SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE PROSPECTUS OF
FRANKLIN EQUITY FUND
DATED NOVEMBER 1, 1994
AS AMENDED JANUARY 19, 1995
The following sections of the prospectus are revised to reflect changes to the
operational policies of the Fund, effective February 1, 1995:
a) The following language is added at the end of the first paragraph:
Investors should review the prospectus of the fund they wish to exchange
from and the fund they wish to exchange into for all specific requirements
or limitations on exercising the exchange privilege, for example, minimum
holding periods or applicable sales charges."
1. EXPENSE TABLE
Revised to reflect that investments of $1,000,000 or more are not subject to
a front-end sales charge but a contingent deferred sales charge of 1% will
be imposed on certain redemptions within 12 months of the calendar month
following such investments. See "How to Sell Shares of the Fund - Contingent
Deferred Sales Charge."
2. MANAGEMENT OF THE FUND
Revised to add the definition "Franklin Templeton Group" to describe the
subsidiaries of Resources.
3. HOW TO BUY SHARES OF THE FUND
a) The following language as paragraph two:
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.
b) Substitute the following for the sales charge table and the ensuing two
paragraphs:
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
------------------------------------------------------------
AS A AS A DEALER CONCESSION
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF NET AS A PERCENTAGE
AT OFFERING PRICE 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 set forth above.
**The following commissions will be paid by Distributors, from its own
resources, to securities dealers who initiate and are responsible for
purchases of $1 million or more: 1.00% on sales of $1 million but less 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.
***At the discretion of Distributors, all sales charges may at times be
allowed to the securities dealer. If 90% or more of the sales commission is
allowed, such securities dealer may be deemed to be an underwriter as that
term is defined in the Securities Act of 1933, as amended.
No front-end sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of
investments of $1 million or more within 12 months of the calendar month
following such investments ("contingency period"). See "How to Sell Shares
of the Fund - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of the
shareholder's current purchase plus the cost or current value (whichever is
higher) of a shareholder's existing investment in one or more of the funds in
the Franklin Group of Funds(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 (al-
1
<PAGE>
though certain investments may not have the same schedule of sales charges
and/or may not be subject to reduction) and (c) the U.S. mutual funds in the
Templeton Group of Funds except Templeton American Trust, Inc., Templeton
Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and
Templeton Variable Products Series Fund (the "Templeton Funds"). (Franklin
Funds and Templeton Funds are collectively referred to as the "Franklin
Templeton Funds.") Sales charge reductions based upon aggregate holdings of
(a), (b) and (c) above ("Franklin Templeton Investments") may be effective
only after notification to Distributors that the investment qualifies for a
discount. References throughout the Prospectus, for purposes of aggregating
assets or describing the exchange privilege, refer to the above
descriptions.
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 company and trust departments of
banks and certain retirement plans of organizations with collective
retirement plan assets of $10 million or more. See definitions under
"Description of Special Net Asset Value Purchases" and as set forth in the
SAI.
b) Substitute the following for the current "Purchases at Net Asset Value"
subsection:
PURCHASES AT NET ASSET VALUE
Shares of the Fund may be purchased without the imposition of either a
front-end sales charge ("net asset value") or a contingent deferred sales
charge by (1) officers, directors, trustees 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; (2) companies exchanging
shares with or selling assets pursuant to a merger, acquisition or exchange
offer; (3) insurance company separate accounts for pension plan contracts;
(4) accounts managed by the Franklin Templeton Group; (5) shareholders of
Templeton Institutional Funds, Inc. reinvesting redemption proceeds from
that fund under an employee benefit plan qualified under Section 401 of the
Internal Revenue Code of 1986, as amended, in shares of the Fund; (6)
certain unit investment trusts and unit holders of such trusts reinvesting
their distributions from the trusts in the Fund; (7) registered securities
dealers and their affiliates, for their investment account only; and (8)
registered personnel and employees of securities dealers and by their
spouses and family members, in accordance with the internal policies and
procedures of the employing securities dealer.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another
of the Franklin Templeton Funds which were purchased with a front-end sales
charge or assessed a contingent deferred sales charge on redemption. An
investor may reinvest an amount not exceeding the redemption proceeds. While
credit will be given for any contingent deferred sales charge paid on the
shares redeemed, a new contingency period will begin. Shares of the Fund
redeemed in connection with an exchange into another fund (see "Exchange
Privilege") are not considered "redeemed" for this privilege. In order to
exercise this privilege, a written order for the purchase of shares of the
Fund must be received by the Fund or the Fund's Shareholder Services Agent
within 120 days after the redemption. The 120 days, however, do not begin to
run on redemption proceeds placed immediately after redemption in a Franklin
Bank Certificate of Deposit ("CD") until the CD (including any rollover)
matures. Reinvestment at net asset value may also be handled by a securities
dealer or other financial institution, who may charge the shareholder a fee
for this service. The redemption is a taxable transaction but reinvestment
without a sales charge may affect the amount of gain or loss recognized and
the tax basis of the shares reinvested. If there has been a loss on the
redemption, the loss may be disallowed if a reinvestment in the same fund is
made within a 30-day period. Information regarding the possible tax
consequences of such a reinvestment is included in the tax section of this
Prospectus and the SAI.
Dividends and capital gains received in cash by the shareholder may also be
used to purchase shares of the Fund or another of the Franklin Templeton
Funds at net asset value and without the imposition of
2
<PAGE>
a contingent deferred sales charge within 120 days of the payment date of
such distribution. To exercise this privilege, a written request to reinvest
the distribution must accompany the purchase order. Additional information
may be obtained from Shareholder Services at 1-800/632-2301. See
"Distributions in Cash" under "Distributions to Shareholders."
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by investors who have,
within the past 60 days, redeemed an investment in an unaffiliated mutual
fund which charged the investor a contingent deferred sales charge upon
redemption and which has investment objectives similar to those of the Fund.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by registered investment
advisors and/or their affiliated broker-dealers, who have entered into a
supplemental agreement with Distributors, on behalf of their clients who are
participating in a comprehensive fee program (also known as a wrap fee
program).
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by anyone who has taken a
distribution from an existing retirement plan already invested in the
Franklin Templeton Funds (including former participants of the Franklin
Templeton Profit Sharing 401(k) plan), to the extent of such distribution.
In order to exercise this privilege a written order for the purchase of
shares of the Fund must be received by Franklin Templeton Trust Company (the
"Trust Company"), the Fund or Investor Services, within 120 days after the
plan distribution. A prospectus outlining the investment objectives and
policies of a fund in which the shareholder wishes to invest may be obtained
by calling toll free at 1-800/DIAL BEN (1-800/342-5236).
Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or
city, or any instrumentality, department, authority or agency thereof which
has determined that the Fund is a legally permissible investment and which
is prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND
TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings
into the Fund should consult with expert counsel to determine the effect, if
any, of various payments made by the Fund or its investment manager on
arbitrage rebate calculations. If an investment by an eligible governmental
authority at net asset value is made through a securities dealer who has
executed a dealer agreement with Distributors, Distributors or one of its
affiliates may make a payment, out of their own resources, to such
securities dealer in an amount not to exceed 0.25% of the amount invested.
Contact Franklin's Institutional Sales Department for additional information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES
Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by certain designated
retirement plans, including profit sharing, pension, 401(k) and simplified
employee pension plans ("designated plans"), subject to minimum requirements
with respect to number of employees or amount of purchase, which may be
established by Distributors. Currently, those criteria require that the
employer establishing the plan have 200 or more employees or that the amount
invested or to be invested during the subsequent 13-month period in the Fund
or in any of the Franklin Templeton Investments totals at least $1,000,000.
Employee benefit plans not designated above or qualified under Section 401
of the Code ("non-designated plans") may be afforded the same privilege if
they meet the above requirements as well as the uniform criteria for
qualified groups previously described under "Group Purchases" which enable
Distributors to realize economies of scale in its sales efforts and sales
related expenses.
3
<PAGE>
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trust companies and bank
trust departments for funds over which they exercise exclusive discretionary
investment authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of purchase, which may be established by
Distributors. Currently, those criteria require that the amount invested or
to be invested during the subsequent 13-month period in this Fund or any of
the Franklin Templeton Investments must total at least $1,000,000. Orders
for such accounts will be accepted by mail accompanied by a check or by
telephone or other means of electronic data transfer directly from the bank
or trust company, with payment by federal funds received by the close of
business on the next business day following such order.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trustees or other
fiduciaries purchasing securities for certain retirement plans of
organizations with collective retirement plan assets of $10 million or more,
without regard to where such assets are currently invested.
