FRANKLIN
GOLD FUND
PROSPECTUS December 1, 1995
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin Gold Fund (the "Fund") is a diversified, open-end management investment
company with the principal investment objective of capital appreciation and a
secondary objective of current income. The Fund will concentrate its investments
in securities of companies engaged in mining, processing or dealing in gold or
other precious metals, which is expected to result in the investment of a
substantial portion of its assets in securities of foreign issuers, as described
under "How Does the Fund Invest Its Assets?"
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that you 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 you or
will find useful to have.
The Fund offers two classes of shares: Franklin Gold Fund - Class I ("Class I")
and Franklin Gold Fund - Class II ("Class II"). You can choose between Class I
shares, which generally bear a higher front-end sales charge and lower ongoing
Rule 12b-1 distribution fees ("Rule 12b-1 fees"), and Class II shares, which
generally have a lower front-end sales charge and higher ongoing Rule 12b-1
fees. You should consider the differences between the two classes, including the
impact of sales charges and Rule 12b-1 fees, in choosing the more suitable class
given your anticipated investment amount and time horizon. See "How Do I Buy
Shares? - Differences Between Class I and Class II."
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.
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.
A Statement of Additional Information (the "SAI") concerning the Fund, dated
December 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 you. 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.
ContentsPage
Expense Table.................................... 3
Financial Highlights -
How Has the Fund Performed?..................... 5
What Is the Franklin Gold Fund?.................. 6
How Does the Fund Invest Its Assets?............. 7
Who Manages the Fund?............................ 12
What Distributions Might
I Receive from the Fund?........................ 14
How Taxation Affects You and the Fund............ 16
How Do I Buy Shares?............................. 17
What Programs and Privileges Are
Available to Me as a Shareholder?............... 25
What If My Investment Outlook Changes? -
Exchange Privilege.............................. 27
How Do I Sell Shares?............................ 30
Telephone Transactions........................... 34
How Are Fund Shares Valued?...................... 35
How Do I Get More Information
About My Investment?............................ 35
How Does the Fund
Measure Performance?............................ 36
General Information.............................. 37
Registering Your Account......................... 38
Important Notice Regarding
Taxpayer IRS Certifications..................... 39
Appendix......................................... 39
Expense Table
The purpose of this table is to assist you in understanding the various costs
and expenses that you will bear directly or indirectly in connection with an
investment in the Fund. The figures for both classes of shares are based on the
aggregate operating expenses of the Class I shares for the fiscal year ended
July 31, 1995.
<TABLE>
<CAPTION>
Class I Class II
<S> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price).................................................. 4.50% 1.00%++
Deferred Sales Charge................................................................. NONE+ 1.00%++
Exchange Fee (per transaction)........................................................ $5.00+++ $5.00+++
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees....................................................................... 0.51% 0.51%
12b-1 Fees............................................................................ 0.20%* 1.00%*
Other Expenses:
Shareholder Servicing Costs......................................................... 0.08% 0.08%
Reports to Shareholders............................................................. 0.08% 0.08%
Other............................................................................... 0.08% 0.08%
Total Other Expenses.................................................................. 0.24% 0.24%
Total Fund Operating Expenses......................................................... 0.95% 1.75%
</TABLE>
++Although Class II has a lower front-end sales charge than Class I, over time
the higher Rule 12b-1 fees for Class II may cause you to pay more for Class II
shares than for Class I shares. Given the maximum front-end sales charge and the
rate of Rule 12b-1 fees of each class, it is estimated that this will take less
than six years if you maintain total shares valued at less than $100,000 in the
Franklin Templeton Funds. If your investments in the Franklin Templeton Funds
are valued at $100,000 or more you will reach the crossover point more quickly.
See "How Do I Buy Shares? - Purchase Price of Fund Shares" for the definition of
Franklin Templeton Funds and similar references.
+Class I investments of $1 million or more are not subject to a front-end sales
charge; however, a contingent deferred sales charge of 1% is generally imposed
on certain redemptions within a "contingency period" of 12 months of the
calendar month of such investments. See "How Do I Sell Shares? - Contingent
Deferred Sales Charge."
++Class II shares redeemed within a "contingency period" of 18 months of the
calendar month of such investments are subject to a 1% contingent deferred sales
charge. See "How Do I Sell Shares? - Contingent Deferred Sales Charge."
+++$5.00 fee imposed only on Timing Accounts as described under "What If My
Investment Outlook Changes? - Exchange Privilege." All other exchanges are
processed without a fee.
*The maximum amount of Rule 12b-1 fees allowed pursuant to the Class I
distribution plan is 0.25%. See "Wh Manages the Fund? - Plans of Distribution."
Rule 12b-1 fees for Class II are based on the maximum amount allowed under Class
II's plan of distribution. 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.
You should be aware that the above table is not intended to reflect in precise
detail the fees and expenses associated with an investment in the Fund. Rather,
the table has been provided only to assist you in gaining a more complete
understanding of fees, charges and expenses. For a more detailed discussion of
these matters, you 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 and applicable contingent deferred
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.
<TABLE>
<CAPTION>
One year Three yearsFive years Ten years
<S> <C> <C> <C> <C>
Class I................................... $54* $74 $95 $156
Class II.................................. $38 $65 $104 $214
*Assumes that a contingent deferred sales charge will not apply to Class I
shares.
You would pay the following expenses on the same investment, assuming no
redemption.
One year Three yearsFive years Ten years
<S> <C> <C> <C> <C>
Class II.................................. $28 $65 $104 $214
</TABLE>
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 you as a result of your 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 - How Has the Fund Performed?
Set forth below is a table containing the financial highlights for a share of
each class of the Fund. The information for each of the five fiscal years in the
period ended July 31, 1995 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 July 31, 1995. The remaining
figures, which are also audited, are not covered by the auditors' current
report. See "Reports to Shareholders" under "General Information."
<TABLE>
<CAPTION>
Year Ended July 31,
Class I Shares 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per share Operating
Performance
Net asset value at
beginning of year..... $14.88 $ 15.63 $11.50 $12.71 $13.74 $12.17 $11.79 $17.07 $ 6.64 $8.28
Net investment income.. 0.18 0.19 0.21 0.35 0.35 0.37 0.41 0.49 0.36 0.33
Net realized and
unrealized gains (losses)
on securities......... 0.275 (0.746) 4.147 (1.191) (0.956) 1.681 0.357 (4.845) 10.38 (1.66)
Total from investment
operations............ 0.455 (0.556) 4.357 (0.841) (0.606) 2.051 0.767 (4.355) 10.74 (1.33)
Less distributions from:
Net investment income. (0.203) (0.194) (0.227) (0.369) (0.334) (0.481) (0.387) (0.530) (0.310) (0.310)
Realized capital gains - - - - (0.090) - - (0.395) - -
In excess of net
investment income..... (0.062) - - - - - - - - -
Total distributions.... (0.265) (0.194) (0.227) (0.369) (0.424) (0.481) (0.387) (0.925) (0.310) (0.310)
Net asset value at
end of year........... $15.07 $14.88 $15.63 $11.50 $12.71 $13.74 $12.17 $11.79 $17.07 $6.64
Total Return*.......... 3.14% (3.52)% 38.56% (6.87)% (4.01)% 16.87% 6.74% (26.16)% 164.92% (16.85)%
Ratios/Supplemental Data
Net assets at end of year
(in 000's)............ $391,966 $418,698 $394,704 $257,888 $277,397 $330,950 $275,341 $278,743 $350,580 $91,520
Ratio of expenses to
average net assets.... 0.95% 0.81% 0.62%+ 0.31%+ 0.75% 0.75% 0.78% 0.76% 0.84% 1.05%
Ratio of net investment
income to average
net assets............ 1.20% 1.30% 1.89% 2.99% 2.78% 2.72% 3.56% 3.72% 3.33% 4.28%
Portfolio turnover rate 6.36% 1.46% 1.62% 0.26% 0.53% 2.98% 2.62% 7.27% 10.09% 2.90%
</TABLE>
*Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum initial sales
charge or the contingent deferred sales charge. Prior to May 1, 1994, the total
return for Class I shares assumed reinvestment of dividend at 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 for Class I shares, as
discussed in Note 5 to the financial statements in the Fund's Annual Report to
Shareholders dated July 31, 1995, the existing sales charge on reinvested
dividends was eliminated.
+During the years indicated, the investment manager agreed in advance to waive a
portion of its management fees incurred by the Fund. Had such action not been
taken, the ratios of operating expenses to average net assets for the years
ended July 31, 1993 and 1992 would have been .75% and .77%, respectively.
Period Ended
Class II Shares July 31, 1995++
Per Share Operating Performance**
Net asset value at beginning of period........................... $15.02
Net investment income............................................ 0.12
Net realized and unrealized gain on securities................... 0.092
Total from investment operations................................. 0.212
Less distributions:
From net investment income...................................... (0.120)
In excess of net investment income.............................. (0.062)
Total Distributions.............................................. (0.182)
Net asset value at end of period................................. $15.05
Total Return*.................................................... 1.45%
Ratios/Supplemental Data
Net assets at end of year (in 000s).............................. $3,104
Ratio of expenses to average net assets.......................... 1.73%++
Ratio of net investment income to average net assets............. 0.33%++
Portfolio turnover rate.......................................... 6.36%
*Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum initial sales
charge or the contingent deferred sales charge. Prior to May 1, 1994, the total
return for Class I shares assumed reinvestment of dividends at 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 for Class I shares, the sales
charge on reinvested dividends was eliminated.
**Per share amounts have been calculated using the daily average shares
outstanding during the period.
++Annualized
++For the period May 1, 1995 (effective date) to July 31, 1995.
What Is the Franklin Gold Fund?
Franklin Gold Fund, which changed its name from Research Capital Fund in October
1983, is a diversified, open-end management investment company, commonly called
a "mutual fund." The Fund was organized as a California corporation in 1968 and
registered with the SEC under the Investment Company Act of 1940, as amended
(the "1940 Act"). The Fund has two classes of shares of capital stock
("multiclass" structure) with a par value of $.10: Franklin Gold Fund - Class I
and Franklin Gold Fund - Class II. All Fund shares outstanding before May 1,
1995, have been redesignated as Class I shares, and will retain their previous
rights and privileges, except for legally required modifications to shareholder
voting procedures, as discussed in "General Information - Organization and
Voting Rights."
You may purchase shares of the Fund (minimum investment of $100 initially and
$25 thereafter) at the current public offering price. The current public
offering price of the Class I shares is equal to the net asset value (see "How
Are Fund Shares Valued?" in this Prospectus and the SAI), plus a variable sales
charge not exceeding 4.50% of the offering price depending upon the amount
invested. The current public offering price of the Class II shares is equal to
the net asset value, plus a sales charge of 1% of the amount invested. See "How
Do I Buy Shares?"
How Does the Fund Invest Its Assets?
The Fund's principal investment objective is capital appreciation. The Fund
seeks to attain this objective by purchasing securities with the potential to
increase in value, so that its own shares will in turn increase in value. The
Fund's secondary objective is to provide current income through the receipt of
dividends or interest from its investments. The payment of dividends may be a
consideration when the Fund purchases securities. These investment objectives
are fundamental policies of the Fund and may not be changed without shareholder
approval. Any such change may result in the Fund having investment objectives
different from the objectives you considered appropriate at the time of your
investment in the Fund.
Because the principal investment objective of the Fund is capital appreciation,
the Fund may invest in securities which are subject to a greater degree of risk
than less volatile securities, if it is felt that the risk is justified by the
potential for appreciation. As in any other investment, there is no assurance
that the Fund's objectives will be achieved.
In seeking to achieve its objectives, the Fund has adopted a fundamental policy
of concentrating its investments in securities of issuers engaged in mining,
processing or dealing in gold or other precious metals, such as silver, platinum
and palladium, which means that the Fund will invest at least 25% of its total
assets in such securities. Under normal circumstances, at least 65% of the value
of the Fund's total assets will be invested in securities of issuers engaged in
gold operations, including securities of gold mining finance companies, as well
as operating companies with long-, medium- or short-life mines.
The Fund anticipates that it will normally invest in common stocks and
securities convertible into common stocks, such as convertible preferred,
convertible debentures, convertible rights and warrants (to the extent
permissible by the Fund's investment policies), and sponsored or unsponsored
American Depositary Receipts ("ADRs") for those securities, all of which may be
traded on a securities exchange or over-the-counter. In seeking income or
appreciation or in times when it is felt that a conservative or temporary
defensive investment policy is in order, the Fund may also purchase preferred
stocks and debt securities, such as notes, bonds, debentures or commercial paper
(short-term debt securities of large corporations), any of which may or may not
be rated by recognized securities rating agencies. In addition, the Fund's
investments in fixed income and convertible securities which are rated or
unrated but deemed equivalent to comparable rated securities, may be below
investment grade (i.e. below BBB by Standard & Poor's Corporation or Baa by
Moody's Investors Service) at the time of purchase. In those circumstances, the
Fund may also place some of its cash reserves in securities of the U.S.
government and its agencies, various bank debt instruments, or repurchase
agreements collateralized by such securities.
Of course, there are risks involved in all investments and an investment in
shares of the Fund is no exception. Because the value of Fund shares fluctuates,
the value of an account may at any time be more or less than its cost. Due to
the Fund's policy of concentrating its investments in gold and precious
metal-related issuers, investments in the Fund's shares may involve special
considerations, including: fluctuations in the price of gold; the potential
effect of the concentration of the sources of supply of gold and control over
the sale of gold; changes in U.S. or foreign tax, currency or mining laws;
increased environmental costs; and unpredictable monetary policies and economic
and political conditions. Also, even companies with strong balance sheets may be
adversely impacted by lower profitability from lower gold prices.
