and expenses 4,327
Custodian fees 2,582
Other 5,950
Total expenses 313,805
-----------
Net investment income 568,069
-----------
Realized and unrealized gain (loss)
on investments:
Realized gain (loss) from security
transactions:
From transactions in written
options which expired or were
closed (Note 4) 147,192
From other security
transactions (261,553)
----------
Net realized loss (114,361)
Net unrealized depreciation
during the year (355,103)
----------
Net realized and unrealized
loss on investments (469,464)
----------
Net increase in net assets
resulting from operations $ 98,605
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
FRANKLIN PREMIER RETURN FUND
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income.......................................................... $ 568,069 $ 477,771
Net realized gain (loss) from security transactions............................ (114,361) 193,052
Net unrealized appreciation (depreciation) during the year..................... (355,103) 3,081,039
----------- -----------
Net increase in net assets resulting from operations....................... 98,605 3,751,862
Distributions to shareholders from undistributed net investment income.......... (564,467) (635,781)
Increase (decrease) in net assets from capital share transactions (Note 3)...... 3,219,354 (2,316,254)
----------- -----------
Net increase in net assets................................................. 2,753,492 799,827
Net assets:
Beginning of year............................................................... 22,877,241 22,077,414
----------- -----------
End of year (including undistributed net investment income
of $34,261 - 1994; and $30,659 - 1993)........................................... $25,630,733 $22,877,241
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
FRANKLIN PREMIER RETURN FUND
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Franklin Premier Return Fund (the Fund) is an open-end, diversified management
investment company (mutual fund) registered under the Investment Company Act of
1940 as amended.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
A. SECURITY VALUATION:
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. Other securities
for which market quotations are readily available are valued at current market
values, obtained from pricing services, which are 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 securities. Portfolio securities which are traded both in the
over-the-counter market and on a securities exchange are valued according to the
broadest and most representative market as determined by the Manager. Other
securities for which market quotations are not available, if any, are valued in
accordance with procedures established by the Board of Directors. Short-term
securities and similar investments with remaining maturities of 60 days or less
are valued at amortized cost, which approximates value.
Open option contracts are valued at their last sales price on the relevant
exchange each day assets are valued. Lacking any sales that day, the options
will be valued at the mean between the current closing bid and ask prices.
B. INCOME TAXES:
The Fund intends to continue to qualify for the tax treatment applicable to
regulated investment companies under the Internal Revenue Code, and to make the
requisite distributions to its shareholders which will be sufficient to relieve
it from income and excise taxes. Therefore, no income tax provision is required.
C. SECURITY TRANSACTIONS:
Security transactions are accounted for on the date the securities are purchased
or sold (trade date). Realized gains and losses on security transactions are
determined on the basis of specific identification for both financial statement
and income tax purposes.
D. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income and estimated expenses are accrued daily. Bond
discounts and premiums, if any, are amortized as required by the Internal
Revenue Code.
Net investment income and net realized capital gain may differ for financial
statement and tax purposes primarily due to differing treatments of wash sale
and option transactions.
E. OPTION TRANSACTIONS:
The Fund writes listed put options and covered call options in which premiums
received are recorded as a liability which is marked to market to reflect the
current value of the options written. A covered call option gives the holder the
right to buy
13
<PAGE>
FRANKLIN PREMIER RETURN FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
1. SIGNIFICANT ACCOUNTING POLICIES (CONT.)
E. OPTION TRANSACTIONS (CONT.)
the underlying security which the Fund owns at any time during the option period
at a predetermined exercise price. The risk in writing a covered call option is
that the Fund gives up the opportunity to participate in any increase in the
price of the underlying security beyond the exercise price. Proceeds from call
options exercised are increased by the amount of premiums received. A put option
gives the holder the right to sell the underlying security to the Fund at any
time during the option period at a predetermined exercise price. The risk in
writing a put option is that the Fund is exposed to the risk of loss if the
market price of the underlying securities declines. If the holder of a put
option written by the Fund exercises the option, the Fund's cost basis in the
underlying security is the exercise price reduced by the premium received. If an
option expires or is cancelled in a closing transaction, the Fund will realize a
gain or loss depending on whether the cost of the closing transaction, if any,
is less than or greater than the premium originally received.
The Fund purchases listed put options on certain securities in order to protect
the securities against a decline in market value. A listed purchased put option
gives the Fund the right to sell the underlying security at the option exercise
price at any time during the option period. The put option on a security allows
the Fund to protect the unrealized gain in an appreciated security without
actually selling the security. Any losses realized by the Fund upon expiration
of the put options are limited to the premiums paid for the purchase of such
options, plus any transaction costs.
The Fund may buy listed 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
securities. A call option gives the Fund the right to buy the underlying
securities from the option writer at a stated exercise price. Any losses
realized by the Fund upon expiration of the call options are limited to the
premiums paid for the purchase of such options, plus any transaction costs.