Refer to the SAI for further information.
4. EXCHANGE PRIVILEGE
Add the following paragraph under the subsection "Additional Information
Regarding Exchanges":
A contingent deferred sales charge will not be imposed on exchanges. If,
however, the exchanged shares were subject to a contingent deferred sales
charge in the original fund purchased, and shares are subsequently redeemed
within the contingency period, a contingent deferred sales charge will be
imposed. The contingency period will be tolled (or stopped) for the period
such shares are exchanged into and held in a Franklin or Templeton money
market fund. See also "How to Sell Shares of the Fund - Contingent Deferred
Sales Charge."
5. HOW TO SELL SHARES OF THE FUND
Add the following subsection:
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers on qualified
investments of $1 million or more, a contingent deferred sales charge of 1%
applies to redemptions of those investments within the contingency period 12
months of the calendar month following their purchase. The charge is 1% of
the lesser of the value of the shares redeemed (exclusive of reinvested
dividends and capital gain distributions) or the total cost of such shares,
and is retained by Distributors. In determining if a charge applies, shares
not subject to a contingent deferred sales charge are deemed to be redeemed
first, in the following order: (i) shares representing amounts attributable
to capital appreciation of those shares held less than 12 months; (ii)
shares purchased with reinvested dividends and capital gain distributions;
and (iii) other shares held longer than 12 months; and followed by any
shares held less than 12 months, on a "first in, first out" basis.
The contingent deferred sales charge is waived for: exchanges; distributions
to participants in Trust Company retirement plan accounts due to death,
disability or attainment of age 59-1/2; tax-free returns of excess
contributions to employee benefit plans; distributions from employee benefit
plans, including those due to plan termination or plan transfer; redemptions
through a Systematic Withdrawal Plan set up prior to February 1, 1995 and,
for Systematic Withdrawal Plans set up thereafter, redemptions of up to 1%
monthly of an account's net asset value (3% quarterly, 6% semiannually or
12% annually); and redemptions initiated by the Fund due to a shareholder's
account falling below the minimum specified account size.
Requests for redemptions for a specified dollar amount will result in
additional shares being redeemed to cover any applicable contingent deferred
sales charge while requests for redemption of a specific number of shares
will result in the applicable contingent deferred sales charge being
deducted from the total dollar amount redeemed.
4
<PAGE>
FRANKLIN
EQUITY FUND
PROSPECTUS NOVEMBER 1, 1994
AS AMENDED JANUARY 19, 1995
[FRANKLIN LOGO]
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
- --------------------------------------------------------------------------------
Franklin Equity 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 return. It is
anticipated that the Fund's assets will generally be primarily invested in
common stocks, or securities convertible into common stocks.
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that a prospective investor should know before
investing. After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of shares and
other items which a prospective investor will find useful to have.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
A Statement of Additional Information concerning the Fund, dated November 1,
1994, as may be amended from time to time, provides a further discussion of
certain areas in this Prospectus and other matters which may be of interest to
some investors. It has been filed with the Securities and Exchange Commission
("SEC") and is incorporated herein by reference. A copy is available without
charge from the Fund or the Fund's principal underwriter, Franklin/Templeton
Distributors, Inc. ("Distributors"), at the address or telephone number listed
above.
This Prospectus is not an offering of the securities herein described in
any state in which the offering is not authorized. No sales representative,
dealer, or other person is authorized to give any information or make any
representations other than those contained in this Prospectus. Further
information may be obtained from the underwriter.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
CONTENTS PAGE
Expense Table.................................... 2
Financial Highlights............................. 4
About the Fund................................... 4
Investment Objectives and
Policies of the Fund............................ 5
Management of the Fund........................... 9
Distributions to Shareholders.................... 11
Taxation of the Fund
and Its Shareholders............................ 12
How to Buy Shares of the Fund.................... 13
Purchasing Shares of the
Fund in Connection with
Retirement Plans Involving
Tax-Deferred Investments........................ 19
Other Programs and Privileges
Available to Fund Shareholders.................. 20
Exchange Privilege............................... 22
How to Sell Shares of the Fund................... 24
Telephone Transactions........................... 27
Valuation of Fund Shares......................... 28
How to Get Information Regarding
an Investment in the Fund....................... 29
Performance...................................... 30
General Information.............................. 30
Account Registrations............................ 31
Important Notice Regarding
Taxpayer IRS Certifications..................... 32
Portfolio Operations............................. 33
EXPENSE TABLE
- --------------------------------------------------------------------------------
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in the Fund. These figures are based on aggregate
operating expenses of the Fund for the fiscal year ended June 30, 1994, except
as otherwise noted.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)................... 4.50%
Maximum Sales Charge Imposed on Reinvested
Dividends.............................................. NONE
Deferred Sales Charge.................................. NONE
Redemption Fees........................................ NONE
Exchange Fee (per transaction)......................... $5.00*
</TABLE>
*$5.00 fee only imposed on Timing Accounts as described under "Exchange
Privilege." All other exchanges are without charge.
2
<PAGE>
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees........................................ 0.53%
Maximum Rule 12b-1 Fees................................ 0.25%**
Other Expenses:
Shareholder Servicing Costs................... 0.09%
Reports to Shareholders....................... 0.09%
Other......................................... 0.05%
-----
Total Other Expenses................................... 0.23%
-----
Total Fund Operating Expenses.......................... 1.01%***
=====
</TABLE>
**Shareholders of the Fund approved a plan of distribution (the "Plan") pursuant
to Rule 12b-1 under the Investment Company Act of 1940, which will provide for
payments made by the Fund in connection with the distribution of its shares, up
to a maximum annual rate of 0.25% of the Fund's average net assets. See
"Management of the Fund - 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.
***Total operating expenses for the fiscal year ended June 30, 1994 have been
restated to reflect the maximum reimbursement allowed pursuant to the Plan of
Distribution permitted by Rule 12b-1, as though the Plan had been in effect for
the entire fiscal year. The Fund's actual total operating expenses equalled
0.79% of the average monthly net assets of the Fund for the fiscal year ended
June 30, 1994.
Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in the Fund. Rather the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.
EXAMPLE
As required by SEC regulations, the following example illustrates the expenses,
including the initial 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. As noted in the table above, the Fund
charges no redemption fees:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$55 $76 $98 $163
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES SHOWN ABOVE AND
SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES, WHICH MAY BE MORE
OR LESS THAN THOSE SHOWN. The operating expenses are borne by the Fund and only
indirectly by shareholders as a result of their investment in the Fund. In
addition, federal regulations require the example to assume an annual return of
5%, but the Fund's actual return may be more or less than 5%.
3
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Set forth below is a table containing the financial highlights for a share
throughout the ten fiscal years ended June 30, 1994. The information for each of
the five fiscal years in the period ended June 30, 1994 has been audited by
Coopers & Lybrand, independent auditors, whose audit report appears in the
Fund's Statement of Additional Information, a copy of which may be obtained as
noted on the front cover of this Prospectus. The remaining figures, which are
also audited, are not covered by the auditors' current report. See also "Reports
to Shareholders" under "General Information."