Foreign Securities. Because of the Fund's policy of investing primarily in
securities of companies engaged in gold mining, a substantial part of the Fund's
assets is generally invested in securities of companies domiciled or operating
in one or more foreign countries. The Fund generally has invested more than 50%
of its total assets in the securities of corporations located outside the United
States. While the Fund intends to acquire securities of foreign issuers only
where there are public trading markets for such securities, such investments may
tend to reduce the liquidity of the Fund's portfolio in the event of internal
problems in such foreign countries or deteriorating relations between the United
States and such countries. Due to current internal conditions in South Africa,
the Fund's indirect investments in that country, which constituted approximately
31.6% of the Fund's portfolio as of July 31, 1995, may be subject to somewhat
greater risk than an investment in a country with a more stable political
profile.
When purchasing foreign securities, the Fund will ordinarily purchase securities
which are traded in the United States or purchase sponsored or unsponsored 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.
A sponsored ADR is an ADR in which establishment of the issuing facility is
brought about by the participation of the issuer and the depository institution
pursuant to a deposit agreement which sets out the rights and responsibilities
of the issuer, the depository and the ADR holder. Under the terms of most
sponsored arrangements, depositories agree to distribute notices of shareholder
meetings and voting instructions, thereby ensuring that ADR holders will be able
to exercise voting rights through the depository with respect to the deposited
securities. An unsponsored ADR has no sponsorship by the issuing facility and
more than one depository institution may be involved in the issuance of the
unsponsored ADR. An unsponsered ADR typically clears through The Depository
Trust Company and therefore, there should be no additional delays in selling the
security or in obtaining dividends as a result of the security being
unsponsored. Although not required, the depository normally requests a letter of
non-objection from the issuer. The issuers of unsponsored ADRs are not obligated
to disclose material information in the United States and, therefore, there may
be less information available to the investing public than with sponsored ADRs.
The investment manager will attempt to independently accumulate and evaluate
information with respect to the issuers of the underlying securities of
sponsored and unsponsored ADRs to attempt to limit the Fund's exposure to the
market risk associated with such investments. In addition, the depository is not
required to distribute notices of shareholder's meetings or financial
information to the purchaser. The Fund may also purchase the securities of
foreign issuers directly in foreign markets so long as, in the investment
manager's judgment, an established public trading market exists (that is, there
are a sufficient number of shares traded regularly relative to the number of
shares to be purchased by the Fund).
Investment in the Fund's shares requires consideration of certain factors that
are not normally involved in investments solely in U.S. securities. Among other
things, the financial and economic policies of some foreign countries in which
the Fund may invest are not as stable as in the United States. Furthermore,
foreign issuers are not generally subject to uniform accounting, auditing and
financial standards and requirements comparable to those applicable to U.S.
corporate issuers. There may also be less government supervision and regulation
of foreign securities exchanges, brokers and issuers than exist in the United
States. Restrictions and controls on investment in the securities markets of
some countries may have an adverse effect on the availability and costs to the
Fund of investments in those countries. In addition, there may be the
possibility of expropriations, foreign withholding taxes, confiscatory taxation,
political, economic or social instability or diplomatic developments which could
affect assets of the Fund invested in issuers in foreign countries.
There may be less publicly available information about foreign issuers than is
contained in reports and reflected in ratings published for U.S. issuers.
Foreign securities markets generally have substantially less volume than the New
York Stock Exchange and some foreign government securities may be less liquid
and more volatile than U.S. government securities. Transaction costs on foreign
securities exchanges may be higher than in the United States, and foreign
securities settlements may, in some instances, be subject to delays and related
administrative uncertainties. The holding of foreign securities, however, may be
limited by the Fund to avoid investment in certain Passive Foreign Investment
Companies ("PFIC") and the imposition of a PFIC tax on the Fund resulting from
such investments.
While the Fund invests in foreign securities, it is generally not its intention
to invest in foreign equity securities of issuers which meet the U.S. tax
definition of a PFIC. To the extent that the Fund makes such an investment,
however, the Fund may be subject to both an income tax and an additional tax in
the form of an interest charge with respect to such investment. To the extent
possible, the Fund will avoid such taxes by not investing in PFIC securities or
by adopting other tax strategies for any PFIC securities it does purchase.
For further details regarding the Fund's investments in the securities of
foreign issuers, please see "How Does the Fund Invest Its Assets?" in the SAI.
Convertible Securities. The Fund may invest in debt obligations and preferred
stocks which are convertible within a specified period of time into a certain
quantity of the common stock of the same or a different issuer. A convertible
security may be called by the issuer but only after a specified date and under
circumstances established at the time the security is issued. Convertible
securities provide a fixed-income stream and the opportunity, through their
conversion feature, to participate in any capital appreciation resulting from a
market price advance in the convertible security's underlying common stock.
Holders of a convertible security will have recourse only to the issuer of the
security which will be either an operating company or an investment bank.
Because convertible securities have features of both common stocks and
fixed-income securities, their value can be influenced by both interest rate and
market movements. As with fixed-income securities, a convertible security tends
to increase in market value when interest rates decline and decrease in value
when interest rates rise. 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.
When issued by an operating company, a convertible security tends to be senior
to common stock, but at the same time is often subordinate to other types of
fixed-income securities issued by the respective company. When convertible
securities issued by operating companies are converted, the operating company
typically issues new common stock to the holder of the security. However, if the
security is called by the issuer and the parity price of the convertible
security is less than the call price, the operating company will often pay out
cash instead of common stock. If the security is issued by an investment bank,
the security is an obligation of and is also convertible through such investment
bank.
Convertible preferred stocks are equity securities. Like common stocks,
preferred stocks are subordinated to all debt obligations in the event of
insolvency, and an issuer's failure to make a dividend payment is generally not
an event of default entitling the preferred shareholder to take action.
Preferred stocks generally have no maturity date, and they pay dividends, rather
than interest payments. For more information on convertible securities,
including enhanced convertible securities and liquidity matters regarding these
securities, please see the SAI.
Options, Futures, Options on Financial Futures and Forward Foreign Currency
Exchange Contracts. As more fully discussed in the SAI, the Fund may enter into
options (including writing covered call options), futures, options on financial
futures and forward foreign currency exchange contracts. Transactions in
options, futures, options on futures and forward foreign currency exchange
contracts are generally 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
primary investment objective and not for speculation. For state law purposes,
the Fund will commit no more than 5% of its assets to premiums when purchasing
put options.
Repurchase Transactions. 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 of Directors and will be held pursuant to a written agreement.
Illiquid Investments and General Matters. It is the policy of the Fund that
repurchase agreements having maturities longer than seven days and securities
subject to legal or contractual restrictions on resale or for which there are no
readily available market quotations may not constitute, at the time of purchase,
more than 10% of the value of the total net assets of the Fund.
The Fund's policies allow it to invest in gold bullion and foreign currency in
the form of gold coins, and to make loans of its portfolio securities under
certain circumstances. These investment techniques have not been used recently,
but remain available in the event it is determined that they could help the Fund
achieve its objectives, subject to diversification restrictions discussed in the
SAI.
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 "How Does the Fund Invest
Its Assets?" and "Investment Restrictions" in the SAI.
Risk Factors Relating to the Fund's
Investments in Lower-Rated Securities
The Fund's investments in securities rated below investment grade and in unrated
securities of comparable quality (referred to in this discussion as
"lower-rated" securities) have credit characteristics similar to lower-rated
bonds. The market values of lower-rated securities tend to reflect individual
corporate developments to a greater extent than do higher-rated securities,
which react primarily to fluctuations in the general level of interest rates.
Such lower-rated securities also tend to be more sensitive to economic
conditions than higher-rated securities. Even securities rated BBB or Baa by
Standard & Poor's Corporation ("S&P") and Moody's Investors Service ("Moody's"),
respectively, which are considered investment grade, possess some speculative
characteristics.
Companies that issue lower-rated, convertible and debt securities are often
highly leveraged and may not have more traditional methods of financing
available to them. Therefore, the risk associated with acquiring the securities
of such issuers is generally greater than is the case with higher-rated
securities.
The Fund may have difficulty disposing of certain lower-rated securities because
there may be a thin trading market for a particular security at any given time.
The market for lower-rated convertible and debt securities generally tends to be
concentrated among a smaller number of dealers than is the case for securities
which trade in a broader secondary retail market. Generally, purchasers of these
securities are predominantly dealers and other institutional buyers, rather than
individuals. To the extent the secondary trading market for a particular high
yielding, fixed-income security does exist, it is generally not as liquid as the
secondary market for higher-rated securities. Reduced liquidity in the secondary
market may have an adverse impact on market price and the Fund's ability to
dispose of particular issues, 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.
Current values for these lower-rated issues are obtained from pricing services
and/or a limited number of dealers and may be based upon factors other than
actual sales.
The Fund is authorized to acquire lower-rated securities that are sold without
registration under the federal securities laws and therefore carry restrictions
on resale. While many recent lower-rated securities have been sold with
registration rights, covenants and penalty provisions for delayed registration,
if the Fund is required to sell such restricted securities before the securities
have been registered, it may be deemed an underwriter of such securities as
defined in the Securities Act of 1933, which entails special responsibilities
and liabilities. The Fund may incur special costs in disposing of such
securities; however, the Fund will generally incur no costs when the issuer is
responsible for registering the securities.
The Fund may acquire lower-rated convertible and debt securities during an
initial underwriting. Such securities involve special risks because they are new
issues. The Fund has no arrangement with its underwriters or any other person
concerning the acquisition of such securities, and the investment manager will
carefully review the credit and other characteristics pertinent to such new
issues.
How You 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
you own will increase. If the securities owned by the Fund decrease in value,
the value of your shares will also decline. In this way, you 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, you may anticipate that the value of Fund
shares will fluctuate with movements in the broader equity and bond markets. A
decline in the stock market of any country in which the Fund is invested may
also be reflected in declines in the Fund's share price. Changes in currency
valuations will also affect the price of Fund shares. History reflects both
decreases and increases in worldwide stock markets and currency valuations, and
these may reoccur unpredictably in the future.
Who Manages the Fund?
The Board of Directors (the "Board") 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.
The Board has carefully reviewed the multiclass structure to ensure that no
material conflict exists between the two classes of shares. Although the Board
does not expect to encounter material conflicts in the future, the Board will
continue to monitor the Fund and will take appropriate action to resolve such
conflicts if any should arise.
In developing the multiclass structure, the Fund has retained the authority to
establish additional classes of shares. It is the Fund's present intention to
offer only two classes of shares, but new classes may be offered in the future.
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 subsidiaries (the "Franklin Templeton Group"). Advisers acts as
investment manager or administrator to 34 U.S. registered investment companies
(116 separate series) with aggregate assets of over $77 billion.
The team responsible for the day-to-day management of the Fund's portfolio is:
R. Martin Wiskemann since 1972, Suzanne Willoughby Killea since January 1994 and
Shan C. Green since June 1994.
R. Martin Wiskemann
Senior Vice President and Portfolio Manager, Advisers
Mr. Wiskemann holds a degree in business administration from the Handelsschule
of the State of Zurich, Switzerland. He has been in the securities industry for
more than 30 years, managing mutual fund equity and fixed-income portfolios and
private investment accounts. He has been with Advisers or an affiliate since
1972. Mr. Wiskemann is a member of several securities industry-related
associations.
Suzanne Willoughby Killea
Portfolio Manager, Advisers
Ms. Killea holds a Master of Business Administration degree from Stanford
University and a Bachelor of Arts degree from Princeton University. She has been
with Advisers or an affiliate since earning her MBA degree in 1991. She is a
member of several securities industry-related associations.
Shan C. Green
Portfolio Manager, Advisers
Ms. Green holds a Master of Business Administration degree from the University
of California at Berkeley. She earned her Bachelor of Science degree from State
University of New York at Stony Brook. Ms. Green has been with Advisers or an
affiliate since 1994.
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 July 31, 1995, management fees totaling 0.51% 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 "How
Does the Fund Purchase Securities For Its Portfolio?" 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 July 31, 1995, expenses borne by Class I and Class
II shares of the Fund, including fees paid to Advisers and to Investor Services,
totaled 0.95% and 1.75%, respectively, of the average monthly net assets of such
class.
Plans of Distribution
A separate plan of distribution has been approved and adopted for each class
("Class I Plan" and "Class II Plan," respectively, or "Plan(s)") pursuant to
Rule 12b-1 under the 1940 Act. The Rule 12b-1 fees charged to each class are
based solely on the distribution and, with respect to the Class II Plan,
servicing fees attributable to that particular class. Under either Plan, the
portion of fees remaining after payment to securities dealers or others for
distribution or servicing may be paid to Distributors for routine ongoing
promotion and distribution expenses incurred with respect to such class. 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.
The maximum amount which the Fund may reimburse to Distributors or others under
the Class I Plan for such distribution expenses is 0.25% per annum of Class I's
average daily net assets, payable on a quarterly basis. All expenses of
distribution in excess of 0.25% per annum will be borne by Distributors, or
others who have incurred them, without reimbursement from the Fund.
Under the Class II Plan, the Fund pays to Distributors distribution and related
expenses up to 0.75% per annum of Class II's average daily net assets, payable
quarterly. Such fees may be used in order to compensate Distributors or others
for providing distribution and related services and bearing certain expenses of
the class. All expenses of distribution, marketing and related services over
that amount will be borne by Distributors or others who have incurred them,
without reimbursement by the Fund. In addition, the Class II Plan provides for
an additional payment by the Fund of up to 0.25% per annum of Class II's average
daily net assets as a servicing fee, payable quarterly. This fee will be used to
pay securities dealers or others for, among other things, assisting in
establishing and maintaining customer accounts and records; assisting with
purchase and redemption requests; receiving and answering correspondence;
monitoring dividend payments from the Fund on behalf of customers, or similar
activities related to furnishing personal services and/or maintaining
shareholder accounts.