F. REPURCHASE AGREEMENTS:
The Fund may enter into a Joint Repurchase Agreement whereby its uninvested cash
balance is deposited into a joint cash account to be used to invest in one or
more repurchase agreements with government securities dealers recognized by the
Federal Reserve Board and/or member banks of the Federal Reserve System. The
value and face amount of the Joint Repurchase Agreement are allocated to the
Fund based on its pro-rata interest.
In a repurchase agreement, the Fund purchases a U.S. government security from a
dealer or bank subject to an agreement to resell it at a mutually agreed upon
price and date. Such a transaction is accounted for as a loan by the Fund to the
seller, collateralized by the underlying security. The transaction requires the
initial collateralization of the seller's obligation by U.S. government
securities with market value, including accrued interest, of at least 102% of
the dollar amount invested by the Fund, with the value of the underlying
security marked to market daily to maintain coverage of at least 100%. The
collateral is delivered to the Fund's custodian and held until resold to the
dealer or bank. At December 31, 1994, all outstanding joint repurchase
agreements held by the Fund had been entered into on December 30, 1994.
2. CAPITAL LOSS CARRYOVERS
At December 31, 1994, for tax purposes, the Fund had capital loss carryovers as
follows:
<TABLE>
<S> <C>
Capital loss carryovers
Expiring in: 2000 $548,931
2002 161,294
--------
$710,225
========
</TABLE>
For tax purposes the aggregate cost of securities and unrealized depreciation of
the Fund are the same as for financial statement purposes at December 31, 1994.
14
<PAGE>
FRANKLIN PREMIER RETURN FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
3. CAPITAL STOCK
At December 31, 1994, there were 5,000,000,000 shares of no par value capital
stock authorized and total capital paid-in aggregated $29,582,624. Transactions
in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1994 1993
---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Shares sold................................................. 348,334 $ 2,165,824 179,187 $ 1,053,868
Shares issued in reinvestment of dividends and distributions 64,686 399,128 69,260 411,906
Shares redeemed............................................. (490,021) (3,056,758) (524,304) (3,064,772)
Changes from exercise of exchange privilege:
Shares sold............................................... 820,741 5,156,663 240,657 1,401,087
Shares redeemed........................................... (230,690) (1,445,503) (370,064) (2,118,343)
------- ----------- ------- -----------
Net increase (decrease)................................. 513,050 $ 3,219,354 (405,264) $(2,316,254)
======= =========== ======= ===========
</TABLE>
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding purchased and written options and
purchases and sales of short-term securities) for the year ended December 31,
1994 aggregated $9,683,184 and $7,980,186, respectively. At December 31, 1994
there were no securities or other assets deposited as collateral for outstanding
options.
Transactions in purchased options for the year ended December 31, 1994 were as
follows:
<TABLE>
<CAPTION>
CALL PUT
-------------------- ---------------------
NUMBER OF NUMBER OF
SHARES SHARES
COST OPTIONED COST OPTIONED
------- --------- -------- --------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1993............................... $ -- -- $ 7,025 10,000
Options purchased.............................................. 49,675 10,000 171,090 76,000
Options expired................................................ (49,675) (10,000) (65,187) (40,000)
Options closed................................................. -- -- (85,165) (33,500)
------- ------ ------ ------
Outstanding at December 31, 1994............................... $ -- -- $ 27,763 12,500
======= ====== ======== ======
</TABLE>
Transactions in written options for the year ended December 31, 1994 were as
follows:
<TABLE>
<CAPTION>
CALL
---------------------
NUMBER OF
AMOUNT OF SHARES
PREMIUMS OPTIONED
--------- ----------
<S> <C> <C>
Options outstanding at December 31, 1993................................................ $ -- --
Options written ........................................................................ 234,063 93,500
Options cancelled in closing purchase transactions...................................... (76,307) (23,000)
Options expired......................................................................... (85,440) (39,400)
Options exercised....................................................................... (37,842) (13,600)
-------- -------
Options outstanding at December 31, 1994................................................ $ 34,474 17,500
======== =======
</TABLE>
15
<PAGE>
FRANKLIN PREMIER RETURN FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
4. PURCHASES AND SALES OF SECURITIES (CONT.)
The cost of canceling written call options in closing purchase transactions was
$14,555 resulting in a net short-term capital gain of $61,752 for the year ended
December 31, 1994. Premiums received on expired written call options resulted in
a net short-term capital gain of $85,440 for the year ended December 31, 1994.