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989
-------- -------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE*
Net asset value at beginning
of year.......................... $ 7.25 $ 7.12 $ 7.36 $ 7.17 $ 7.21 $ 6.67
-------- -------- -------- -------- -------- --------
Net investment income............. .10 .12 .14 .15 .17 .19
Net realized and unrealized
gains (losses) on securities..... .107 .557 .089 .190 .344 .558
-------- -------- -------- -------- -------- --------
Total from investment
operations....................... .207 .677 .229 .340 .514 .748
-------- -------- -------- -------- -------- --------
Less distributions:
Dividends from net investment
income........................... (.103) (.119) (.142) (.150) (.296) (.109)
Distributions from net
capital gains.................... (.824) (.428) (.327) -- (.258) (.099)
-------- -------- -------- -------- -------- --------
Total distributions............... (.927) (.547) (.469) (.150) (.554) (.208)
Net asset value at end of year.... $ 6.53 $ 7.25 $ 7.12 $ 7.36 $ 7.17 $ 7.21
======== ======== ======== ======== ========= ========
Total return**.................... 2.28% 9.53% 3.36% 4.87% 7.00% 11.54%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of year
(in 000's)....................... $279,880 $345,755 $364,826 $374,993 $419,422 $370,705
Ratio of expenses to average
net assets....................... .79% .69% .70% .69% .69% .70%
Ratio of net income to average
net assets....................... 1.27% 1.67% 1.86% 2.29% 2.51% 2.82%
Portfolio turnover rate........... 95.18% 51.12% 49.19% 56.76% 42.71% 51.17%
</TABLE>
<TABLE>
<CAPTION>
1988 1987 1986 1985
--------- -------- -------- --------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE*
Net asset value at beginning
of year......................... $ 7.73 $ 7.19 $ 5.43 $ 5.86
-------- --------- -------- --------
Net investment income............ .12 .10 .11 .13
Net realized and unrealized
gains (losses) on securities.... (.249) 1.141 2.000 1.320
-------- -------- -------- --------
Total from investment
operations...................... (.129) 1.241 2.110 1.450
-------- -------- -------- --------
Less distributions:
Dividends from net investment
income......................... (.116) (.100) (.118) (.150)
Distributions from net
capital gains................... (.815) (.601) (.232) (1.730)
-------- -------- -------- --------
Total distributions.............. (.931) (.701) (.350) (1.880)
Net asset value at end of year... $ 6.67 $ 7.73 $ 7.19 $ 5.43
======== ======== ======== ========
Total return**................... (.53)% 19.66% 41.26% 31.78%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of year
(in 000's)...................... $341,520 $299,353 $161,222 $ 95,349
Ratio of expenses to average
net assets...................... .72% .78% .89% .94%
Ratio of net income to average
net assets...................... 1.97% 1.74% 2.00% 2.68%
Portfolio turnover rate.......... 85.03% 44.82% 48.96% 53.40%
</TABLE>
*Selected data for a share of capital stock outstanding throughout the year
**Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum initial sales charge and assumes
reinvestment of dividends and capital gains at net asset value. Effective May 1,
1994, with the implementation of the Rule 12b-1 Plan of Distribution as
discussed in "Plan of Distribution" under "Management of the Fund", below, the
existing sales charge on reinvested income dividends has been eliminated.
ABOUT THE FUND
- --------------------------------------------------------------------------------
Franklin Equity Fund, known as Research Equity Fund, Inc. until October 1984, is
a diversified open-end management investment company, commonly called a "mutual
fund," and has been registered as such under the Investment Company Act of 1940
as amended (the "1940 Act"). The Fund was originally organized in 1933,
reincorporated in Maryland on September 6, 1973, and reincorporated in
California in October 1984 through the merger of the Maryland corporation into a
newly formed California corporation.
4
<PAGE>
Shares of the Fund may be purchased (minimum investment of $100 initially and
$25 thereafter) at the current public offering price which is equal to the
Fund's net asset value (see "Valuation of Fund Shares") plus a sales charge
based upon a variable percentage (ranging from 4.5% to less than 1.0% of the
offering price) depending upon the amount invested. (See "How to Buy Shares of
the Fund.")
INVESTMENT OBJECTIVES AND POLICIES OF THE FUND
- --------------------------------------------------------------------------------
The principal investment objective of the Fund is capital appreciation -- that
is, the Fund seeks to purchase securities which management believes have the
potential to increase in value, so that its own shares will in turn increase in
value. The secondary objective of the Fund is to provide current income return
through the receipt of dividends or interest from its investments. The payment
of dividends may be a consideration when securities are purchased. The Fund's
investment objective of capital appreciation is a fundamental policy and may not
be changed without shareholder approval.
Because of the Fund's investment objective of capital appreciation, if
management feels the risk is justified by the potential for appreciation, the
Fund may invest in securities which will be subject to more risk than if less
volatile securities were purchased. As with any other investment, there is no
assurance that the Fund's objectives will be attained.
TYPES OF SECURITIES THE FUND MAY PURCHASE
The Fund will normally invest at least 65% of its assets in common stocks, and
securities convertible into common stocks, which may be traded on a securities
exchange or over-the-counter to satisfy its primary objective of capital
appreciation. In seeking income, the Fund may also purchase preferred stocks and
debt securities. For temporary defensive purposes some of the cash reserves may
be placed in securities of the U.S. government and its agencies, commercial
paper (short-term debt securities of large corporations), or various bank debt
instruments such as bankers' acceptances and certificates of deposit.
The investment strategy of the Fund is generally to invest in undervalued
securities issued by companies which, in the opinion of the Fund's investment
adviser, have strong future earnings growth prospects and are trading at
attractive valuation ratios relative to their industry peers. In attempting to
provide enhanced value to the shareholder over the long term, the Fund's
fundamental analysis and continuous active management will be used in
conjunction with a disciplined, quantitative model which management believes
identifies potentially rewarding investments. This strategy is not a fundamental
investment policy of the Fund and may be changed at any time at the directors'
discretion and without shareholder approval.
Smaller Companies. The Fund may invest in relatively new or unseasoned
companies which are in their early stages of development, or in new and
emerging industries where the opportunity for rapid growth is expected to be
above average. Securities of unseasoned companies present greater risks than
securities of larger, more established companies. The companies in which the
Fund may invest may have relatively small revenues, limited product lines, and
may have a small share of the market for their products or services. Due to
these and other factors, new or unseasoned companies may suffer significant
losses as well as realize substantial growth, and investments in such companies
tend to be volatile and are therefore speculative. Any such investments,
however, will be limited in the case of issuers which have less than three
years continuous operation, in-
5
<PAGE>
cluding the operations of any predecessor companies, to no more than 5% of the
Fund's total assets.
SOME OF THE FUND'S OTHER INVESTMENT POLICIES
The remaining 35% (or less) of the Fund's assets will be invested in the
securities described above as well as those discussed below.
Options and Financial Futures. The Fund may write covered put and call options
and purchase put and call options on securities and securities indices which
trade on securities exchanges and in the over-the-counter market. The Fund may
purchase and sell financial futures and options on financial futures with
respect to securities, securities indices and currencies. Additionally, the Fund
may purchase and sell financial futures and options to "close out" futures and
options it may have purchased. The Fund will not enter into any futures contract
or related options (except for closing transactions) if, immediately thereafter,
the sum of the amount of its initial deposits and premiums on open futures
contracts and related options would exceed 5% of the Fund's total assets (taken
at current value). The Fund will not engage in any stock options or stock index
options (except for closing transactions) if, immediately thereafter, the option
premiums paid regarding its open option positions exceed 5% of the value of the
Fund's total assets (taken at current value). Transactions in options and
financial futures and options related thereto are generally considered
"derivative securities." The Fund will not engage in any such transactions for
speculation but only as a hedge against changes resulting from market conditions
in the values of its securities or securities which it intends to purchase and,
to the extent consistent therewith, to accommodate cash flows.
The Fund's option and futures investments involve certain risks. Such risks
include the risk that the effectiveness of an options and futures strategy
depends on the degree to which price movements in the underlying index or
securities correlate with price movements in the relevant portion of the Fund's
portfolio. The Fund bears the risk that the prices of its portfolio securities
will not move in the same amount as the option or future it has purchased, or
that there may be a negative correlation which would result in a loss on both
such securities and the option or futures contracts or investment.
The Fund's option and futures investments may be limited by the requirements of
the Internal Revenue Code of 1986, as amended ("the Code"), for qualification as
a regulated investment company and may reduce the portion of the Fund's
dividends which is eligible for the corporate dividends-received deduction.
These transactions are also subject to special tax rules that may affect the
amount, timing and character of certain distributions to shareholders, more
information about which is included in the section entitled "Additional
Information Regarding Taxation" in the Statement of Additional Information.
Positions in exchange traded options and futures may be closed out only on an
exchange which provides a secondary market. There may not always be a liquid
secondary market for a futures or option contract at a time when the Fund seeks
to "close out" its position. If the Fund were unable to "close out" a futures or
option position, and if prices moved adversely, the Fund would have to continue
to make daily cash payments to maintain its required margin, and if the Fund had
insufficient cash, it might have to sell portfolio securities at a
disadvantageous time. In addition, the Fund might be required to deliver the
stocks underlying futures or options contracts it holds.
Over-the-counter Options ("OTC" options) may not be closed out on an exchange
and 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 is-
6
<PAGE>
sued it. There can be no assurance that a liquid secondary market will exist for
any particular option or futures contract at any specific time. Thus, it may not
be possible to close such an option or futures position. The Fund will enter
into an option or futures position only if there appears to be a liquid
secondary market for such option or futures.