Either Distributors or one of its affiliates may pay, from its own resources, a
commission of up to 1% of the amount invested to securities dealers who initiate
and are responsible for purchases of Class II shares. During the first year
following the purchase of Class II shares, Distributors will retain a portion of
Class II's Rule 12b-1 fees equal to 0.75% per annum of Class II's average daily
net assets to partially recoup fees Distributors pays to securities dealers in
connection with initial purchases of Class II shares.
Both Plans cover 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 Plans are included in the maximum
operating expenses which may be borne by each class of the Fund. For more
information, including a discussion of the Board's policies with regard to the
amount of the Class I Plan's fees, please see "The Fund's Underwriter" in the
SAI.
What Distributions Might I Receive from the Fund?
You may receive two types of distributions from the Fund:
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 once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed net capital gains from the prior fiscal year. 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 these distributions for
operational or other reasons.
Distributions To Each Class of Shares
According to the requirements of the Internal Revenue Code of 1986, as amended
(the "Code"), dividends and capital gains will be calculated and distributed in
the same manner for Class I and Class II shares. The per share amount of any
income dividends will generally differ only to the extent that each class is
subject to different Rule 12b-1 fees.
Distribution Date
Although subject to change by the Board, without prior notice to or approval by
shareholders, the Fund's current policy is to declare regular semiannual income
dividends in May and November for shareholders of record on the last business
day of that month, payable on or about the 15th day of the following 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. 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, you must have acquired Fund shares prior
to the close of business on the record date. If you are considering purchasing
Fund shares shortly before the record date of a distribution, you 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 your investment, it may be taxable as
dividend income or capital gain.
Distribution Options
You may choose to receive your distributions from the Fund in any of these ways:
1. Purchase additional shares of the Fund - You may purchase additional shares
of the same class of the Fund (without a sales charge or imposition of a
contingent deferred sales charge) by reinvesting capital gain distributions, or
both dividend and capital gain distributions. If you are a Class II shareholder,
you may also reinvest your distributions in Class I shares of the Fund. This is
a convenient way to accumulate additional shares and maintain or increase your
earnings base.
2. Purchase shares of other Franklin Templeton Funds - You may direct your
distributions to purchase the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a contingent deferred sales
charge). If you are a Class II shareholder, you may also direct your
distributions to purchase Class I shares of another Franklin Templeton Fund.
Many shareholders find this a convenient way to diversify their investments.
3. Receive distributions in cash - You may choose to receive dividends, or both
dividend and capital gain distributions in cash. You may have the money sent
directly to you, to another person, or to a checking account. If you choose to
send the money to a checking account, please see "Electronic Fund Transfers"
under "What Programs and Privileges Are Available to Me as a Shareholder?"
To select one of these options, please complete sections 6 and 7 of the
shareholder application included with this Prospectus or tell your investment
representative which option you prefer. If no option is selected, dividend and
capital gain distributions will be automatically reinvested in the same class of
the Fund. You may change the distribution option selected at any time by
notifying the Fund by mail or by telephone. Please allow at least seven days
prior to the record date for the Fund to process the new option.
How Taxation Affects You and the Fund
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For additional information on tax matters
relating to the Fund and its shareholders see "Additional Information Regarding
Taxation" in the SAI.
The Fund intends to continue to qualify for treatment as a regulated investment
company under Subchapter M of the Code. By distributing all of its net
investment income, net foreign currency gains recharacterized as ordinary income
and net realized short-term and long-term capital gain for a fiscal year in
accordance with the timing requirements imposed by the Code and by 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 you receive 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 you have 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 are treated as long-term capital gain for purposes of
computing your income taxes regardless of the length of time you have 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 you
until the following January, will be treated for tax purposes as if received by
you on December 31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on the sale or exchange of Fund
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.
It is anticipated that only a small portion, if any, of the Fund's dividends
during the current fiscal year will qualify for the corporate dividends-received
deduction because of the Fund's level of investment in securities of foreign
corporations. To the extent that the Fund pays dividends which qualify for this
deduction, the availability of the deduction is subject to certain holding
period and debt financing restrictions imposed under the Code on the corporation
claiming the deduction. These restrictions are discussed in the SAI.
The Fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of the total assets of the Fund at the
end of its fiscal year are invested in securities of foreign corporations, the
Fund may elect to pass through to its shareholders the pro rata share of foreign
taxes paid by the Fund. If this election is made, you will be (i) required to
include in your gross income your pro rata share of foreign source income
(including any foreign taxes paid by the Fund), and (ii) entitled to either
deduct your share of such foreign taxes in computing your taxable income or to
claim a credit for such taxes against your U.S. income tax, subject to certain
limitations under the Code. You will be informed by the Fund at the end of each
calendar year regarding the availability of any credits and the amount of
foreign source income (including any foreign taxes paid by the Fund) to be
included in your income tax returns. You should consult your tax advisor as to
the availability of foreign tax payments as deductions on your tax return.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of such dividends
and distributions.
If you are not a U.S. person for purposes of federal income taxation you should
consult with your financial or tax advisors regarding the applicability of U.S.
withholding or other taxes to distributions received by you from the Fund and
the application of foreign tax laws to these distributions.
You should also consult your tax advisors with respect to the tax consequences
of a redemption or exchange of Fund shares or the applicability of any state and
local intangible property or income taxes on your shares of the Fund and
distributions and redemption proceeds received from the Fund.
How Do I Buy Shares?
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors. The use of the term "securities dealer"
shall include other financial institutions which, either directly or through
affiliates, have an agreement with Distributors to 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.
Differences Between Class I and Class II
Class I and Class II shares differ in the amount of their front-end sales
charges and Rule 12b-1 fees as well as the circumstances under which the
contingent deferred sales charge applies. Generally, Class I shares have higher
front-end sales charges than Class II shares and comparatively lower Rule 12b-1
fees. Voting rights of each class will be the same on matters affecting the Fund
as a whole, but each class will vote separately on matters affecting only
shareholders of that class. See "General Information - Organization and Voting
Rights."
Class I. All Fund shares outstanding before the implementation of the multiclass
structure have been redesignated as Class I shares, and will retain their
previous rights and privileges. Class I shares are generally subject to a
variable sales charge upon purchase and may be purchased at a reduced front-end
sales charge or at net asset value if certain conditions are met. In most
circumstances, contingent deferred sales charges will not be assessed against
redemptions of Class I shares. Class I shares are subject to Rule 12b-1 fees of
up to a maximum 0.25% per annum of the average daily net assets of the class.
See "Who Manages the Fund?" and "How Do I Sell Shares?" for more information.
Class II. Class II shares are subject to a front-end sales charge of 1% of the
amount invested and a contingent deferred sales charge of 1% if shares are
redeemed within 18 months of the calendar month of purchase. In addition, Class
II shares are subject to Rule 12b-1 fees of up to a maximum of 1% per annum of
the average daily net assets of Class II shares, 0.75% of which will be retained
by Distributors during the first year of investment.
Deciding Which Class to Purchase
You should carefully evaluate your anticipated investment amount and time
horizon prior to determining which class of shares to purchase. Generally, if
you expect to invest less than $100,000 in the Franklin Templeton Funds and to
make substantial redemptions within approximately six years or less of
investment, you should consider purchasing Class II shares. However, the higher
annual Rule 12b-1 fees on Class II shares will result in higher operating
expenses (which will accumulate over time to outweigh the difference in
front-end sales charges) and lower income dividends for Class II shares. For
this reason, Class I shares may be more attractive to you if you plan to invest
in the Fund over the long-term, even if no sales charge reductions are available
to you.
If you qualify to purchase Class I shares at reduced sales charges, you should
seriously consider purchasing Class I shares, especially if you intend to hold
your shares approximately six years or more. If you qualify to purchase Class I
shares at reduced sales charges but intend to hold your shares less than
approximately six years, you should evaluate whether it is more economical to
purchase Class I shares through a Letter of Intent or under Rights of
Accumulation or other means, rather than purchasing Class II shares. If you are
investing $1 million or more in a single payment or you qualify to purchase
Class I shares at net asset value you may not purchase Class II shares. See
"Purchases at Net Asset Value" and "Description of Special Net Asset Value
Purchases" below for a discussion of when shares may be purchased at net asset
value.
Each class represents the same interest in the investment portfolio of the Fund
and has the same rights, except that each class has a different front-end sales
charge, bears the separate expenses of its Rule 12b-1 distribution plan, and has
exclusive voting rights with respect to such plan. The two classes also have
separate exchange privileges.
Purchases of Class II shares are limited to purchases below $1 million. Any
purchase of $1 million or more will automatically be invested in Class I shares,
since that is considered more beneficial to you. Such purchases, however, may be
subject to a contingent deferred sales charge. You may exceed $1 million in
Class II shares by cumulative purchases over a period of time. If you intend to
make investments exceeding $1 million, however, you should consider purchasing
Class I shares through a Letter of Intent, instead of purchasing Class II
shares.
Each class has a separate schedule for compensating securities dealers for
selling Fund shares. You should take all of the factors regarding an investment
in each class into account before deciding which class of shares to purchase.
There are no conversion features attached to either class of shares.
Purchase Price of Fund Shares
When placing purchase orders, you should clearly indicate which class of shares
you intend to purchase. A purchase order that fails to specify a class will
automatically be invested in Class I shares.
Shares of both classes of the Fund are offered at their respective public
offering prices, which are determined by adding the net asset value per share
plus a front-end sales charge, next computed (1) after your securities dealer
receives the order which is promptly transmitted to the Fund, or (2) after
receipt of an order by mail from you directly in proper form (which generally
means a completed Shareholder Application accompanied by a negotiable check).
Class I. The sales charge for Class I shares 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 "How Are Fund Shares Valued?"
Set forth below is a table showing front-end sales charges and dealer
concessions for Class I shares.
<TABLE>
<CAPTION>
Total Sales Charge
As a Dealer Concession
Size of Transaction As a Percentage Percentage of Net As a Percentage
at Offering Price of Offering Price Amount Invested of Offering Price*
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 or more None None (see below)**
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. 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 under the Securities Act of 1933, as amended.
**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% 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. Dealer
concession breakpoints are reset every 12 months for purposes of additional
purchases.
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 investments of $1 million or more within the contingency period.
See "How Do I Sell Shares? - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Class I shares is determined by adding the amount of your current
purchase plus the cost or current value (whichever is higher) of your existing
investments in one or more of the funds in the Franklin Group of Funds(R) 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, 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
Fund(s)." 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.
Other Payments to Securities Dealers. Either 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
"Description of Special Net Asset Value Purchases" below and "How Do I Buy and
Sell Shares?" in the SAI.
Class II. Unlike Class I shares, the front-end sales charges and dealer
concessions for Class II shares do not vary depending on the amount of purchase,
as indicated in the table below.
<TABLE>
<CAPTION>
Total Sales Charge
As a Dealer Concession
Size of Transaction As a Percentage Percentage of Net As a Percentage
at Offering Price of Offering Price Amount Invested of Offering Price*
<S> <C> <C> <C>
Any amount (less than $1 million) 1.00% 1.01% 1.00%
</TABLE>
*Either Distributors or one of its affiliates may make additional payments to
securities dealers, out of its own resources, of up to 1% of the amount
invested. During the first year following a purchase of Class II shares,
Distributors will keep a portion of the Rule 12b-1 fees assessed to those shares
to partially recoup fees Distributors pays to securities dealers.
Class II shares redeemed within 18 months of their purchase will be assessed a
contingent deferred sales charge of 1% on the lesser of the then-current net
asset value or the net asset value of such shares at the time of purchase,
unless such charge is waived as described under "How Do I Sell Shares? -
Contingent Deferred Sales Charge."
Either 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 and payments made 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. Securities 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.
Additional terms concerning the offering of the Fund's shares are included in
the SAI under "How Do I Buy and Sell Shares?"
Certain officers and directors of the Fund are also affiliated with
Distributors. A detailed description is included under "Officers and Directors"
in the SAI.
Quantity Discounts in Sales Charges -
Class I Shares Only
Class I 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,
you or your securities dealer should notify Distributors at the time of each
purchase of shares which qualifies for the reduction. In determining whether a
purchase qualifies for a discount, an investment in any of the Franklin
Templeton Investments may be combined with those of your spouse, children under
the age of 21 and grandchildren under the age of 21. The value of Class II
shares you own may also be included for this purpose.
In addition, an investment in Class I shares 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. You may immediately qualify for a reduced sales charge on a
purchase of Class I shares by completing the Letter of Intent section of the
Shareholder Application (the "Letter"). By completing the Letter, you (i)
express 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, (ii) grant
to Distributors a security interest in the reserved shares discussed below, and
(iii) irrevocably appoint 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 22d-1 under the 1940 Act. You or your securities
dealer must inform Investor Services or Distributors that this Letter is in
effect each time a purchase is made.
You acknowledge and agree 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 Class I shares
registered in your 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 you have
directed. You will not be able to dispose of the reserved shares until the
Letter has been completed or the higher sales charge paid. This policy of
reserving shares does not apply to certain benefit plans described under
"Description of Special Net Asset Value Purchases." For more information, see
"How Do I Buy and Sell Shares?" in the SAI.
Although the sales charges on Class II shares cannot be reduced through these
programs, the value of Class II shares you own may be included in determining a
reduced sales charge to be paid on Class I shares pursuant to the Letter of
Intent and Rights of Accumulation programs.