5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Franklin Advisers, Inc., under terms of an agreement, provides investment
advice, administrative services, office space and facilities to the Fund, and
receives fees computed monthly on the net assets of the Fund on the last day of
the month at an annualized rate of 5/8 of 1% of the first $100 million of net
assets, 1/2 of 1% of net assets in excess of $100 million up to $250 million,
and 45/100 of 1% of net assets in excess of $250 million. Fees incurred by the
Fund aggregated $155,985 for the year ended December 31, 1994. The terms of the
agreement provide that aggregate annual expenses of the Fund be limited to the
extent necessary to comply with the limitations set forth in the laws,
regulations and administrative interpretations of the states in which the Fund's
shares are registered. For the year ended December 31, 1994, the Fund's expenses
did not exceed these limitations.
In its capacity as underwriter for the capital stock of the Fund,
Franklin/Templeton Distributors, Inc. received commissions on sales of the
Fund's capital stock for the year ended December 31, 1994 totalling $93,593, of
which $86,966 was paid to other dealers. Commissions are deducted from the gross
proceeds received from the sale of the capital stock of the Fund, and as such
are not expenses of the Fund.
Pursuant to a shareholder service agreement with Franklin/Templeton Investor
Services, Inc., the Fund pays costs on a per shareholder account basis.
Shareholder servicing costs incurred for the year ended December 31, 1994
aggregated $20,420, of which $19,262 was paid to Franklin/Templeton Investor
Services, Inc.
Effective May 1, 1994, the Fund implemented a plan of distribution under Rule
12b-1 of the Investment Company Act of 1940, pursuant to which the Fund will
reimburse Franklin/Templeton Distributors, Inc. in an amount up to 0.25% per
annum of the Fund's average daily net assets for the costs incurred in the
promotion, offering and marketing of the Fund's shares. Fees incurred by the
Fund under the agreement aggregated $30,623 for the year ended December 31,
1994.
Certain officers and directors of the Fund are also officers and/or directors of
Franklin/Templeton Distributors, Inc., Franklin Advisers, Inc., and
Franklin/Templeton Investor Services, Inc., all wholly-owned subsidiaries of
Franklin Resources, Inc.
6. RULE 144A SECURITIES
Rule 144A provides a non-exclusive safe harbor exemption from the registration
requirements of the Securities Act of 1933 for specified resales of restricted
securities to qualified institutional investors. The Fund values these
securities as disclosed in Note 1. At December 31, 1994, the Fund held 144A
securities with a value aggregating $305,750 representing 1.2% of the Fund's net
assets. See the accompanying statement of investments in securities, open
options and net assets for specific information of such securities.
16
<PAGE>
FRANKLIN PREMIER RETURN FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
7. FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each year are
as follows.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value at beginning of year ...................... $6.22 $5.40 $4.88 $4.21 $5.19
----- ------ ------ ------ -----
Net investment income...................................... .14 .13 .15 .14 .16
Net realized and unrealized gain
(loss) on securities...................................... (.110) .860 .530 .780 (.595)
------ ------ ------ ------ -----
Total from investment operations........................... .030 .990 .680 .920 (.435)
------ ------ ------ ------ -----
Less distributions:
Dividends from net investment income...................... (.140) (.170) (.160) (.135) (.155)
Distributions from capital gains.......................... -- -- -- (.115) (.390)
------ ----- ----- ------ -----
Total distributions........................................ (.140) (.170) (.160) (.250) (.545)
------ ----- ----- ------ -----
Net asset value at end of year ............................ $6.11 $6.22 $5.40 $4.88 $4.21
====== ======= ====== ====== ======
TOTAL RETURN**............................................. .46% 18.38% 14.02% 22.06% (8.81)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of year (in 000's)....................... $25,631 $22,877 $22,077 $28,189 $32,878
Ratio of expenses to average net assets.................... 1.27% 1.00% .92% .93% .85%
Ratio of net investment income
to average net assets..................................... 2.29% 2.15% 2.81% 2.95% 3.27%
Portfolio turnover rate.................................... 45.18% 20.49% 23.17% 62.25% 73.12%
</TABLE>
**Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum initial sales charge and assumes
reinvestment of dividends at the maximum offering price and capital gains, if
any, at net asset value. Effective May 1, 1994, with the implementation of the
Rule 12b-1 distribution plan, as discussed in Note 5, the existing sales charge
on reinvested dividends has been eliminated.
- - - - - --------------------------------------------------------------------------------
The percentage of income dividends paid by the Fund during the year ended
December 31, 1994 which qualified for the 70% dividends-received deduction for
corporations was 72.28%.
- - - - - --------------------------------------------------------------------------------
17
<PAGE>
FRANKLIN PREMIER RETURN FUND
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
of Franklin Premier Return Fund:
We have audited the accompanying statement of assets and liabilities of Franklin
Premier Return Fund, including the statement of investments in securities, open
options and net assets, as of December 31, 1994, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1994 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significiant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Franklin Premier Return Fund as of December 31, 1994, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
February 1, 1995
<PAGE>
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED
FROM EDGAR FILING (PURSUANT TO ITEM 304 (a)
of REGULATION S-T)
GRAPHIC MATERIAL (1)
This chart shows in pie chart format the fund's securities
breakdown by security type as a percentage of the fund's
total net assets.