The Fund understands the current position of the staff of the SEC to be that
purchased OTC options are illiquid securities and that the assets used to cover
the sale of an OTC option are considered illiquid. The Fund and Advisers
disagree with this position. Nevertheless, pending a change in the staff's
position, the Fund will treat OTC options and "cover" assets as subject to the
Fund's limitation on illiquid securities. (See "Investment Objective and
Policies Followed by the Fund - Illiquid Investments" in this Prospectus.)
In addition, adverse market movements could cause the Fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a futures contract. There is also the risk of loss by
the Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a futures contract or option.
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 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 or its agencies
or instrumentalities, or irrevocable letters of credit. The lending of
securities is a common practice in the securities industry. The Fund engages 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. Under the
securities loan agreement, the Fund continues 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.
Borrowing. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of the assets of the Fund, except that borrowings for temporary or
emergency purposes may be made in an amount up to 5% of total asset value.
Illiquid Investments. It is the policy of the Fund that illiquid securities
(securities that cannot be disposed of within seven days in the normal course of
business at approximately the amount at which the Fund has valued the
securities) may not constitute, at the time of purchase or at any time, more
than 10% of the value of the total net assets of the Fund.
Repurchase Agreements. The Fund may engage in repurchase transactions, in which
the Fund purchases a U.S. Government security subject to resale to a bank or
dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Fund in each agreement, with the value of the
underlying security marked to market daily to maintain coverage of at least
100%. A default
7
<PAGE>
by the seller might cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund might
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks which are deemed creditworthy by the Fund's
investment manager. A repurchase agreement is deemed to be a loan by the Fund
under the 1940 Act. The U.S. government security subject to resale (the
collateral) will be held on behalf of the Fund by a custodian approved by the
Fund's Board and will be held pursuant to a written agreement.
REITs. The Fund may invest in companies which qualify as real estate investment
trusts ("REITs") for federal income tax purposes, when the manager believes that
such investments would help to achieve the Fund's investment objectives. In
order to qualify as a REIT, a company must invest primarily in real
estate-related assets, obtain its income primarily from real estate-related
investments, and distribute virtually all of its taxable income to shareholders,
all as more specifically defined in the Code. The risks involved in REIT
investments include risks common to all real estate investing, such as declines
in the value of real estate, risks related to general and local economic
conditions, overbuilding and increased competition, increases in property taxes
and operating expenses, changes in zoning laws, casualty or condemnation losses,
variations in rental income, changes in neighborhood values, the appeal of
properties to tenants and increases in interest rates. REITs are also subject to
heavy cash flow dependency, defaults by borrowers, self-liquidation and the
possibility of failing to qualify for tax-free pass-through of income under the
Code and to maintain exemption from the 1940 Act.
Other Restrictions. The Fund is subject to a number of additional investment
restrictions, some of which may be changed only with the approval of
shareholders, which limits its activities to some extent. For a list of these
restrictions and more information concerning the policies discussed herein,
please see the Statement of Additional Information.
FOREIGN SECURITIES
There are no restrictions on investment of assets in foreign securities,
providing such investments are consistent with the objectives and comply with
the concentration and diversification policies of the Fund. The holding of
foreign securities, however, may be limited by the Fund to avoid investment in
certain Passive Foreign Investment Companies ("PFICs") as defined by the
Internal Revenue Code of 1986, as amended (the "Code"), and the imposition of a
PFIC tax on the Fund resulting from such investment. To the extent that the Fund
makes such an investment and it generates PFIC income, the Fund may be subject
to a non-deductible tax at the Fund level.
The Fund will ordinarily purchase foreign securities which are traded in the
United States or purchase American Depositary Receipts ("ADRs"), which are
certificates issued by U.S. banks representing the right to receive securities
of a foreign issuer deposited with that bank or a correspondent bank. The Fund
may purchase the securities of foreign issuers directly in foreign markets, and
may purchase the securities of issuers in developing nations, but has no present
intention of doing so.
Investments in foreign securities involve certain risks, in addition to the
usual risks inherent in domestic investments. In many countries, there is less
publicly available information about issuers than is generally available in the
U.S., and foreign companies may not be subject to auditing, accounting and
financial reporting standards comparable to
8
<PAGE>
those applicable to U.S. companies. In addition, there is the possibility of
expropriation, nationalization, extraordinary taxation, adverse currency
fluctuations, political or social instability and/or diplomatic developments
which could affect investment in securities of issuers in foreign nations. For
more information on investing in securities of foreign issuers generally, please
see the Statement of Additional Information.
HOW SHAREHOLDERS PARTICIPATE IN THE RESULTS OF THE FUND'S ACTIVITIES
The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
the shareholder owns will increase. If the securities owned by the Fund decrease
in value, the value of the shareholder's shares will also decline. In this way,
shareholders participate in any change in the value of the securities owned by
the Fund.
In addition to the factors which affect the value of individual securities, as
described in the preceding sections, a shareholder may anticipate that the value
of Fund shares will fluctuate with movements in the broader equity and bond
markets, as well. A decline in the stock markets, expressed for example by a
drop in the Dow Jones Industrial Average, the Standard and Poors 500 index or
any other equity based index, may also be reflected in declines in the Fund's
net asset value. History reflects both decreases and increases in the valuation
of the markets, and these may reoccur unpredictably in the future.
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
The Board of Directors has the primary responsibility for the overall management
of the Fund and for electing the officers of the Fund who are responsible for
administering its day-to-day operations.
Franklin Advisers, Inc. ("Advisers" or "Manager") serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin Resources,
Inc. ("Resources"), a publicly owned holding company, the principal shareholders
of which are Charles B. Johnson, Rupert H. Johnson, Jr. and R. Martin Wiskemann,
who own approximately 20%, 16% and 10%, respectively, of Resources' outstanding
shares. Through its subsidiaries, Resources is engaged in various aspects of the
financial services industry. Advisers acts as investment manager or
administrator to 33 U.S. registered investment companies (111 separate series)
with aggregate assets of over $75 billion.
Pursuant to the management agreement, the Manager supervises and implements the
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct the Fund's business.
During the fiscal year ended June 30, 1994, fees totaling 0.53% of the average
monthly net assets of the Fund were paid to Advisers.
Among the responsibilities of the Manager under the management agreement is the
selection of brokers and dealers through whom transactions in the Fund's
portfolio securities will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more than one broker is
able to provide the best execution, the Manager will consider the furnishing of
quotations and of other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of shares of the Fund,
as factors in selecting a broker. Further information is included under "The
Fund's Policies Regarding Brokers Used on Portfolio Transactions" in the
Statement of Additional Information.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services"
9
<PAGE>
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 June 30, 1993, expenses borne by the Fund,
including fees paid to Advisers and to Investor Services, totalled 0.79% of the
average monthly net assets of the Fund.
PLAN OF DISTRIBUTION
Effective May 1, 1994 (the "Effective Date") the Fund adopted a plan pursuant to
Rule 12b-1 under the 1940 Act (the "Plan"), as approved by shareholders at a
special meeting held on April 13, 1994. Under the Plan, the Fund may reimburse
Distributors or others for all expenses incurred by Distributors or others in
the promotion and distribution of the Fund's shares. Such expenses may include,
but are not limited to, the printing of prospectuses and reports used for sales
purposes, expenses of preparing and distributing sales literature and related
expenses, advertisements, and other distribution-related expenses, including a
prorated portion of Distributors' overhead expenses attributable to the
distribution of Fund shares, as well as any distribution or service fees paid to
securities dealers or their firms or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates. The maximum amount
which the Fund may pay to Distributors or others for such distribution expenses
is 0.25% per annum of the average daily net assets of the Fund, payable on a
quarterly basis. All expenses of distribution and marketing in excess of 0.25%
per annum will be borne by Distributors, or others who have incurred them,
without reimbursement from the Fund. The Plan also covers any payments to or by
the Fund, Advisers, Distributors, or other parties on behalf of the Fund,
Advisers or Distributors, to the extent such payments are deemed to be for the
financing of any activity primarily intended to result in the sale of shares
issued by the Fund within the context of Rule 12b-1. The payments under the Plan
are included in the maximum operating expenses which may be borne by the Fund.
In implementing the Plan, the Board has determined that initially, the annual
fees payable thereunder will be equal to the sum of: (i) the amount obtained by
multiplying 0.25% by the average daily net assets represented by shares of the
Fund that were acquired by investors on or after the Effective Date of the Plan
("New Assets"), and (ii) the amount obtained by multiplying 0.15% by the average
daily net assets represented by shares of the Fund that were acquired before the
Effective Date of the Plan ("Old Assets"). 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 12b-1 Plan. The payments to be made to
Distributors will be used by Distributors to defray other marketing expenses
that have been incurred in accordance with the Plan, such as advertising.