Group Purchases of Class I Shares
If you are a member of a qualified group you may purchase Class I 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 members of 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 you select a payroll deduction plan, subsequent investments will be automatic
and will continue until such time as you notify the Fund and your 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
Class I shares may be purchased without the imposition of 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 investments made by such
parties after cessation of employment; (2) companies exchanging shares or
selling assets pursuant to a merger, acquisition or exchange offer; (3) accounts
managed by the Franklin Templeton Group; (4) certain unit investment trusts and
unit holders of such trusts reinvesting their distributions from the trusts in
the Fund; (5) registered securities dealers and their affiliates, for their
investment account only; (6) current employees of securities dealers and their
affiliates and by their family members, in accordance with the internal policies
and procedures of the employing securities dealer and affiliate; (7) insurance
company separate accounts for pension plan contracts; and (8) 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.
For either Class I or Class II, the same class of shares of the Fund may be
purchased at net asset value by persons who have redeemed, within the previous
365 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. If a different class of shares is
purchased, the full front-end sales charge must be paid at the time of purchase
of the new shares. Under this privilege, you 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. Matured shares will be reinvested at net
asset value and will not be subject to a new contingent deferred sales charge.
Shares of the Fund redeemed in connection with an exchange into another fund
(see "What If My Investment Outlook Changes? - 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 365 days after the
redemption. The 365 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 you 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 under "Additional Information Regarding Taxation" in the SAI.
For either Class I or Class II, the same class of shares of the Fund or of
another of the Franklin Templeton Funds may be purchased at net asset value and
without a contingent deferred sales charge by persons who have received
dividends and capital gain distributions from investments in that class of
shares of the Fund within 365 days of the payment date of such distribution.
Class II shareholders may also direct such distributions for investment at net
asset value in a Class I Franklin Templeton Fund. 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 "Distribution Options" under "What Distributions Might I
Receive from the Fund?"
Class I shares 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 was subject to a front-end sales charge or a
contingent deferred sales charge and which has investment objectives similar to
those of the Fund.
Class I shares 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 advisors
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).
Class I shares 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 the Fund's
Shareholder Services Agent within 365 days after the plan distribution.
Class I shares 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. In connection with investments by eligible governmental
authorities at net asset value made through a securities dealer who has executed
a dealer agreement with Distributors, either Distributors or one of its
affiliates may make a payment, out of its own resources, to such securities
dealer in an amount not to exceed 0.25% of the amount invested. Contact the
Franklin Templeton Institutional Services Department for additional information.
Description of Special Net Asset Value Purchases
Class I shares 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 of Class I Shares," which enable
Distributors to realize economies of scale in its sales efforts and sales
related expenses.
Class I shares 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 the
amount to be purchased, 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 the 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.
Class I shares 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.
Please see "How Do I Buy and Sell Shares?" in the SAI for further information
regarding net asset value purchases of Class I shares.
How Do I Buy Shares in Connection with
Tax-Deferred Retirement Plans?
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 Trust Company may provide the plan
documents and serve as custodian or trustee. A plan document must be adopted in
order for a retirement plan to be in existence.
Trust Company, an affiliate of Distributors, can serve as custodian or trustee
for retirement plans. Brochures for 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 Trust Company. To obtain a retirement plan brochure or application, call
1-800/DIAL BEN (1-800/342-5236).
Please see "How Do I Sell Shares?" for specific information regarding
redemptions from retirement plan accounts. Specific forms are required to be
completed for distributions from 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 advisors concerning investment decisions within their plans.
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.
What Programs and Privileges Are
Available to Me as a Shareholder?
Certain of the programs and privileges described in this section may not be
available directly from the Fund if your 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 "Registering Your
Account" in this Prospectus).
Share Certificates
Shares from an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in your name 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 you, can be 2% or more of the value of the lost, stolen or
destroyed certificate. A certificate will be issued if requested by you or your
securities dealer.
Confirmations
A confirmation statement will be sent to you semiannually to reflect the
dividends reinvested during the period and after each other transaction which
affects your account. This statement will also show the total number of shares
you own, including the number of shares in "plan balance" for your account.
Automatic Investment Plan
The Automatic Investment Plan offers a convenient way to invest in the Fund.
Under the plan, you can arrange to have money transferred automatically from
your checking account to the Fund each month to purchase additional shares. If
you are interested in this program, please refer to the Automatic Investment
Plan Application at the back of this Prospectus for the requirements of the
program or contact your investment representative. Of course, the market value
of the Fund's shares may fluctuate and a systematic investment plan such as this
will not assure a profit or protect against a loss. You may terminate the
program at any time by notifying Investor Services by mail or by phone.
Systematic Withdrawal Plan
The Systematic Withdrawal Plan allows you to receive regular payments from your
account on a monthly, quarterly, semiannual or annual basis. To establish a
Systematic Withdrawal Plan, the value of your account must be at least $5,000
and the minimum payment amount for each withdrawal must be at least $50. Please
keep in mind that $50 is merely the minimum amount and is not a recommended
amount. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply.
If you would like to establish a Systematic Withdrawal Plan, please complete the
Systematic Withdrawal Plan section of the Shareholder Application included with
this Prospectus and indicate how you would like to receive your payments. You
may choose to receive your payments in any of the following ways:
1. Purchase shares of other Franklin Templeton Funds - You may direct your
payments to purchase the same class of shares of another Franklin Templeton
Fund.
2. Receive payments in cash - You may choose to receive your payments in cash.
You may have the money sent directly to you, to another person, or to a checking
account. If you choose to have the money sent to a checking account, please see
"Electronic Fund Transfers" below.
There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once your plan is established, any distributions paid by the
Fund will be automatically reinvested in your account. Payments under the plan
will be made from the redemption of an equivalent amount of shares in your
account, generally on the first business day of the month in which a payment is
scheduled. You will generally receive your payments within three to five days
after the shares are redeemed.
Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Redemptions under a
Systematic Withdrawal Plan are considered a sale for federal income tax
purposes. Because the amount withdrawn under the plan may be more than your
actual yield or income, part of the payment may be a return of your investment.
While a Systematic Withdrawal Plan is in effect, no share certificates will be
issued. You should ordinarily not make additional investments in the Fund of
less than $5,000 or three times the amount of annual withdrawals under the plan
because of the sales charge on additional purchases. Shares redeemed under the
plan may also be subject to a contingent deferred sales charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may terminate a Systematic Withdrawal Plan, change the amount and schedule
of withdrawal payments, or suspend a payment by notifying Investor Services in
writing at least seven business days prior to the end of the month preceding a
scheduled payment. The Fund may also terminate a Systematic Withdrawal Plan by
notifying you in writing and will automatically terminate a Systematic
Withdrawal Plan if all shares in your account are withdrawn or if the Fund
receives notification of the shareholder's death or incapacity.
Electronic Fund Transfers
You may choose to have distributions from the Fund or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the checking
account is maintained at a bank that is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
you choose this option, please allow at least fifteen days for initial
processing. Any payments made during that time will be sent to the address of
record on your account.
Institutional Accounts
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
the Franklin Templeton Institutional Services Department at 1-800/321-8563.
What If My Investment Outlook Changes? - Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these funds are
offered to the public with a sales charge. If your investment objective or
outlook for the securities markets changes, Fund shares may be exchanged for the
same class of shares of other Franklin Templeton Funds which are eligible for
sale in your state of residence and in conformity with such fund's stated
eligibility requirements and investment minimums. Some funds, however, may not
offer Class II shares. Class I shares may be exchanged for Class I shares of any
of the other Franklin Templeton Funds. Class II shares may be exchanged for
Class II shares of any of the other Franklin Templeton Funds. No exchanges
between different classes of shares will be allowed. 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. Before making an exchange, you should
review the prospectus of the fund you wish to exchange from and the fund you
wish to exchange into for all specific requirements or limitations on exercising
the exchange privilege, for example, limitations on a fund's sale of its shares,
minimum holding periods for exchanges at net asset value, or applicable sales
charges.
You may exchange shares in any of the following ways:
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.
By Telephone
You or your investment representative of record, if any, may exchange shares of
the Fund by calling Investor Services at 1-800/632-2301 or the automated
Franklin TeleFACTS(R) system (day or night) at 1-800/247-1753. If you do not
wish this privilege extended to a particular account, you should notify the Fund
or Investor Services.
The telephone exchange privilege allows you to effect exchanges from the Fund
into an identically registered account of the same class of shares 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 your account. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Please see "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, you should follow the other exchange
procedures discussed in this section, including the procedures for processing
exchanges through securities dealers.
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 "By Telephone" above.
Such a dealer-ordered exchange will be effective only for uncertificated shares
on deposit in your account or for which certificates have previously been
deposited. A securities dealer may charge a fee for handling an exchange.
Additional Information Regarding Exchanges
Exchanges of the same class of shares are made on the basis of the net asset
value of the class involved, except as set forth below. Exchanges of shares of a
class which were purchased without a sales charge will be charged a sales charge
in accordance with the terms of the prospectus of the fund and the class of
shares being purchased, unless the original investment in the Franklin Templeton
Funds was made pursuant to the privilege permitting purchases at net asset
value, as discussed under "How Do I Buy Shares?" Exchanges of Class I shares of
the Fund which were purchased with a lower sales charge into 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.
If you request the exchange of the total value of your 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, you 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 under "Additional Information Regarding Taxation" in the SAI.
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.
Exchanges of Class I Shares
The contingency period during which a contingent deferred sales charge may be
assessed for Class I shares will be tolled (or stopped) for the period such
shares are exchanged into and held in a Franklin or Templeton Class I money
market fund. If a Class I account has shares subject to a contingent deferred
sales charge, Class I shares will be exchanged into the new account on a
"first-in, first-out" basis. See "How Do I Sell Shares? - Contingent Deferred
Sales Charge" for a discussion of investments subject to a contingent deferred
sales charge.
Exchanges of Class II Shares
When an account is composed of Class II shares subject to the contingent
deferred sales charge, and Class II shares that are not, the shares will be
transferred proportionately into the new fund. Shares received from reinvestment
of dividends and capital gains are referred to as "free shares," shares which
were originally subject to a contingent deferred sales charge but to which the
contingent deferred sales charge no longer applies are called "matured shares,"
and shares still subject to the contingent deferred sales charge are referred to
as "CDSC liable shares." CDSC liable shares held for different periods of time
are considered different types of CDSC liable shares. For instance, if you have
$1,000 in free shares, $2,000 in matured shares, and $3,000 in CDSC liable
shares, and you exchange $3,000 into a new fund, $500 will be exchanged from
free shares, $1,000 from matured shares, and $1,500 from CDSC liable shares.
Similarly, if CDSC liable shares have been purchased at different periods, a
proportionate amount will be taken from shares held for each period. If, for
example, you hold $1,000 in shares bought 3 months ago, $1,000 bought 6 months
ago, and $1,000 bought 9 months ago, and you exchange $1,500 into the new fund,
$500 from each of these shares will be deemed exchanged into the new fund.
The only money market fund exchange option available to Class II shareholders is
the Franklin Templeton Money Fund II ("Money Fund II"), a series of the Franklin
Templeton Money Fund Trust. No drafts (checks) may be written on Money Fund II
accounts, nor may you purchase shares of Money Fund II directly. Class II shares
exchanged for shares of Money Fund II will continue to age and a contingent
deferred sales charge will be assessed if CDSC liable shares are redeemed. No
other money market funds are available for Class II shareholders for exchange
purposes. Class I shares may be exchanged for shares of any of the money market
funds in the Franklin Templeton Funds except Money Fund II. Draft writing
privileges and direct purchases are allowed on these other money market funds as
described in their respective prospectuses.
To the extent shares are exchanged proportionately, as opposed to another
method, such as first-in first-out or free-shares followed by CDSC liable
shares, the exchanged shares may, in some instances, be CDSC liable even though
a redemption of such shares, as discussed elsewhere herein, may no longer be
subject to a contingent deferred sales charge. The proportional method is
believed by management to more closely meet and reflect the expectations of
Class II shareholders in the event shares are redeemed during the contingency
period. For federal income tax purposes, the cost basis of shares redeemed or
exchanged is determined under the Code without regard to the method of
transferring shares chosen by the Fund.
Retirement Plan Accounts
Franklin Templeton IRA and 403(b) retirement plan accounts may exchange shares
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
exchange 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, (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.
Your 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, as indicated under "How Do I Buy Shares?" reserve the
right to refuse any order for the purchase of shares.
Transfers
Transfers between identically registered accounts in the same fund and class are
treated as non-monetary and non-taxable events, and are not subject to a
contingent deferred sales charge. The transferred shares will continue to age
from the date of original purchase. Shares of each class will be transferred on
the same basis as described above for exchanges.
Conversion Rights
It is not presently anticipated that Class II shares will be convertible to
Class I shares. You may, however, sell Class II shares and use the proceeds to
purchase Class I shares, subject to all applicable sales charges.
How Do I Sell Shares?
You may liquidate your shares at any time and receive from the Fund the value of
the shares. You may redeem shares in any of the following ways:
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. You will then receive from the Fund the
value of the class of shares redeemed based upon the net asset value per share
(less a contingent deferred sales charge, if applicable) 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 will
receive the price calculated on the following business day. The net asset value
per share of each class is determined as of the scheduled close of the New York
Stock Exchange (the "Exchange") (generally 1:00 p.m. Pacific time), each day
that the Exchange is open for trading. You are requested to provide a telephone
number where you may be reached during business hours, or in the evening if
preferred. Investor Services' ability to contact you promptly when necessary
will speed the processing of the redemption.
To be considered in proper form, signatures 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 owners of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
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.
Signatures 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 owners exactly as the account is
registered, with the signatures guaranteed as referenced above. You are advised,
for your 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
officers 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 trustees and (2)
a copy of the pertinent pages of the trust document listing the trustees or a
Certification for Trust if the trustees 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 applicable state
law since these accounts have varying requirements, depending upon the state of
residence.
Payment for redeemed shares will be sent to you within seven days after receipt
of the request in proper form.