<TABLE>
<CAPTION>
Portfolio Breakdown on 12/31/94
<S> <C>
Equity 57.0%
Fixed-Income 14.0%
Cash & Equivalents 29.0%
</TABLE>
GRAPHIC MATERIAL (2)
The following line graph hypothetically compares the performance
of Franklin Premier Return Fund to that of the S&P 500 and the
Consumer Price Index (CPI), based on a $10,000 investment from
1/1/85 to 12/31/94.
<TABLE>
<CAPTION>
Period Ending Prem. Ret S&P 500 CPI
<S> <C> <C> <C>
1/85 $9,551 $10,000 $10,000
$10,409 $10,918 $10,104
$10,978 $11,718 $10,218
$10,873 $11,239 $10,285
12/85 $11,883 $13,172 $10,379
$12,784 $15,029 $10,331
$13,142 $15,915 $10,398
$12,106 $14,804 $10,464
$12,788 $15,628 $10,492
$14,061 $18,965 $10,645
$14,570 $19,917 $10,778
$15,287 $21,232 $10,920
12/87 $12,986 $16,448 $10,958
$13,747 $17,384 $11,062
$14,550 $18,542 $11,205
$14,888 $18,605 $11,376
$15,301 $19,180 $11,442
$16,138 $20,540 $11,613
$16,998 $22,353 $11,783
$18,053 $24,747 $11,870
12/89 $17,574 $25,257 $11,974
$17,133 $24,497 $12,221
$17,785 $26,038 $12,334
$15,194 $22,460 $12,601
$16,047 $24,472 $12,705
$18,025 $28,028 $12,820
$18,334 $27,964 $12,914
$19,048 $29,460 $13,028
12/91 $19,609 $31,929 $13,095
$20,537 $31,121 $13,228
$20,699 $31,712 $13,314
$21,151 $32,711 $13,418
$22,386 $34,356 $13,474
$23,632 $35,858 $13,636
$24,613 $36,034 $13,712
$25,556 $36,963 $13,778
12/93 $26,530 $37,821 $13,844
$26,295 $36,387 $13,977
$26,358 $36,540 $14,053
$27,244 $38,327 $14,186
12/94 $26,657 $38,319 $14,215
</TABLE>
GRAPHIC MATERIAL (3)
The following line graph hypothetically compares the performance
of Franklin Premier Return Fund to that of the S&P 500 and the
Consumer Price Index, based on a $10,000 investment from 5/1/91
to 12/31/94.
<TABLE>
<CAPTION>
Period Ending Premier Ret. S&P 500 CPI
<S> <C> <C> <C>
5/91 $9,553 $10,000 $10,000
$9,980 $10,431 $10,030
$9,593 $9,953 $10,059
$9,799 $10,417 $10,074
8/91 $9,963 $10,664 $10,103
$9,966 $10,486 $10,148
$10,113 $10,626 $10,163
$9,695 $10,198 $10,193
12/91 $10,260 $11,365 $10,200
$10,512 $11,153 $10,215
$10,806 $11,298 $10,252
$10,746 $11,078 $10,304
4/92 $11,000 $11,404 $10,318
$10,957 $11,460 $10,333
$10,830 $11,289 $10,370
$11,043 $11,751 $10,392
8/92 $10,808 $11,510 $10,421
$11,066 $11,646 $10,450
$10,916 $11,686 $10,487
$11,325 $12,085 $10,501
12/92 $11,713 $12,233 $10,494
$11,973 $12,336 $10,545
$12,103 $12,506 $10,582
$12,365 $12,770 $10,619
4/93 $12,474 $12,461 $10,649
$12,692 $12,795 $10,664
$12,878 $12,832 $10,679
$12,812 $12,781 $10,679
8/93 $13,229 $13,265 $10,709
$13,372 $13,163 $10,731
$13,615 $13,436 $10,775
$13,504 $13,308 $10,783
12/93 $13,881 $13,469 $10,783
$14,327 $13,927 $10,812
$14,216 $13,550 $10,849
$13,758 $12,959 $10,886
4/94 $13,803 $13,125 $10,901
$13,960 $13,340 $10,909
$13,791 $13,013 $10,946
$14,039 $13,440 $10,975
8/94 $14,423 $13,991 $11,019
$14,254 $13,648 $11,049
$14,322 $13,955 $11,057
$13,846 $13,447 $11,071
12/94 $13,947 $13,646 $11,071
</TABLE>