The fee is a Fund expense so that all shareholders, regardless of when they
purchased their shares, will bear expenses under the Plan at the same rate. That
rate initially will be at least 0.20% (0.15% plus 0.05%) of such average daily
net assets and, as Fund shares are sold on or after the Effective Date, will
increase over time. Thus, as the proportion of Fund shares purchased on or after
the Effective Date to outstanding Fund Shares increases, the expenses
attributable to payments under the Plan will also increase (but will not exceed
0.25% of average daily net assets). While this is the currently anticipated
method for calculating fees payable under the Plan, the Plan permits the Fund's
Directors to allow the Fund to pay a full 0.25% on all assets both Old and New
at any time. The approval of the Fund's Board of Directors would be required to
change the method of calculating the payments to be made under the Plan.
10
<PAGE>
DISTRIBUTIONS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
There are two types of distributions which the Fund may make to its
shareholders:
1. Income dividends. The Fund receives income in the form of dividends, interest
and other income derived from its investments. This income, less the expenses
incurred in the Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of dividends paid per
share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made once a year in December and will 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 gain in any year or adjust the timing of these distributions
for operational or other reasons.
DISTRIBUTION DATE
Although subject to change by the Fund's Board of Directors, without prior
notice to or approval by shareholders, the Fund's current policy is to declare
income dividends semi-annually for shareholders of record on the last business
day of May and November, 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 Fund's Board of Directors.
Fund shares are quoted ex-dividend on the first business day following the
record date. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY FIXED RATE OF
RETURN ON AN INVESTMENT IN ITS SHARES.
In order to be entitled to a dividend, an investor must have acquired Fund
shares prior to the close of business on the record date. An investor
considering purchasing Fund shares shortly before the record date of
distribution should be aware that because the value of the Fund's shares is
based directly on the amount of its net assets, rather than on the principle of
supply and demand, any distribution of income or capital gain will result in a
decrease in the value of the Fund's shares equal to the amount of the
distribution. While a dividend or capital gain distribution received shortly
after purchasing shares represents, in effect, a return of a portion of the
shareholder's investment, it may be taxable as dividend income or capital gain.
DIVIDEND REINVESTMENT
Unless requested otherwise in writing or on the Shareholder Application, income
dividends and capital gain distributions, if any, will be automatically
reinvested in the shareholder's account in the form of additional shares, valued
at the closing net asset value (without sales charge) on the dividend
reinvestment date. Shareholders have the right to change their election with
respect to the receipt of distributions by notifying the Fund, but any such
change will be effective only as to distributions for which the record date is
seven or more business days after the Fund has been notified. See the Statement
of Additional Information for more information. Many of the Fund's shareholders
receive their distributions in the form of additional shares. This is a
convenient way to accumulate additional shares and maintain or increase the
shareholder's earnings base. Of course, any shares so acquired remain at market
risk.
11
<PAGE>
DISTRIBUTIONS IN CASH
A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to
another fund in the Franklin Group of Funds(R) or the Templeton Group, to
another person, or directly to a checking account. If the bank at which the
account is maintained is a member of the Automated Clearing House, the payments
may be made automatically by electronic funds transfer. If this last option is
requested, the shareholder should allow at least 15 days for initial
processing. Dividends which may be paid in the interim will be sent to the
address of record. Additional information regarding automated fund transfers
may be obtained from Franklin's Shareholder Services Department. Dividend and
capital gain distributions are eligible for investment in another fund in the
Franklin Group of Funds or the Templeton Group at net asset value. See
"Purchases at Net Asset Value" under "How to Buy Shares of the Fund."
TAXATION OF THE FUND AND ITS SHAREHOLDERS
- --------------------------------------------------------------------------------
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Fund and its shareholders is included in the section entitled
"Additional Information Regarding Taxation" in the Statement of Additional
Information.
The Fund has elected to be treated as a regulated investment company under
Subchapter M of the Code, qualified as such, and intends to continue to qualify.
By distributing all of its income and meeting certain other requirements
relating to the sources of its income and diversification of its assets, the
Fund will not be liable for federal income or excise taxes.
For federal income tax purposes, any income dividends which the shareholder
receives from the Fund, as well as any distributions derived from the excess of
net short-term capital gain over net long-term capital loss, are treated as
ordinary income whether the shareholder has elected to receive them in cash or
in additional shares.
Of the income dividends paid by the Fund for the fiscal year ended June 30,
1994, 100% qualified for the corporate dividends-received deduction, subject to
certain holding period and debt financing restrictions imposed under the Code
on the corporation claiming the deduction.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time the shareholder has owned Fund shares and regardless of whether
such distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January, will be treated for tax purposes as if
received by the shareholder on December 31 of the calendar year in which they
are declared.
Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on sale or exchange of
the Fund's shares, held for six months or less, will be treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such shares.
The Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid and will, promptly after the close of
each
12
<PAGE>
calendar year, advise them of the tax status for federal income tax purposes of
such dividends and distributions.
Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding or other taxes to distributions received by them from the
Fund and the application of foreign tax laws to these distributions.
Shareholders should also consult their tax advisors with respect to the
applicability of any state and local intangible property or income taxes to
their shares of the Fund and distributions and redemption proceeds received from
the Fund.
HOW TO BUY SHARES OF THE FUND
- --------------------------------------------------------------------------------
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall include other financial
institutions which, pursuant to an agreement with Distributors (directly or
through affiliates), handle customer orders and accounts with the Fund. Such
reference, however, is for convenience only and does not indicate a legal
conclusion of capacity. The minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be waived when the shares
are purchased through plans established at Franklin. The Fund and Distributors
reserve the right to refuse any order for the purchase of shares. 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.
PURCHASE PRICE OF FUND SHARES
Shares of the Fund are offered at the public offering price, which is the net
asset value per share, plus a sales charge, next computed (1) after the
shareholder's securities dealer receives the order which is promptly transmitted
to the Fund, or (2) after receipt of an order by mail from the shareholder
directly in proper form (which generally means a completed Shareholder
Application accompanied by a negotiable check). The sales charge is a variable
percentage of the offering price depending upon the amount of the sale. On
orders for 100,000 shares or more, the offering price will be calculated to four
decimal places. On orders for less than 100,000 shares, the offering price will
be calculated to two decimal places using standard rounding criteria. A
description of the method of calculating net asset value per share is included
under the caption "Valuation of Fund Shares."
Set forth below is a table of total sales charges or underwriting commissions
and dealer concessions.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
TOTAL SALES CHARGE
--------------------------------------------------------
AS A PERCENTAGE DEALER CONCESSION
SIZE OF TRANSACTION AS A PERCENTAGE OF NET AMOUNT AS A PERCENTAGE
AT OFFERING PRICE OF OFFERING PRICE 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 through $2,500,000 1.00% 1.01% 1.00%
- --------------------------------------------------------------------------------------------------
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
13
<PAGE>
On purchases in excess of $2,500,000, the sales charge is 1% of the offering
price on the first $2,500,000, plus 0.5% on the next $2,500,000, plus 0.25% on
the excess over $5,000,000. All sales charges on purchases of $1,000,000 or more
are paid to the securities dealer, if any, involved in the trade, who may
therefore be deemed an "underwriter" under the Securities Act of 1933, as
amended.
The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of the shareholder's
current purchase plus the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of the many funds in the
Franklin Group of Funds(R) and the Templeton Group of Funds. Included for these
purposes are (a) the open-end investment companies in the Franklin Group (except
Franklin Valuemark Funds and Franklin Government Securities Trust) (the
"Franklin Group of Funds"), (b) other investment products in the Franklin Group
underwritten by Distributors or its affiliates (although certain investments may
not have the same schedule of sales charges and/or may not be subject to
reduction) (the products in subparagraphs (a) and (b) are referred to as the
"Franklin Group") and (c) the open-end U.S. registered investment companies in
the Templeton Group of Funds except Templeton American Trust, Inc., Templeton
Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton
Variable Products Series Fund (the "Templeton Group"). Purchases pursuant to a
Letter of Intent for more than $2,500,000 will be at a 1% sales charge until
cumulative purchases reach $2,500,000 and at the incremental sales charge on the
excess over $2,500,000. Purchases pursuant to the Rights of Accumulation will be
at the applicable sales charge of 1% or more until the additional purchase, plus
the value of the account or the amount previously invested, less redemptions,
exceeds $2,500,000, in which event the sales charge on the excess will be
calculated as stated above. Sales charge reductions based upon purchases in more
than one of the funds in the Franklin Group or Templeton Group (the "Franklin
Templeton Group") may be effective only after notification to Distributors that
the investment qualifies for a discount.