By Telephone
If you complete the Franklin Templeton Telephone Redemption Authorization
Agreement (the "Agreement"), included with this Prospectus, you may redeem
shares of the Fund by telephone, subject to the Restricted Account exception
noted under "Telephone Transactions - Restricted Accounts." You may obtain
additional information about telephone redemptions 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. You, however, bear
the risk of loss in certain cases as described under "Telephone Transactions -
Verification Procedures."
If your account has a 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 before 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, you should follow the other
redemption procedures set forth in this Prospectus. Institutional accounts
(certain corporations, bank trust departments, qualified retirement plans, and
government entities which qualify to purchase shares at net asset value pursuant
to the terms of this Prospectus) that wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which is
available from the Franklin Templeton Institutional Services Department by
calling 1-800/321-8563.
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 you redeem
shares through a dealer, the redemption price will be the net asset value next
calculated after your dealer receives the order which is promptly transmitted to
the Fund, rather than on the day the Fund receives your written request in
proper form. The documents described under "How Do I Sell Shares - By Mail"
above, as well as a signed letter of instruction, are required regardless of
whether you redeem shares directly or submit such shares to a securities dealer
for repurchase. Your letter should reference the Fund and the class, 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 your 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 your best interest
to have the required documentation completed and forwarded to the Fund as soon
as possible. Your dealer may charge a fee for handling the order. See "How Do I
Buy and Sell Shares?" in the SAI for more information on the redemption of
shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers, all or a portion of
Class I investments of $1 million or more and any Class II investments redeemed
within the contingency period (12 months for Class I and 18 months for Class II)
will be assessed a contingent deferred sales charge, unless one of the
exceptions described below applies. The charge is 1% of the lesser of the value
of the shares redeemed (exclusive of reinvested dividends and capital gain
distributions) or the net asset value at the time of purchase of such shares,
and is retained by Distributors. The contingent deferred sales charge is waived
in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation on shares held less than the contingency
period; (ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than the contingency period.
Shares subject to a contingent deferred sales charge will then be redeemed on a
"first-in, first-out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
The contingent deferred sales charge on each class of shares is waived, as
applicable, for: exchanges; any account fees; distributions from an individual
retirement plan account by reason of death or disability, or upon periodic
distributions based on life expectancy; tax-free returns of excess contributions
from employee benefit plans; distributions from employee benefit plans,
including those due to termination or plan transfer; redemptions initiated by
the Fund due to an account falling below the minimum specified account size;
redemptions following the death of the shareholder or beneficial owner; and
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). For example, if a Class I account maintained
an annual balance of $1,000,000, only $120,000 could be withdrawn through a
once-yearly Systematic Withdrawal Plan free of charge. Any amount over that
$120,000 would be assessed a 1% contingent deferred sales charge. Likewise, if a
Class II account maintained an annual balance of $10,000, only $1,200 could be
withdrawn through a once-yearly Systematic Withdrawal Plan free of charge.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Unless otherwise specified, requests for redemptions of 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. 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
you invested, 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 Internal Revenue Service ("IRS")
regulations. To liquidate a retirement plan account, you or your 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 591/2, unless the distribution meets one of the exceptions
set forth in the Code.
Other Information
Distribution or redemption checks sent to you 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 caused by your failure to cash such
checks.
"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.
For any information required about a proposed liquidation, you may call
Franklin's Shareholder Services Department. Securities dealers may call
Franklin's Dealer Services Department.
Telephone Transactions
By calling Investor Services at 1-800/632-2301, you or your investment
representative of record, if any, may be able to execute various telephone
transactions, including 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, (iv) request
the issuance of certificates (to be sent to the address of record only) and (v)
exchange Fund shares as described in this Prospectus by telephone. In addition,
if you complete and file an Agreement as described under "How Do I Sell Shares?
- - By Telephone," you 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, 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 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 you
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. You 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 redemption, distribution or
dividend payment changes. 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.
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.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privilege will be difficult to execute because of heavy
telephone volume. In such situations, you may wish to contact your investment
representative for assistance or 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 your inability to execute a telephone transaction.
How Are Fund Shares Valued?
The net asset value per share of each class 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 each class of shares of the
Fund).
The net asset value per share of each class is determined by deducting the
aggregate gross value of all liabilities of each class from the aggregate gross
value of all assets of each class, and then dividing the difference by the
number of shares of the class outstanding. Assets in the Fund's portfolio are
valued as described under "How Are Fund Shares Valued?" in the SAI.
Each class will bear, pro rata, all of the common expenses of the Fund, except
that each class will bear the Rule 12b-1 fees payable under its respective plan.
The net asset value of all outstanding shares of each class of the Fund will be
computed on a pro rata basis based on the proportionate participation in the
Fund represented by the value of shares of such class. Due to the specific
distribution expenses and other costs that will be allocable to each class, the
dividends paid to each class of the Fund may vary.
How Do I Get More Information
About My Investment?
Any questions or communications regarding your account should be directed to
Investor Services at the address shown on the back cover of this Prospectus.
From a touch-tone phone, you may access an automated system (day or night) which
offers the following features.
By calling the Franklin TeleFACTS(R) system at 1-800/247-1753, you may obtain
Class I and Class II account information, current price and, if available, yield
or other performance information specific to the Fund or any Franklin Templeton
Fund. In addition, Class I shareholders may process an exchange, within the same
class, into an identically registered Franklin account and request duplicate
confirmation or year-end statements and deposit slips.
Class I and Class II share codes for the Fund, which will be needed to access
system information, are 101 and 232, respectively. The system's automated
operator will prompt you with easy to follow step-by-step instructions from the
main menu. Other features may be added in the future.
To assist you and securities dealers wishing to speak directly with a
representative, the following list of Franklin departments, telephone numbers
and hours of operation is provided. 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 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
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.
How Does the Fund Measure Performance?
Advertisements, sales literature and communications to you may contain several
measures of a class' performance, including current yield, various expressions
of total return, and current distribution rate. They may also occasionally cite
statistics to reflect the Fund's 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 each class 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 for each class reflects the income per share earned by the Fund's
portfolio investments. It is calculated for each class by dividing that class'
net investment income per share during a recent 30-day period by the maximum
public offering price for that class of shares on the last day of that period
and annualizing the result.
Current yield for each class, which is calculated according to a formula
prescribed by the SEC (see "General Information" in 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 of a class are
reflected in the current distribution rate, which may be quoted to you. The
current distribution rate is computed by dividing the total amount of dividends
per share paid by a class during the past 12 months by a current maximum
offering price for that class of shares. 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 a class' income and will assume the payment of the
maximum sales charge on the purchase of that class 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 each class,
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 a class' total return, current yield or distribution rate may be
in any future period.
General Information
As of May 1, 1995, the full name of each class is as follows: Franklin Gold
Fund, Franklin Gold Fund Series, Franklin Gold Fund - Class I, and Franklin Gold
Fund, Franklin Gold Fund Series, Franklin Gold Fund - Class II.
Reports to Shareholders
The Fund's fiscal year ends July 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. To reduce the volume of mail sent to one household, as well as to
reduce Fund expenses, Investor Services will attempt to identify related
shareholders within a household and send only one copy of the report. Additional
copies may be obtained, 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 under "General Information" in the SAI.
Organization and Voting Rights
The Fund's authorized capital stock consists of 100,000,000 shares of common
stock of $0.10 par value divided into two classes. 45,000,000 shares of capital
stock have been allocated to Class I and 45,000,000 shares of capital stock have
been allocated to Class II. All shares 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.
The Fund reserves the right to issue additional classes of shares.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect a certain class of the Fund's shares, however, only shareholders of that
class will be entitled to vote. Therefore, each class of shares will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by class by state corporation law, or (3) required to be
voted on separately by class by the 1940 Act, or the rules adopted thereunder.
For instance, if a change to the Rule 12b-1 plan relating to Class I shares
requires shareholder approval, only shareholders of Class I may vote on the
change to the Rule 12b-1 plan affecting that class. Similarly, if a change to
the Rule 12b-1 plan relating to Class II shares requires approval, only
shareholders of Class II may vote on changes to such plan. On the other hand, if
there is a proposed change to the investment objective of the Fund, the proposal
would affect all shareholders, regardless of which class of shares they hold
and, therefore, each share has the same voting rights.
Voting rights are cumulative, 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 Fund does not intend to hold annual shareholders meetings. The Fund may,
however, hold a special shareholders 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 the directors in their discretion or by
shareholders holding at least ten percent of the outstanding shares of the Fund.
Shareholders will 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 your shares, at net asset value, if your
account has been in existence for at least 12 months and has a value of less
than $50, but only where the value of your account has been reduced by your
prior voluntary redemption of shares and has been inactive (except for the
reinvestment of distributions) for a period of at least six months, provided you
are given advance notice. For more information, see "How Do I Buy and Sell
Shares?" in the SAI.
Registering Your Account
An account registration should reflect your 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, you may transfer an account in the Fund carried in "street"
or "nominee" name by your 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 your
delivering securities dealer. To effect the transfer, you should instruct the
securities dealer to transfer the account to a receiving securities dealer and
sign any documents required by the securities dealers 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 your delivering securities dealer. Account transfers may be
effected electronically through the services of the NSCC.
The Fund may conclusively accept instructions from you or your nominee listed in
publicly available nominee lists, regardless of whether the account was
initially registered in the name of or by you, your nominee, or both. If a
securities dealer or other representative is of record on your account, you 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 Investor Services, 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 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. You may also
be subject to backup withholding if the IRS or a securities dealer notifies the
Fund that the number furnished by you is incorrect or that you are 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 you 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.
Appendix
Description of Corporate Bond Ratings
Moody's
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered as medium grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered as well assured. Often the protection of
interest and principal payments is very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
FRANKLIN
GOLD
FUND
STATEMENT OF
ADDITIONAL INFORMATION
777 Mariners Island Blvd., P.O. Box 7777 DECEMBER 1, 1995
San Mateo, CA 94403-7777 1-800/DIAL BEN
Contents Page
How Does the Fund Invest Its Assets? 2
What Are the Fund's Potential Risks? 8
Investment Restrictions........... 11
Officers and Directors............ 12
Investment Advisory and Other Services 15
How Does the Fund Purchase
Securities For Its Portfolio?.... 16
How Do I Buy and Sell Shares?..... 17
How Are Fund Shares Valued?....... 20
Additional Information
Regarding Taxation............... 21
The Fund's Underwriter............ 23
General Information............... 26
Financial Statements.............. 29
Franklin Gold Fund (the "Fund") is a diversified, open-end management investment
company with the principal investment objective of capital appreciation and a
secondary objective of current income. The Fund will concentrate its investments
in securities of companies engaged in mining, processing or dealing in gold or
other precious metals, which is expected to result in the investment of a
substantial portion of its assets in the securities of foreign issuers.
A Prospectus for the Fund, dated December 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 or telephone number shown above.
As explained in the Prospectus, this Fund offers two classes of shares to its
investors: Franklin Gold Fund - Class I ("Class I") and Franklin Gold Fund -
Class II ("Class II"). The Fund's dual class structure ("multiclass") allows
investors to consider, among other features, the impact of sales charges and
distribution fees ("Rule 12b-1 fees") on their investments in the Fund.
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 Prospectus.
How Does the Fund Invest Its Assets?
As noted in the Prospectus, the principal investment objective of the Fund is
capital appreciation. That is, the Fund seeks to purchase securities with the
potential to increase in value, so that shares of the Fund will in turn increase
in value. The secondary objective is to provide current income through the
receipt of dividends or interest from its investments. The payment of dividends
may be a consideration when the Fund purchases securities.
Some of the Fund's Other Investment Policies
Concentration of Investments. As a fundamental policy, the Fund intends to
concentrate its investments in securities of issuers engaged in mining,
processing or dealing in gold or other precious metals, such as silver, platinum
and palladium. Such investments may include securities of gold mining finance
companies, as well as operating companies with long-life mines, medium-life
mines or short-life mines. Accordingly, the Fund will have at least 25% of the
value of its assets invested in such securities, except for temporary periods
when unusual and adverse economic conditions exist in those industries, and it
may invest up to 100% of the value of its assets in such securities. Under
normal circumstances, at least 65% of the Fund's assets will be invested in
securities of issuers engaged in gold operations, including securities of gold
mining finance companies, as well as operating companies with long-, medium- or
short-life mines. On July 31, 1995, approximately 84.8% of the Fund's assets
were invested in such securities.
Foreign Securities. As a result of the concentration of the Fund's investments
in gold and precious metal-related issuers, the Fund is expected to invest a
substantial portion of its assets in foreign securities, that is, securities
issued by companies domiciled and operating outside the U.S. or securities
issued by foreign governments. Although the Fund is not obligated to do so, the
Fund presently expects that under normal conditions more than 50% of the value
of its assets may be invested in foreign securities. At any particular time a
substantial portion of the Fund's assets may be invested in companies domiciled
or operating in one or a very few foreign countries. The Fund retains the
flexibility, however, to invest some or all of its assets in U.S. securities
when the investment manager concludes that investments in U.S. companies are
more likely to accomplish the Fund's objectives. On July 31, 1995, approximately
75.5% of the Fund's assets were invested in securities of foreign issuers in the
following countries: 31.6% in South Africa; 10.6% in Australia; 28.6% in Canada;
1.7% in United Kingdom; and 3% in Ghana.
Any investments made by the Fund in foreign securities where delivery takes
place outside the United States will have to be made in compliance with
applicable United States and foreign currency restrictions and other tax laws
and laws limiting the amount and types of foreign investments. Changes of
governmental administrations, economic or monetary policies in the United States
or abroad, or changed circumstances in dealings between nations could result in
investment losses for the Fund and could adversely affect the Fund's operations.
The Fund's purchase of securities in foreign countries will involve currencies
of the U.S. and of foreign countries; consequently, changes in exchange rates,
currency convertibility and repatriation may favorably or adversely affect the
Fund. Although current regulations do not, in the opinion of the Fund's
investment manager, limit seriously the Fund's investment activities, if they
were changed in the future they might restrict the ability of the Fund to make
its investments or tend to impair the liquidity of the Fund's investments.