Distributors or its affiliates, at their expense, may also provide additional
compensation to dealers in connection with sales of shares of the Fund and
other funds in the Franklin Group of Funds or the Templeton Group. Compensation
may include financial assistance to dealers in connection with conferences,
sales or training programs for their employees, seminars for the public,
advertising, sales campaigns and/or shareholder services and programs regarding
one or more of the Franklin Group of Funds or the Templeton Group and other
dealer-sponsored programs or events. In some instances, this compensation may
be made available only to certain dealers whose representatives have sold or
are expected to sell significant amounts of such shares. Compensation may
include payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives and members of their
families to locations within or outside of the United States for meetings or
seminars of a business nature. Dealers may not use sales of the Fund's shares
to qualify for this compensation to the extent such may be prohibited by the
laws of any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. None of the aforementioned
additional compensation is paid for by the Fund or its shareholders.
Certain officers and directors of the Fund are also affiliated with
Distributors. A detailed description is included in the Statement of Additional
Information.
QUANTITY DISCOUNTS IN SALES CHARGES
Shares may be purchased under a variety of plans which provide for a reduced
sales charge. To be
14
<PAGE>
certain to obtain the reduction of the sales charge, the investor or the dealer
should notify Distributors at the time of each purchase of shares which
qualifies for the reduction. In determining whether a purchase qualifies for any
of the discounts, investments in any of the Franklin Templeton Group may be
combined with those of the investor's spouse and children under the age of 21.
In addition, the aggregate investments of a trustee or other fiduciary account
(for an account under exclusive investment authority) may be considered in
determining whether a reduced sales charge is available, even though there may
be a number of beneficiaries of the account.
In addition, an investment in the Fund may qualify for a reduction in the sales
charge under the following programs:
1. Rights of Accumulation. The cost or current value (whichever is higher) of
existing investments in the Franklin Templeton Group may be combined with the
amount of the current purchase in determining the sales charge to be paid.
2. Letter of Intent. An investor may immediately qualify for a reduced sales
charge on a purchase of shares of the Fund by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which if made at one time would qualify for a
reduced sales charge. At any time within 90 days after the first investment
which the investor wants to qualify for the reduced sales charge, a signed
Shareholder Application, with the Letter of Intent section completed, may be
filed with the Fund. After the Letter of Intent is filed, each additional
investment made will be entitled to the sales charge applicable to the level of
investment indicated on the Letter of Intent as described above. Sales charge
reductions based upon purchases in more than one company in the Franklin
Templeton Group will be effective only after notification to Distributors that
the investment qualifies for a discount. The shareholder's holdings in the
Franklin Templeton Group acquired more than 90 days before the Letter of Intent
is filed will be counted towards completion of the Letter of Intent but will not
be entitled to a retroactive downward adjustment of sales charge. Any
redemptions made by the shareholder during the 13-month period will be
subtracted from the amount of the purchases for purposes of determining whether
the terms of the Letter of Intent have been completed. If the Letter of Intent
is not completed within the 13-month period, there will be an upward adjustment
of the sales charge as specified below, depending upon the amount actually
purchased (less redemptions) during the period. An investor who executes a
Letter of Intent prior to the change in the sales charge structure for the Fund
will be entitled to complete the Letter at the lower of (i) the new sales charge
structure; or (ii) the sales charge structure in effect at the time the Letter
was filed with the Fund.
AN INVESTOR ACKNOWLEDGES AND AGREES TO THE FOLLOWING PROVISIONS BY COMPLETING
THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION: Five percent (5%)
of the amount of the total intended purchase will be reserved in shares of the
Fund, registered in the investor's name, to assure that the full applicable
sales charge will be paid if the intended purchase is not completed. The
reserved shares will be included in the total shares owned as reflected on
periodic statements; income and capital gain distributions on the reserved
shares will be paid as directed by the investor. The reserved shares will not be
available for disposal by the investor until the Letter of Intent has been
completed, or the higher sales charge paid. 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 inves-
15
<PAGE>
tor 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 dealer through whom
purchases were made pursuant to the Letter of Intent (to reflect such further
quantity discount) on purchases made within 90 days before, and on those made
after filing the Letter. 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 of Intent, the additional sales charge due will be
deducted from the proceeds of the redemption and the balance will be forwarded
to the investor. By completing the Letter of Intent section of the Shareholder
Application, an investor grants to Distributors a security interest in the
reserved shares and irrevocably appoints Distributors as attorney-in-fact with
full power of substitution to surrender for redemption any or all shares for the
purpose of paying any additional sales charge due. Purchases under the Letter of
Intent will conform with the requirements of Rule 22d-1 under the 1940 Act. The
investor or the investor's securities dealer must inform Investor Services or
Distributors that this Letter is in effect each time a purchase is made.
Additional terms concerning the offering of the Fund's shares are included in
the Statement of Additional Information.
GROUP PURCHASES
An individual who is a member of a qualified group may also purchase shares of
the Fund at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of shares previously
purchased and still owned by the group, plus the amount of the current purchase.
For example, if members of the group had previously invested and still held
$80,000 of Fund shares and now were investing $25,000, the sales charge would be
3.75%. Information concerning the current sales charge applicable to a group may
be obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, must be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, must 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 must seek to
arrange for payroll deduction or other bulk transmission of investments to the
Fund.
If an investor selects a payroll deduction plan, subsequent investments will be
automatic and will continue until such time as the investor notifies the Fund
and the investor's employer to discontinue further investments. Due to the
varying procedures
16
<PAGE>
used to prepare, process and to forward the payroll deduction information to the
Fund, there may be a delay between the time of the payroll deduction and the
time the money reaches the Fund. The investment in the Fund will be made at the
offering price per share determined on the day that both the check and payroll
deduction data are received in required form by the Fund.
PURCHASES AT NET ASSET VALUE
Shares of the Fund may be purchased at net asset value (without sales charge) by
employee benefit plans qualified under Section 401 of the Code, including salary
reduction plans qualified under Section 401(k) of the Code, 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 500 or more employees or that the amount
invested or to be invested during the subsequent 13-month period in the Fund or
another company or companies in the Franklin Templeton Group totals at least
$1,000,000. Employee savings plans and employee benefit plans not qualified
under Section 401 of the Code may be afforded the same privilege if they meet
the above requirements as well as the uniform criteria for qualified groups
previously described under Group Purchases which enable Distributors to realize
economies of scale in its sales efforts and sales related expenses. If
investments by employee benefit plans at net asset value are made through a
dealer who has executed a dealer agreement with Distributors, Distributors or
one of its affiliates may make a payment, out of their own resources, to such
dealer in an amount not to exceed 1.00% of the amount invested.
Shares of the Fund may be purchased at net asset value by trust companies and
bank trust departments for funds over which they exercise exclusive
discretionary investment authority and which are held in a fiduciary, agency,
advisory, custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of purchase, which may be established by
Distributors. Currently, those criteria require that the amount invested or to
be invested during the subsequent 13-month period in this Fund or any other
company in the Franklin Templeton Group 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. If an investment by a trust
company or bank trust department at net asset value is made through a dealer who
has executed a dealer agreement with Distributors, Distributors or one of its
affiliates may make a payment, out of their own resources, to such dealer in an
amount not to exceed 0.25% of the amount invested. Contact Franklin's
Institutional Sales Department for additional information.
Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another fund
in the Franklin Group of Funds or the Templeton Group which were purchased with
a sales charge. An investor may reinvest an amount not exceeding the redemption
proceeds. Shares of the Fund redeemed in connection with an exchange into
another fund (see "Exchange Privilege") are not considered "redeemed" for this
privilege. In order to exercise this privilege, a written order for the purchase
of shares of the Fund must be received by the Fund or the Fund's Shareholder
Services Agent within 120 days after the redemption. The 120 days, however, do
not begin to run on redemption proceeds placed immediately after redemption in a
Franklin Bank Certificate of Deposit ("CD") until the CD (including any
rollover) matures. Reinvest-
17
<PAGE>
ment at net asset value may also be handled by a securities dealer or other
financial institution, who may charge the shareholder a fee for this service.