Securities which are acquired by the Fund outside of 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 illiquid
assets, if (a) the Fund reasonably believes it can readily dispose of the
securities for cash in the U.S. or foreign market or (b) current market
quotations are readily available. The Fund will not acquire the securities of
foreign issuers outside of the United States under circumstances where, at the
time of acquisition, the Fund has reason to believe that it could not resell the
securities in a public trading market. Investors should recognize that foreign
securities are often traded with less frequency and volume, and therefore may
have greater price volatility, than is the case with many U.S. securities.
Notwithstanding the fact that the Fund intends to acquire the securities of
foreign issuers only where there are public trading markets, investments by the
Fund in the securities of foreign issuers may tend to increase the risks with
respect to the liquidity of the Fund's portfolio and the Fund's ability to meet
a large number of shareholders' redemption requests should there be economic or
political turmoil in a country in which the Fund has a substantial portion of
its assets invested or should relations between the United States and such
foreign country deteriorate markedly.
Forward Foreign Currency Exchange Contracts. The Fund may purchase or sell
forward foreign currency exchange contracts. While these contracts are not
presently regulated by the Commodity Futures Trading Commission ("CFTC"), the
CFTC may in the future assert authority to regulate forward contracts. In such
event the Fund's ability to utilize forward contracts in the manner set forth in
the Prospectus may be restricted. Forward contracts will reduce the potential
gain from a positive change in the relationship between the U.S. dollar and
foreign currencies. Unanticipated changes in currency prices may result in
poorer overall performance for the Fund than if it had not entered into such
contracts. The use of foreign currency forward contracts will not eliminate
fluctuations in the underlying U.S. dollar equivalent value of, or rates of
return on, the Fund's foreign currency denominated portfolio securities and the
use of such techniques will subject the Fund to certain risks.
The matching of the increase in value of a forward contract and the decline in
the U.S. dollar equivalent value of the foreign currency denominated asset that
is the subject of the hedge generally will not be precise. In addition, the Fund
may not always be able to enter into foreign currency forward contracts at
attractive prices and this will limit the Fund's ability to use such contracts
to hedge or cross-hedge its assets. Also, with regard to the Fund's use of
cross-hedges, there can be no assurance that historical correlations between the
movement of certain foreign currencies relative to the U.S. dollar will
continue. Thus, at any time, poor correlation may exist between movements in the
exchange rates of the foreign currencies in which the Fund's assets that are the
subject of such cross-hedges are denominated.
Gold Bullion. As a means of seeking its principal objective of capital
appreciation and when it is felt to be appropriate as a possible hedge against
inflation, the Fund may invest a portion of its assets in gold bullion and may
hold a portion of its cash in foreign currency in the form of gold coins. There
is, of course, no assurance that such investments will provide capital
appreciation or a hedge against inflation. The Fund's ability to invest in gold
bullion is restricted by the diversification requirements which the Fund must
meet in order to qualify as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code"), as well as the diversification
requirements of the Investment Company Act of 1940, as amended (the "1940 Act").
In addition, the ability of the Fund to make such investments may be further
restricted by the securities laws and regulations in effect from time to time in
the states where the Fund's shares are qualified for sale. The Fund has not
previously invested in gold bullion because of these regulations. However, at
the date of this SAI there do not appear to be any regulations currently in
effect in the states in which the Fund is qualified for sale prohibiting such
purchases although some states may limit such purchases. Accordingly, if
otherwise consistent with the Fund's objectives, it may invest up to 10% of its
assets in gold bullion.
Fund assets will be invested in gold bullion at such times as the prospects of
such investments are, in the opinion of management, attractive in relation to
other possible investments. The basic trading unit for gold bullion is a gold
bar weighing approximately 100 troy ounces with a purity of at least 995/1000,
although gold bullion is also sold in much smaller units. Gold bars and wafers
are usually numbered and bear an indication of purity and the stamp or assay
mark of the refinery or assay office which certifies the bar's purity. Bars of
gold bullion historically have traded primarily in the New York, London, and
Zurich gold markets and in terms of volume, such gold markets have been the
major markets for trading in gold bullion. Prices in the Zurich gold market
generally correspond to the prices in the London gold market. Since the
ownership of gold bullion became legal in the United States on December 31,
1974, U.S. markets for trading gold bullion have developed. It is anticipated
that transactions in gold will generally be made in such U.S. markets, although
such transactions may be made in foreign markets when it is deemed to be in the
best interest of the Fund. Transactions in gold bullion by the Fund are
negotiated with principal bullion dealers unless, in the investment manager's
opinion, more favorable prices (including the costs and expenses described
below) are otherwise obtainable. Prices at which gold bullion is purchased or
sold include dealer mark-ups or mark-downs, insurance expenses, assay charges
and shipping costs for delivery to a custodian bank. Such costs and expenses may
be a greater or lesser percentage of the price from time to time, depending on
whether the price of gold bullion decreases or increases. Since gold bullion
does not generate any investment income, the only source of return to the Fund
on such an investment will be from any gains realized upon its sale, and
negative return will be realized, of course, to the extent the Fund sells its
gold bullion at a loss.
Loans of Portfolio Securities. Consistent with procedures approved by the Board
of Directors and subject to the following conditions, the Fund may lend its
portfolio securities to qualified securities dealers or other institutional
investors, provided that such loans do not exceed 10% of the value of the Fund's
total assets at the time of the most recent loan. The borrower must deposit with
the Fund's custodian bank collateral with an initial market value of at least
102% of the initial market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 100%. Such
collateral shall consist of cash, securities issued by the U.S. government, its
agencies or instrumentalities, or irrevocable letters of credit. The lending of
securities is a common practice in the securities industry. The Fund may engage
in security loan arrangements with the primary objective of increasing the
Fund's income either through investing the cash collateral in short-term
interest bearing obligations or by receiving a loan premium from the borrower.
The Fund will continue to be entitled to all dividends or interest on any loaned
securities. As with any extension of credit, there are risks of delay in
recovery and loss of rights in the collateral should the borrower of the
security fail financially.
Repurchase Agreements. As discussed in the Prospectus, the Fund may invest in
repurchase agreements with commercial banks, brokers or dealers, either for
defensive purposes due to market conditions or to generate income from its
excess cash balances.
The use of repurchase agreements involves certain risks. For example, if the
other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Fund not within the control
of the Fund and therefore the realization by the Fund on such collateral may be
automatically stayed. Finally, it is possible that the Fund may not be able to
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While the Fund's
investment manager acknowledges these risks, it is expected that if repurchase
agreements are otherwise deemed useful to the Fund, these risks can be
controlled through careful monitoring procedures.
Transactions in Options, Futures
and Options on Financial Futures
Call and Put Options on Securities. The Fund intends to write covered call
options and purchase put and call options which trade on securities exchanges
and in the over-the-counter market. Although the Fund has no current intention
of writing covered put options in the foreseeable future, the Fund reserves the
right to do so.
Writing Call Options. Call options written by the Fund give the holder the right
to buy the underlying securities from 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. 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, 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.
The writer of an option that 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 can be effected.
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. 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.
Purchasing Call 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. The Fund may also purchase call options on
securities held in its portfolio and on which it has written call options. A
call option gives the holder the right to buy the underlying securities from the
option writer at a stated exercise price. 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.
Writing Put Options. A put option gives the purchaser of the option the right to
sell, and the writer (seller) the obligation to buy, the underlying security or
currency at the exercise price during the option period. The option may be
exercised at any time prior to its expiration date. The operation of put options
in other respects, including their related risks and rewards, is substantially
identical to that of call options.
The Fund would write put options only on a covered basis, which means that the
Fund would maintain in a segregated account cash, U.S. government securities or
other liquid, high-grade debt securities in an amount not less than the exercise
price at all times while the put option is outstanding. The rules of the
clearing corporation currently require that such assets be deposited in escrow
to secure payment of the exercise price. The Fund would generally write covered
put options in circumstances where the investment manager wishes to purchase the
underlying security or currency for the Fund's portfolio at a price lower than
the current market price of the security or currency. In such event, the Fund
would write a put option at an exercise price which, reduced by the premium
received on the option, reflects the lower price it is willing to pay. Since the
Fund would also receive interest on debt securities or currencies maintained to
cover the exercise price of the option, this technique could be used to enhance
current return during periods of market uncertainty. The risk in such a
transaction would be that the market price of the underlying security or
currency would decline below the exercise price less the premiums received.
Purchasing Put Options. The Fund may purchase put options. As the holder of a
put option, the Fund has the right to sell the underlying security or currency
at the exercise price at any time during the option period. The Fund may enter
into closing sale transactions with respect to such options, exercise them or
permit them to expire.
The Fund may purchase a put option on an underlying security or currency owned
by the Fund (a "protective put") as a hedging technique in order to protect
against an anticipated decline in the value of the security or currency. Such
hedge protection is provided only during the life of the put option when the
Fund, as the holder of the put option, is able to sell the underlying security
or currency at the put exercise price, regardless of any decline in the
underlying security's market price or currency's exchange value. For example, a
put option may be purchased in order to protect unrealized appreciation of a
security or currency when the investment manager deems it desirable to continue
to hold the security or currency because of tax considerations. The premium paid
for the put option and any transaction costs would reduce any short-term capital
gain otherwise available for distribution when the security or currency is
eventually sold.
The Fund may also purchase put options at a time when the Fund does not own the
underlying security or currency. By purchasing put options on a security or
currency it does not own, the Fund seeks to benefit from a decline in the market
price of the underlying security or currency. If the put option is not sold when
it has remaining value, and if the market price of the underlying security or
currency remains equal to or greater than the exercise price during the life of
the put option, the Fund will lose its entire investment in the put option. In
order for the purchase of a put option to be profitable, the market price of the
underlying security or currency must decline sufficiently below the exercise
price to cover the premium and transaction costs, unless the put option is sold
in a closing sale transaction.
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. 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.
Options on Stock Indices. The Fund may also purchase call and put 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 of
futures 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, as in the case of the Fund, 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
such cash value called for by the contract on a specified date. A "purchase" of
a futures contract means the acquisition of a contractual obligation to take
delivery of the cash value called for by the contract at a specified date.
Futures contracts have been designed by exchanges which have been designated
"contracts markets" by the Commodity Futures Trading Commission ("CFTC") and
must be executed through a futures commission merchant, or brokerage firm, which
is a member of the relevant contract market.
To the extent the Fund enters into a futures contract, it will deposit in a
segregated account with its custodian cash or U.S. Treasury obligations equal to
a specified percentage of the value of the futures contract (the "initial
margin"), as required by the relevant contract market and futures commission
merchant. The futures contract will be marked-to-market daily. Should the value
of the futures contract decline relative to the Fund's position, the Fund will
be required to pay to the futures commission merchant an amount equal to such
change in value.
Although financial futures contracts by their terms call for the actual delivery
or acquisition of securities, or the cash value of the index, in most cases the
contractual obligation is fulfilled before the date of the contract without
having to make or take delivery of the securities or cash. The offsetting of a
contractual obligation is accomplished by buying (or selling, as the case may
be) on a commodities exchange an identical financial 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 make or take delivery of the
securities or cash. 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 financial futures contracts.
The Fund will not engage in transactions in futures contracts or related options
for speculation but only as a hedge against changes in the values of its
securities or securities which it intends to purchase resulting from market
conditions and, to the extent consistent therewith, to accommodate cash flows.
The Fund may not purchase or sell futures contracts or purchase or sell related
options if, immediately thereafter, the sum of the amount of initial deposits on
its existing financial futures and premiums paid on options on financial futures
contracts 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,
money market instruments equal to the market value of the futures contract or
related option 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 the price of portfolio securities without
actually buying or selling the underlying security.
To the extent the Fund enters into a futures contract, it will maintain with its
custodian, to the extent required by the rules of the SEC, 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 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 common 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 marketside 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 or sell 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.
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 objectives and
legally permissible for the Fund. Prior to investing in any such investment
vehicle, the Fund will supplement its prospectus, if appropriate.
Timing of the Fund's Securities Transactions
Normally, the Fund will purchase securities for investment with a view to
long-term appreciation. However, the Fund may on occasion purchase securities
with the expectation of realizing gains over the short-term. Because the
investment outlook of the types of securities which the Fund may be purchasing
may change as a result of unexpected developments in national or international
securities markets, or in economic, monetary or political relationships, the
Fund will not treat its portfolio turnover as a limiting factor. Changes in
particular portfolio holdings may be made whenever it is considered that a
security no longer has optimum growth potential or has reached its anticipated
level of performance, or that another security appears to have a relatively
greater opportunity for capital appreciation, and will be made without regard to
the length of time a security has been held. However, the differences between
the tax treatment of long-term gains and short-term gains may be considered in
determining the timing of sales of portfolio securities.
The Fund's portfolio turnover rates are set forth in the table under "Financial
Highlights - How Has the Fund Performed?" in the Prospectus.
What Are the Fund's Potential Risks?
As is true with respect to virtually all investments, there are risks inherent
in the Fund's policies of investing in securities of companies engaged in
mining, processing or dealing in gold or other precious metals and in gold
bullion. In addition to the general considerations described above, such
investments may involve the following special considerations:
1. Fluctuations in the Price of Gold. The price of gold has recently been
subject to substantial upward and downward price movements over short periods of
time and may be affected by unpredictable international monetary and political
policies, such as currency devaluations or reevaluations, economic conditions
within an individual country, trade imbalances or trade or currency restrictions
between countries and world inflation rates and interest rates. The price of
gold, in turn, is likely to affect the market prices of securities of companies
mining, processing or dealing in gold and, accordingly, the value of the Fund's
investments in such securities also may be affected.
2. Potential Effect of Concentration of Source of Supply and Control of Sales.
At the current time there are only four major sources of supply of primary gold
production, and the market share of each source cannot be readily ascertained.
One of the largest national producers of gold bullion and platinum is the
Republic of South Africa. Changes in political and economic conditions affecting
South Africa may have a direct impact on its sales of gold. Under South African
law, the only authorized sales agent for gold produced in South Africa is the
Reserve Bank of South Africa which, through its retention policies, controls the
time and place of any sale of South African bullion. The South African Ministry
of Mines determines gold mining policy. South Africa depends predominantly on
gold sales for the foreign exchange necessary to finance its imports, and its
sales policy is necessarily subject to national and international economic and
political developments.
3. Tax and Currency Laws. Changes in the tax or currency laws of the U.S., and
of foreign countries, may inhibit the Fund's ability to pursue or may increase
the cost of pursuing its investment programs.
4. Unpredictable Monetary Policies, Economic and Political Conditions. The
Fund's assets might be less liquid or the change in the value of its assets
might be more volatile (and less related to general price movements in the U.S.
markets) than would be the case with investments in the securities of larger
U.S. companies, particularly because the price of gold and other precious metals
may be affected by unpredictable international monetary policies and economic
and political considerations, governmental controls, conditions of scarcity,
surplus or speculation. In addition, the use of gold or Special Drawing Rights
(which are also used by members of the International Monetary Fund for
international settlements) to settle net deficits and surpluses in trade and
capital movements between nations subjects the supply and demand, and therefore
the price, of gold to a variety of economic factors which normally would not
affect other types of commodities.
5. New and Developing Markets for Private Gold Ownership. Between 1933 and
December 31, 1974, a market did not exist in the United States in which gold
bullion could be purchased by individuals for investment purposes. Since it
became legal to invest in gold, markets have developed in the U.S. Any large
purchases or sales of gold bullion could have an effect on the price of gold
bullion. Recently, several central banks have been sellers of gold bullion from
their reserves. Sales by central banks and/or rumors of such sales have had a
negative effect on gold prices.
6. Expertise of the Investment Manager. The successful management of the Fund's
portfolio may be more dependent upon the skills and expertise of its investment
manager than is the case for most mutual funds because of the need to evaluate
the factors identified above. Moreover, in some countries, disclosures
concerning an issuer's financial condition and results and other matters may be
subject to less stringent regulatory provisions, or may be presented on a less
uniform basis than is the case for issuers subject to U.S. securities laws.
Issuers and securities exchanges in some countries may be subject to less
stringent governmental regulations than is the case for U.S. companies.
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 indexes, stock index futures and
related options depends on the degree to which price movements in the underlying
index or underlying 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 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 investment 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.
Positions in stock index options, stock index 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 CFTC 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 manager may
still not result in a successful transaction.
In addition, futures contracts entail risks. Although the Fund believes that the
use of such contracts will benefit the Fund, if the investment manager's
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
and, to the extent consistent therewith, to accommodate cash flows. 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.
Risk Factors Relating to the Fund's
Investments in Lower-Rated Securities
The market values of lower-rated convertible and debt securities and unrated
securities of comparable quality, tend to reflect individual corporate
developments to a greater extent than do higher-rated securities, which react
primarily to fluctuations in the general level of interest rates. Such
lower-rated securities also tend to be more sensitive to economic conditions
than higher-rated securities. These lower-rated securities are considered by the
nationally recognized rating services, on balance, to be predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and will generally
involve more credit risk than securities in the higher rating categories. Even
bonds rated BBB by Standard & Poor's ("S&P") or Baa by Moody's Investors Service
("Moody's"), ratings which are considered investment grade, possess some
speculative characteristics.
Companies that issue lower-rated, convertible and debt securities are often
highly leveraged and may not have more traditional methods of financing
available to them. Therefore, the risk associated with acquiring the securities
of such issuers is generally greater than is the case with higher-rated
securities. For example, during an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of lower-rated securities may
experience financial stress. During these periods, such issuers may not have
sufficient cash flow to meet their interest payment obligations. The issuer's
ability to service its debt obligations may also be adversely affected by
specific corporate developments, the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing.
Lower-rated convertible or debt securities frequently have call or buy-back
features which permit an issuer to call or repurchase the securities from the
Fund. Although such securities are typically not callable for a period from
three to five years after their issuance, if a call were exercised by the issuer
during periods of declining interest rates, the Fund would likely have to
replace such called securities with lower yielding securities, thus decreasing
the net investment income to the Fund and dividends to shareholders. The
premature disposition of a high yielding security due to a call or buy-back
feature, the deterioration of the issuer's creditworthiness, or a default may
also make it more difficult for the Fund to manage the timing of its receipt of
income, which may have tax implications. The Fund may be required under the Code
and U.S. Treasury regulations to accrue income for income tax purposes on
defaulted obligations and to distribute such income to the Fund's shareholders
even though the Fund is not currently receiving interest or principal payments
on such obligations. In order to generate cash to satisfy any or all of these
distribution requirements, 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.
Factors adversely impacting the market value of high yielding securities will
adversely impact the Fund's net asset value. For example, adverse publicity
regarding lower-rated bonds, which appeared during 1989 and 1990, along with
highly publicized defaults of some high yield issuers, and concerns regarding a
sluggish economy which continued in 1993, depressed the prices for many such
securities. In addition, the Fund may incur additional expenses to the extent it
is required to seek recovery upon a default in the payment of principal or
interest on its portfolio holdings. The Fund will rely on the investment
manager's judgment, analysis and experience in evaluating the creditworthiness
of an issuer. In this evaluation, the investment manager will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
Investment Restrictions
The Fund has adopted the following restrictions as fundamental policies, which
means that they may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, a "vote of a
majority of the outstanding voting securities" of the Fund means the affirmative
vote of the lesser of (1) more than 50% of the outstanding shares of the Fund,
or (2) 67% or more of the shares of the Fund present at a shareholders' meeting
if more than 50% of the outstanding shares of the Fund are represented at the
meeting in person or by proxy. The Fund may not:
1. Purchase the stock or securities of any issuer other than those of the United
States of America or its instrumentalities, if at the time of the investment the
effect thereof shall be to cause more than 5% of the value of its assets to be
invested at such time in the securities of such issuer;
2. As to 75% of its total assets, purchase stock or securities of an issuer,
other than the United States of America or its instrumentalities, if the effect
thereof shall be to cause more than 10% of the voting securities of such issuer
to be held by the Fund;
3. Borrow money in an amount in excess of 5% of the value of its total assets,
and then only from banks for temporary or emergency purposes, and not for direct
investment in securities;
4. Lend its assets, except through the purchase or acquisition of bonds,
debentures or other debt securities of a type customarily purchased by
institutional investors, or through loans of its portfolio securities, or to the
extent the entry into a repurchase agreement may be deemed a loan;
5. Underwrite the securities of other issuers or invest more than 10% of its
assets in illiquid securities, including certain securities with legal or
contractual restrictions on resale;
6. Invest in securities for the purpose of exercising management or control of
the issuer;
7. Maintain a margin account with a securities dealer or effect short sales;
8. Invest in commodities or commodity contracts, except that it may invest in
gold bullion and foreign currency in the form of gold coins;
9. Invest directly in real estate (although it may invest in real estate
investment trusts) or in the securities of other open-end investment companies,
except that securities of another open-end investment company may be acquired
pursuant to a plan of reorganization, merger, consolidation or acquisition and
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 expenses 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;
10. Invest in assessable securities or securities involving unlimited liability
on the part of the Fund; or
11. Purchase or retain in its portfolio any security if any officer, director or
security holder of the issuer is at the same time an officer, director or
employee of the Fund or of its investment manager and such person owns
beneficially more than 1/2 of 1% of the securities and if all such persons
owning more than 1/2 of 1% own more than 5% of the outstanding securities of the
issuer.
In addition to these fundamental policies, it is the present policy of the Fund
(which may be changed without the approval of the Fund's shareholders) not to
pledge, mortgage or hypothecate the Fund's assets as security for loans, nor to
engage in joint or joint and several trading accounts in securities, except that
an order to purchase or sell may be combined with orders from other persons to
obtain lower brokerage commissions except as the Fund may participate in a joint
repurchase agreement account with other funds in the Franklin Templeton Group of
Funds. The Fund may not invest in real estate limited partnerships or in
interests (other than publicly traded equity securities) in oil, gas, or other
mineral leases, exploration or development (investments in marketable securities
issued by real estate investment trusts are not subject to this restriction).
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 Fund will not invest
in commodities or commodity contracts, except that the Fund may invest up to 10%
of its total assets in gold bullion and gold coins, up to 5% of its total assets
in options, financial futures or stock index futures and more than 5% of its
total assets in options, financial futures or stock index futures for hedging
purposes only or when such investments are covered by cash or securities.
Officers and Directors
The Board of Directors (the "Board") 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 1940 Act, are indicated by an asterisk
(*).
Positions and Offices
Name, Age and Address with the Fund Principal Occupations During Past Five
Years
Frank H. Abbott, III (74) Director
1045 Sansome St.
San Francisco, CA 94111
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 31 of the
investment companies in the Franklin Group of Funds.
Harris J. Ashton (63) Director
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 56 of the investment companies in the Franklin
Templeton Group of Funds.
*Harmon E. Burns (50) Vice President
777 Mariners Island Blvd. and Director
San Mateo, CA 94404
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 43 of the investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (63) Director
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
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 58 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (80) Director
111 New Montgomery St., #402
San Francisco, CA 94105
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 30 of the investment companies in the
Franklin Group of Funds.
*Charles B. Johnson (62) Chairman
777 Mariners Island Blvd. of the Board
San Mateo, CA 94404 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 57 of the investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (55) Vice President
777 Mariners Island Blvd. and Director
San Mateo, CA 94404
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 43 of the investment companies
in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (66) Director
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or trustee, as the case may
be, of 26 of the investment companies in the Franklin Group of Funds.
*R. Martin Wiskemann (68) President and
777 Mariners Island Blvd. Director
San Mateo, CA 94404
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 20 of the
investment companies in the Franklin Group of Funds.
Kenneth V. Domingues (63) Vice President -
777 Mariners Island Blvd. Financial
San Mateo, CA 94404 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 37 of the investment companies
in the Franklin Group of Funds.
Martin L. Flanagan (35) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 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 61 of the investment companies in the Franklin Templeton Group of
Funds.
Deborah R. Gatzek (46) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President - Legal, Franklin Resources, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc.; and officer of 37
of the investment companies in the Franklin Group of Funds.
Diomedes Loo-Tam (56) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting
Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey (58) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 32 of the investment companies in the Franklin Group of
Funds.
The preceding table indicates those officers and directors who are also
affiliated persons of Distributors and Advisers. Directors not affiliated with
the investment manager ("nonaffiliated directors") are currently paid fees of
$150 per month plus $150 per meeting attended. As indicated above, certain of
the Fund's nonaffiliated directors also serve as directors, trustees or managing
general partners of other investment companies in the Franklin Group of Funds
and the Templeton Group of Funds (the "Franklin Templeton Group of Funds") from
which they may receive fees for their services. The following table indicates
the total fees paid to nonaffiliated directors by the Fund and by other funds in
the Franklin Templeton Group of Funds.
Number of Boards
Total Fees in the Franklin
Total Fees Received from the Templeton Group
Received Franklin Templeton of Funds on Which
Name from Fund* Group of Funds** Each Serves***
Frank H. Abbott, III..............$3,600 $176,870 31
Harris J. Ashton..................$3,600 $318,125 56
S. Joseph Fortunato...............$3,600 $334,265 58
David W. Garbellano...............$3,600 $153,300 30
Frank W.T. LaHaye.................$3,450 $150,817 26
*For the fiscal year ended July 31, 1995.
**For the calendar year ended December 31, 1994.
***The number of boards is based on the number of registered investment
companies in the Franklin Templeton Group of Funds and does not include the
total number of series or funds within each investment company for which the
directors are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, consisting of approximately 162
U.S- based funds or series.
Nonaffiliated directors are reimbursed for expenses incurred in connection with
attending board meetings, paid pro rata by each fund in the Franklin Templeton
Group of Funds for which they serve as director, trustee or managing general
partner. No officer or director received any other compensation directly from
the Fund. Certain officers or directors who are shareholders of Franklin
Resources, Inc. may be deemed to receive indirect remuneration by virtue of
their participation, if any, in the fees paid to its subsidiaries. For
additional information concerning director compensation and expenses, please see
the Fund's Annual Report to Shareholders.
As of September 6, 1995 the directors and officers, as a group, owned of record
and beneficially approximately 10,632 shares, or less than 1% of the total
outstanding shares of the Fund. Many of the Fund's directors also own shares in
various of the other funds in the Franklin Templeton Group of Funds. 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 Franklin Resources, Inc.
("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.
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 Board to whom the Manager renders periodic
reports of the Fund's investment activities. Under the terms of the management
agreement, the Manager provides 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. See the Statement of Operations in the
financial statements included in the Fund's Annual Report to Shareholders dated
July 31, 1995.
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) of 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 2.5% 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 1.5% of average net assets of the Fund in excess of $100 million. Expense
reductions have not been necessary based on state requirements.
The Manager waived, in advance, its management fees payable during the period
October 1, 1991, through October 31, 1992, in order to reimburse the Fund for a
loss incurred in connection with the inadvertent purchase of certain debt
securities in excess of limits set forth in the Fund's investment restrictions.
For the fiscal year ended July 31, 1993, the management fees the Fund was
contractually obligated to pay the Manager were $1,445,968 and the management
fees actually paid by the Fund were $1,124,060. For the fiscal years ended July
31, 1994 and 1995 the Fund paid management fees of $1,960,100 and $2,063,979,
respectively. Each class will pay its share of the fee as determined by the
proportion of the Fund that it represents.