The redemption is a taxable transaction but reinvestment without a sales charge
may affect the amount of gain or loss recognized and the tax basis of the shares
reinvested. If there has been a loss on the redemption, the loss may be
disallowed if a reinvestment in the same fund is made within a 30-day period.
Information regarding the possible tax consequences of such a reinvestment is
included in the tax section of this Prospectus and the Statement of Additional
Information.
Dividends and capital gains received in cash by the shareholder may also be used
to purchase shares of the Fund or another fund in the Franklin Group of Funds or
the Templeton Group at net asset value within 120 days of the payment date of
such distribution. To exercise this privilege, a written request to reinvest the
distribution must accompany the purchase order. Additional information may be
obtained from Shareholder Services at 1-800/632-2301. See "Distributions in
Cash" under "Distributions to Shareholders."
Shares of the Fund may be purchased at net asset value by investors who have,
within the past 60 days, redeemed an investment in an unaffiliated mutual fund
which charged the investor a contingent deferred sales charge upon redemption
and which has investment objectives similar to those of the Fund.
Shares of the Fund may also be purchased at net asset value by (1)
officers, directors and full-time employees of the Fund, or any fund in the
Franklin Group of Funds or the Templeton Group, the Manager and Distributors and
affiliates of such companies, if they have been such for at least 90 days, and
by their spouses and family members, (2) registered securities dealers and their
affiliates, for their investment account only, and (3) registered personnel and
employees of securities dealers and by their spouses and family members, in
accordance with the internal policies and procedures of the employing securities
dealer. Such sales are made upon the written assurance of the purchaser that the
purchase is made for investment purposes and that the securities will not be
transferred or resold except through redemption or repurchase by or on behalf of
the Fund. Employees of securities dealers must obtain a special application from
their employers or from Franklin's Sales Department in order to qualify.
Shares of the Fund may be purchased at net asset value by anyone who has taken a
distribution from an existing retirement plan already invested in the Franklin
Group of Funds or the Templeton Group (including former participants of the
Franklin/Templeton Profit Sharing 401(k) plan). 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 ("FTTC"), the Fund or Investor
Services, within 120 days after the plan distribution. To obtain a free
prospectus for any fund in which you may be interested, please call toll free at
1-800/DIAL BEN (1-800/342-5236).
Shares of the Fund may also be purchased at net asset value 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
18
<PAGE>
investors considering investment of proceeds of bond offerings into the Fund
should consult with expert counsel to determine the effect, if any, of various
payments made by the Fund or its investment manager on arbitrage rebate
calculations. If an investment by an eligible governmental authority at net
asset value is made through a dealer who has executed a dealer agreement with
Distributors, Distributors or one of its affiliates may make a payment, out of
their own resources, to such dealer in an amount not to exceed 0.25% of the
amount invested. Contact Franklin's Institutional Sales Department for
additional information.
Shares of the Fund may be purchased at net asset value by i) insurance company
separate accounts for pension plan contracts; ii) and registered investment
advisors and/or their affiliated broker-dealers, who have entered into a
supplemental agreement with Distributors, on behalf of their clients who are
participating in a comprehensive fee program (also known as a wrap fee program).
Contact Franklin's Institutional Sales Department for additional information.
GENERAL
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling Fund shares may be required to register as dealers pursuant
to state law.
PURCHASING SHARES OF THE FUND IN CONNECTION WITH RETIREMENT PLANS INVOLVING
TAX-DEFERRED INVESTMENTS
- --------------------------------------------------------------------------------
Shares of the Fund may be used for retirement programs providing for
tax-deferred investments for both individuals and businesses. The Fund may be
used as an investment vehicle for an existing retirement plan, or FTTC may
provide the plan documents and trustee or custodian services. A plan document
must be adopted in order for a plan to be in existence.
FTTC, an affiliate of Distributors, can serve as custodian or trustee for
various types of retirement plans. Brochures for each of the plans sponsored by
Franklin contain important information regarding eligibility, contribution
limits and Internal Revenue Service ("IRS") requirements. Please note that the
separate applications other than the one contained in this Prospectus must be
used to establish an FTTC retirement account. To obtain a retirement plan
brochure or application, call toll free 1-800/DIAL BEN (1-800/342-5236).
The Franklin Templeton IRA is an individual retirement account in which the
contributions, annually limited to the lesser of $2,000 or 100% of an
individual's earned compensation, accumulate on a tax-deferred basis until
withdrawn. Under the current tax law, individuals who (or whose spouses) are
covered by a company retirement plan (termed "active participants") may be
restricted in the amount they may claim as an IRA deduction on their returns.
The IRA deduction is gradually reduced to the extent that a taxpayer's adjusted
gross incomes exceeds certain specified limits.
Two IRAs, with a combined limit of $2,250 or 100% of earned compensation*, may
be established by a married couple in which only one spouse is a wage earner.
The $2,250 may be split between the two IRAs, so long as no more than $2,000 is
contributed to either one for a given tax year.
A Franklin Rollover IRA account is designed to maintain the tax-deferred status
of a qualifying distribution from an employer-sponsored retirement plan, such as
a 401(k) plan or qualified pension plan. Additionally, if the eligible
distribution is directly transferred to a rollover IRA account, the distribution
will be exempt from 20% mandatory federal withholding, a new withholding which
became effective in 1993.
19
<PAGE>
The Franklin Simplified Employee Pension Plan (SEP-IRA) and Salary Reduction
Simplified Employee Pension Plan (SAR-SEP) are for use by small businesses
(generally 25 or fewer employees) to provide a retirement plan for their
employees and, at the same time, provide for a tax-deduction to the employer.
SEP-IRA contributions are made to an employee's IRA, at the discretion of the
employer, up to the lesser of $30,000 or 15% of compensation* per employee. The
SAR-SEP allows employees to contribute a portion of their salary to an IRA on a
pre-tax basis through salary deferrals. The maximum annual salary deferral limit
for a SAR-SEP is the lesser of 15% of compensation (adjusted for deferrals) or
$9,240 (1995 limit; indexed for inflation).
The Franklin Templeton 403(b) Retirement Plan is a salary deferral plan for
employees of certain non-profit and educational institutions (ss.501(c)(3)
organizations and public schools). The 403(b) Plan allows participants to
determine the annual amount of salary they wish to defer. The maximum annual
salary deferral amount is generally the lesser of 25% of compensation (adjusted
for deferrals) or $9,500.
The Franklin Business Retirement Plans provide employers with additional
retirement plan options and may be used individually, in combination, or with
custom designed features. The Profit Sharing Plan allows an employer to make
contributions, at its discretion, of up to the lesser of $30,000 or 15% of
compensation* per employee each year. The Money Purchase Pension Plan allows the
employer to contribute up to the lesser of $30,000 or 25% of compensation* per
employee; however, contributions are required annually at the rate (percentage)
elected by the employer at the outset of the plan. In order to achieve a
combined contribution rate of 25% while maintaining a certain degree of
flexibility, employers may establish both a Profit Sharing Plan and a Money
Purchase Pension Plan (with a fixed contribution rate of 10%).
FTTC can add optional provisions to the Profit Sharing and Money Purchase
Pension Plans described above and provide a Defined Benefit, Target Benefit, and
401(k) Plans on a custom designed basis. Business Retirement Plans, whether
standard or custom designed, may require an annual report (Form 5500) to be
filed with the IRS.
Redemptions from any Franklin retirement plan accounts require the completion of
specific distribution forms to comply with IRS regulations. Please see "How to
Sell Shares of the Fund."
Individuals and employers should consult with a competent tax or financial
advisor before choosing a retirement plan.
*The limit on compensation for determining SEP and qualified plan contributions
was reduced from $235,840 in 1993 to $150,000 for 1994 and 1995. The $150,000
limit will be adjusted for inflation, but only in $10,000 increments.
OTHER PROGRAMS AND PRIVILEGES AVAILABLE TO FUND SHAREHOLDERS
- --------------------------------------------------------------------------------
CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION MAY NOT BE
AVAILABLE DIRECTLY FROM THE FUND TO SHAREHOLDERS WHOSE SHARES ARE HELD, OF
RECORD, BY A FINANCIAL INSTITUTION OR IN A "STREET NAME" ACCOUNT, OR NETWORKED
ACCOUNT THROUGH THE NATIONAL SECURITIES CLEARING CORPORATION ("nscc") (SEE THE
SECTION CAPTIONED "ACCOUNT REGISTRATIONS" IN THIS PROSPECTUS).