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 Board or by a vote of
the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the 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.
The Manager also provides management services to numerous other investment
companies or funds pursuant to management agreements with each fund. The Manager
may give advice and take action with respect to any of the other funds which it
manages, or for its own account, which may differ from action taken by the
Manager on behalf of the Fund. Similarly, the Manager is not obligated to
recommend, purchase or sell, or to refrain from recommending, purchasing or
selling, with respect to the Fund, any security which the Manager and "access
persons" as defined by the 1940 Act, may purchase or sell for its or their own
account(s) or for the accounts of any other fund; or from investing in
securities held by the Fund or other funds which it manages or administers. Of
course, any transactions for the accounts of the Manager and other "access
persons" will be made in compliance with the Fund's Code of Ethics.
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. Wilmington Trust Company, Rodney Square North, Wilmington, Delaware
19890, acts as custodian with respect to accepting, holding, storing,
transferring and delivering precious metals owned by the Fund. 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 July 31, 1995,
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 July 31, 1995.
How Does the Fund Purchase
Securities For Its Portfolio?
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 Board 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 past three fiscal years ended July 31, 1993, 1994, and 1995 the Fund
paid total brokerage commissions of $108,212, $93,141, and $163,994
respectively. As of July 31, 1995, the Fund did not own securities of its
regular broker-dealers.
How Do I Buy and Sell 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) 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 "What If My Investment Outlook
Changes? - 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 fund 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 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 its 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:
Sales
Size of Purchase in U.S. dollars Charge
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, either directly
or through affiliates, have an agreement with Distributors to 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 - Class I
As discussed in the Prospectus under "How Do I Buy Shares? - 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. Either 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 of 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 fixed-income Franklin Templeton Funds made at
net asset value by certain designated retirement plans (excluding IRA and IRA
rollovers): 1% 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
fixed-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, either Distributors or
one of its affiliates, out of its own resources, may pay up to 1% of the amount
invested.
Letter of Intent - Class I
An investor may qualify for a reduced sales charge on the purchase of Class I
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
("Letter") section completed, may be filed with the Fund. After the Letter is
filed, each additional investment will be entitled to the sales charge
applicable to the level of investment indicated on the Letter. Sales charge
reductions based 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, including Class II shares, acquired more than 90 days before the Letter
is filed will be counted towards completion of the Letter but will not be
entitled to a retroactive downward adjustment in the sales charge. Any
redemptions 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 have been completed.
If the Letter is not completed within the 13-month period, there will be an
upward adjustment of the sales charge, depending 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 prior to a
change in the sales charge structure for the Fund will be entitled to complete
the Letter at the lower of the new sales charge structure or the sales charge
structure in effect at the time the Letter was filed 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, 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 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 (to reflect such further quantity discount) on
purchases made within 90 days before and on those made after filing the Letter.
The resulting difference in offering price will be applied to the purchase of
additional shares at the offering price applicable to a single purchase or the
dollar amount of the total purchases. If the total purchases, less redemptions,
are less than the amount specified under the Letter, 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. 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, 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 is executed on behalf of a benefit plan (such plans are described
under "How Do I Buy Shares? - 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. 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.
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.
How Are Fund Shares Valued?
As noted in the Prospectus, each class of the Fund 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.
For the purpose of determining the aggregate net assets of each class, 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. The value of a foreign security is
determined as of the close of trading on the foreign exchange on which it is
traded or as of the scheduled close of trading on the Exchange, if that is
earlier, and that value is then converted into its U.S. dollar equivalent at the
foreign exchange rate in effect at noon, New York time, on the day the value of
the foreign security is determined. If no sale is reported at that time, the
security is valued within the range of the most recent quoted bid and ask
prices. Occasionally, events which affect the values of foreign securities and
foreign exchange rates may occur between the times at which they are determined
and the close of the exchange and will, therefore, not be reflected in the
computation of each class' net asset value. If events materially affecting the
value of these foreign securities occur during such period, then these
securities will be valued in accordance with procedures established by the
Board.
Over-the-counter portfolio securities are valued within the range of the most
recent quoted bid and ask price. 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 sale price on the relevant exchange prior to the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, 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. With the approval of directors, the Fund may utilize a pricing
service, bank or securities dealer to perform any of the above described
functions.
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 semiannual 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
The Franklin Templeton Institutional Services Department 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 continue to qualify to be
treated as a regulated investment company under Subchapter M of 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 taxable 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 the 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 the Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividends-received deduction. For example, any interest income and 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 the
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. 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. 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.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between the shareholder's basis
in his/her shares and the amount received, subject to the rules described below.
If such shares are a capital asset in the hands of the shareholder, gain or loss
will be capital gain or loss and will be long-term for federal income tax
purposes if the shares have been held for more than one year.
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.
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 Templeton Funds (defined under "How Do I
Buy Shares?" in the Prospectus) 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.
The Fund's investment in options and forward 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. By
contrast, 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 contacts and certain foreign
currency contacts 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 timing 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 a regulated investment company, the Fund is 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 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 options and futures 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.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currencies, foreign currency payables or
receivables, or foreign currency-denominated debt securities, foreign currency
forward contracts, and options or futures contracts on foreign currencies are
subject to special tax rules which may cause such gains and losses to be treated
as ordinary income and losses rather than capital gains and losses and may
affect the amount and timing of the Fund's income or loss from such transactions
and, in turn, its distributions to shareholders.
In order for the Fund to qualify as a regulated investment company, at least 90%
of the Fund's annual gross income must consist of dividends, interest and other
types of qualifying income and no more than 30% of its annual gross income may
be derived from the sale or other disposition of securities or certain other
investments held for less than three months. Foreign exchange gains derived by a
Fund with respect to the Fund's business of investing in stock or securities or
options or futures with respect to such stock or securities is qualifying income
for purposes of this 90% limitation.
If the Fund owns shares in a foreign corporation that constitutes a "passive
foreign investment company" (a "PFIC") for federal income tax purposes and the
Fund does not elect to treat the foreign corporation as a "qualified electing
fund" within the meaning of the Code, the Fund may be subject to United States
federal income taxation on a portion of any "excess distribution" it receives
from the PFIC or any gain it derives from the disposition of such shares, even
if such income is distributed as a taxable dividend by the Fund to its United
States shareholders. The Fund may also be subject to additional interest charges
in respect of deferred taxes arising from such distributions or gains. Any tax
paid by the Fund as a result of its ownership of shares in a PFIC will not give
rise to a deduction or credit to the Fund or to any shareholder. A PFIC means
any foreign corporation if, for the taxable year involved, either (i) it derives
at least 75 percent of its gross income from "passive income" (including, but
not limited to, interest, dividends, royalties, rents and annuities), or (ii) on
average, at least 50 percent of the value (or adjusted basis, if elected) of the
assets held by the corporation produce "passive income."
On April 1, 1992, proposed U.S. Treasury regulations were issued regarding a
special mark to market election for regulated investment companies. Under these
regulations, the annual mark-to-market gain, if any, on shares held by the Fund
in a PFIC would be treated as an excess distribution received by the Fund in the
current year, eliminating the deferral and the related interest charge. Such
excess distribution amounts are treated as ordinary income, which the Fund will
be required to distribute to shareholders even though the Fund has not received
any cash to satisfy this distribution requirement. These regulations would be
effective for taxable years ending after the promulgation of the proposed
regulations as final regulations.
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. 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 Board, or by a vote of the holders of a
majority of the Fund's outstanding voting securities, and in either event by a
majority vote of the 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.
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.
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 July 31, 1993, 1994, and 1995 were
$2,579,590, $3,229,173, and $1,831,694 respectively. After allowances to
dealers, Distributors retained $72,573, $56,232, and $200,964 during the fiscal
years ended July 31, 1993, 1994, and 1995 respectively. Effective February 1,
1995, Distributors is entitled to retain net underwriting discounts and
commissions in connection with some redemptions or repurchases of shares. For
the fiscal year ended July 31, 1995, Distributors retained $19. Distributors may
be entitled to reimbursement under the distribution plan of the Fund as
discussed below. Except as noted, Distributors received no other compensation
from the Fund for acting as underwriter.
Plans of Distribution
Each class of the Fund has adopted a distribution plan ("Class I Plan" and
"Class II Plan," respectively, or "Plan(s)") pursuant to Rule 12b-1 under the
1940 Act.
The Class I Plan
Pursuant to the Class I Plan, the Fund may pay up to a maximum of 0.25% per
annum of its average daily net assets, payable quarterly, for expenses incurred
in the promotion and distribution of its shares.
In implementing the Class I 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 Class I shares
of the Fund that were acquired by investors on or after May 1, 1994 ("New
Assets"), and (ii) the amount obtained by multiplying 0.15% by the average daily
net assets represented by Class I shares of the Fund that were acquired before
May 1, 1994 ("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 Class I 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 Class I Plan, such as
advertising.
The fee is a Class I expense so that all Class I shareholders, regardless of
when they purchased their shares, will bear Rule 12b-1 expenses at the same
rate. That rate initially will be at least 0.20% (0.05% plus 0.15%) of such
average daily net assets and, as Class I shares are sold on or after the
Effective Date, will increase over time. Thus, as the proportion of Class I
shares purchased on or after the Effective Date increases in relation to
outstanding Class I shares, the expenses attributable to payments under the
Class I 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 Class I Plan, the Class I 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
Board would be required to change the calculation of the payments to be made
under the Plan.
Pursuant to the Class I 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 Class I 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 Class I 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 Class II Plan
Under the Class II Plan, the Fund pays to Distributors or others annual
distribution fees, payable quarterly, of 0.75% of Class II's average daily net
assets, in order to compensate Distributors or others for providing distribution
and related services and bearing certain expenses of the Class. All expenses of
distribution and marketing over that amount will be borne by Distributors, or
others who have incurred them, without reimbursement by the Fund. In addition to
this amount, under the Class II Plan, the Fund shall pay 0.25% per annum,
payable quarterly, of the Class' average daily net assets as a servicing fee.
This fee will be used to pay dealers or others for, among other things,
assisting in establishing and maintaining customer accounts and records;
assisting with purchase and redemption requests; receiving and answering
correspondence; monitoring dividend payments from the Fund on behalf of
customers, and similar activities related to furnishing personal services and
maintaining shareholder accounts. Distributors may pay the securities dealer,
from its own resources, a commission of up to 1% of the amount invested at the
time of investment.
In General
In addition to the payments to which Distributors or others are entitled under
the Plans, the Plans also provide 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 each class 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 Plans.
In no event shall the aggregate asset-based sales charges which include payments
made under a Plan, plus any other payments deemed to be made pursuant to a 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 Plans relating to required reports, term, and
approval are consistent with Rule 12b-1. The Plans do 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 Plans 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 Plans 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 Plans have been approved in accordance with the provisions of Rule 12b-1.
The Plans are effective through April 30, 1996 and renewable annually by a vote
of the Board, 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 Plans, 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 Plans 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 management agreement with the Manager or by
vote of a majority of outstanding shares of such class. Distributors or any
dealer or other firm may also terminate their respective distribution or service
agreement at any time upon written notice.
With respect to a Plan, 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 respective class' 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 at least quarterly on
the amounts and purpose of any payment made under the Plan and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the Plan should be continued.
For the fiscal year ended July 31, 1995, the total amount paid by the Fund
pursuant to the Class I Plan was $818,573, which was used for the following
purposes.
Dollar
Amount
Advertising.................. $ 85,823
Printing and mailing of
prospectuses to other than
current shareholders........ $ 89,187
Payments to underwriters..... $ 22,821
Payments to brokers or dealers$620,742
For the three-month period ended July 31, 1995, the total amount paid by the
Fund pursuant to the Class II Plan was $4,072, all of which was paid to
securities dealers.
General Information
Performance
As noted in the Prospectus, each class of 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 Class I shares of the Fund for the indicated
one-, five-, and ten-year periods ended on July 31, 1995 were -1.50%, 3.38%, and
9.21%, 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 (or fractional portion thereof)
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 Class I shares of the Fund for the one-, five-,
and ten-year periods ended on July 31, 1995 were -1.50%, 18.06% and 141.27%,
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 Class I shares and the Class II shares of the Fund for the 30-day
period ended on July 31, 1995 were 0.87% and 0.11%, respectively.
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(R). 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 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 - Equity Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and 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, 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.
In addition to the indices listed above, the following gold bullion and gold
mining stock indices may be appropriate:
a) London Gold Prices - based on afternoon price fixings of five major gold
bullion dealers.
b) Financial Times Gold Mining Shares Index - represents the return on the
market value of South African gold mining stocks.
c) Toronto Gold Index - represents the return on the market value of gold mining
stocks listed on the Toronto Exchange.
d) Australian Gold Index - represents the return on the market value of gold
mining stocks listed on the Australian Exchange.
e) Philadelphia Gold and Silver Index - represents the return on the market
value of gold and silver mining stocks listed on the Philadelphia exchange.
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.
Advertisements may discuss the purchase of shares of the Fund in connection with
a strategy to combat the effects of inflation. The discussion may note the fact
that, over time, inflation may erode purchasing power. Even if inflation
averages only 4.5% a year, the value of the dollar today would be reduced to
just 42 cents in 20 years. Gold historically has acted as a hedge against
inflation.
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
costs 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.
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 2.4 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 $130 billion in
assets under management for more than 3.9 million U.S. based mutual fund
shareholder and other accounts. The Franklin Group of Funds and the Templeton
Group of Funds offers to the public 114 U.S. based mutual funds. The Fund may
identify itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past seven years.
Miscellaneous Information
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 audited financial statements contained in the Annual Report to Shareholders
of the Fund dated July 31, 1995, including the auditors' report, are
incorporated herein by reference.