SHARE CERTIFICATES
Shares for an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") mini-
20
<PAGE>
6. DISTRIBUTION OPTIONS CHECK ONE
Except when monthly dividends are paid in cash, you will receive a quarterly
statement. If no box is checked, all distributions will be reinvested in
additional shares of the fund.
/ / RD-Reinvest all dividends and capital gains.
/ / PD-Pay all dividends and capital gains in cash.
/ / RC-Pay all dividends in cash and reinvest capital gains.
7. OPTIONAL SHAREHOLDER PRIVILEGES
A. SPECIAL PAYMENT INSTRUCTIONS FOR DISTRIBUTIONS
/ / Pay distributions, as noted above, or / / withdrawals under box 7B to
another Franklin or Templeton Fund.
Fund Name Existing Account Number
------------------------ ----------------
OR
/ / Send my distributions or withdrawals under Box 7B to the person, or to the
checking account at the bank, named below, instead of as registered in
Section 1.
Name Street Address
---------------------------- -------------------------
City State, Zip Code
---------------------------- ------------------------
IMPORTANT! Please indicate account number and ATTACH A VOID CHECK IMPRINTED
WITH YOUR NAME ADDRESS if payable to your bank account.
Bank Account # .
---------------------------
If I have listed a bank account, by signing this Application I give may
authorization to the Fund, its bank(s) and my bank (if it is a member of an
Automated Clearing House [ACH]) to make and receive distributions by ACH
electronic funds transfers, and to initiate and make, if necessary, debit
entries and any adjustments to my bank account of any amounts credited to it
in error. I agree that this authorization will remain in full force and
effect until the Fund has received written notification from me of its
termination. Please allow at least 15 days for initial processing.
Distributions which may be paid in the interim period will be sent to the
address of record.
================================================================================
B. SYSTEMATIC WITHDRAWAL PLAN
Please withdraw ($50 minimum per withdrawal) $
--------
/ / Monthly, / / Quarterly, / / Semi-Annually or / / Annually from my
Franklin account as set forth in the prospectus, starting in
(month). The net asset value of the shares held must be at
------------
least $5,000 at the time the plan is established.
Send the proceeds to: / / address of record OR / / the Franklin or Templeton
Fund, person, or bank account specified in BOX 7A-Special Payment
Instructions for Distributions.
================================================================================
C. TELEPHONE TRANSACTIONS
Telephone Exchange Privilege: If the Fund does not receive specific
instructions from the shareholder, either in writing or by telephone, the
Telephone Exchange Privilege (see the prospectus) is automatically extended
to each account. The shareholder should understand, however, that the Fund
and Franklin Templeton Investor Services, Inc. and their agents will not be
liable for any loss, injury, damage or expense as a result of acting upon
instructions communicated by telephone reasonably believed to be genuine.
The shareholder agrees to hold the Fund and its agents harmless from any
loss, claims, or liability arising from its or their compliance with such
instructions. The shareholder understands that this option is subject to
the terms and conditions set forth in the prospectus of the fund to be
acquired.
/ / No, I do NOT wish to participate in the Telephone Exchange Privilege or
authorize the Fund or its agents, including Franklin Templeton Investor
Services, Inc., to act upon instructions received by telephone to exchange
shares for shares of any other account(s) within the Franklin Templeton
Group.
Telephone Redemption Privilege: This is available to shareholders who
specifically request it and who complete the Franklin Templeton Telephone
Redemption Authorization Agreement in the back of the Fund's prospectus.
================================================================================
D. AUTOMATIC INVESTMENT PROGRAMS
Automatic Payroll Deduction: If you would like to invest directly from
your paycheck, you may direct money automatically to your Franklin fund
account via electronic funds transfer.
/ / Please send me an application for the Automatic Payroll Deduction program.
Direct Deposit Program: If you receive a monthly Social Security check or
other regularly occurring federal payments, you may direct money
automatically to your Franklin fund account via electronic funds transfer.
/ / Please send me an application for the Direct Deposit Program for Federal
Payments.
Automatic Investment Plan: For the convenience of investing on a regular
basis, we can process automatic monthly deposits from your bank account into
any one of our Funds. An application form is in the back of the Fund's
prospectus.
<PAGE>
[FRANKLIN TEMPLETON LOGO] THE FRANKLIN TEMPLETON GROUP
777 MARINERS ISLAND BLVD., P.O. BOX 7777, SAN MATEO, CA 94403-7777
1-800/632-2301
Please do not use this form for Franklin Templeton retirement plans.
Request separate applications.
SHAREHOLDER APPLICATION OR REVISION / / PLEASE CHECK BOX IF REVISION AND SEE
SECTION 8
<TABLE>
<S> <C> <C>
Date
---------------------------
/ / Adjustable U.S. Government / / Convertible Securities Fund 0137 / / Global Health Care Fund 0199
Securities Fund 0138 / / DynaTech Fund 0108 / / Global Utilities Fund 0197
/ / Adjustable Rate Securities Fund 0151 / / Equity Fund 0103 / / Gold Fund 0101
/ / AGE High Income Fund 0105 / / Equity Income Fund 0139 / / Franklin Growth Fund 0106
/ / California Growth Fund 0180 / / Global Government Income / / Franklin Income Fund 0109
Fund 0135 / / International Equity Fund 0191
/ / Investment Grade / / Small Cap Growth Fund 0198
Income Fund 0159 / / Strategic Income Fund 0194
/ / Pacific Growth Fund 0190 / / Strategic Mortgage Portfolio 0157
/ / Premier Return Fund 0102 / / U.S. Government
/ / Real Estate Securities Fund 0192 Securities Fund 0110
/ / Rising Dividends Fund 0158 / / Utilities Fund 0107
</TABLE>
1. ACCOUNT REGISTRATION - PLEASE PRINT
/ / INDIVIDUAL OR JOINT ACCOUNT
---------------------------------------------------------------------------
First name Middle initial Last name
| | | |-| | |-| | | | |
-----------------------
Social security number (SSN)
----------------------- ------------------------ ------------------------
Joint owner(s) (Joint ownership means "joint tenants with rights of
survivorship" unless otherwise specified.)
ALL OWNERS MUST SIGN SECTION 4.
===============================================================================
/ / GIFT/TRANSFER TO A MINOR
--------------------------------------------------------------------------
Name of custodian (one only)
As Custodian For
----------------------------------------------------------
Minor's name (one only)
Uniform Gift/Transfer to Minors Act
--------------------------------------
State (minor's or custodian's state
of residence)
| | | |-| | |-| | | | |
-----------------------
Minor's social security number
Please Note: Custodian's signature, not minor's, is required in Section 4.
===============================================================================
/ / TRUST, CORPORATION, PARTNERSHIP, OR OTHER ENTITY
--------------------------------------------------------------------------
If corporation, resolution required from Board of Directors
| | | |-| | |-| | | | |
-----------------------
Taxpayer identification number (TIN)
--------------------------------------------------------------------------
Name of each trustee (if any)
--------------------------------------------------------------------------
Date of trust document (must be completed for trust registration)
2. ADDRESS
--------------------------------------------------------------------------
Street address (P.O. Box acceptable if street address is given)
| | | | | |-| | | | |
--------------------------------------------------------------------------
City State Zip code
Daytime Phone ( )
---------------------------------
Area code
Evening Phone ( )
---------------------------------
Area code
I am a citizen of: / / U.S. / /
----------------------------------------------
<PAGE>
3. INITIAL INVESTMENT - $100 MINIMUM INITIAL INVESTMENT
Enclosed is a check payable to the Fund indicated above
for $ .
---------------
4. SIGNATURE AND TAX CERTIFICATIONS - All REGISTERED OWNERS MUST SIGN
APPLICATION
See "Important Notice Regarding Taxpayer IRS Certifications" in back of
prospectus. The Fund reserves the right to refuse to open an account without
either a certified taxpayer identification number ("TIN") or a certification of
foreign status. Failure to provide the tax certifications in this section may
result in backup withholding on payments relating to your account and/or in
your inability to qualify for treaty withholding rates.
I am not subject to backup withholding because I have not been notified by the
IRS that I am subject to backup withholding as a result of a failure to report
all interest or dividends or because the IRS has notified me that I am no longer
subject to backup withholding. (If you are currently subject to backup
withholding as a result of a failure to report all interest or dividends,
please cross out the preceding statement.)
/ / The number shown above is my correct TIN, or that of the minor named in
section 1.
/ / AWAITING TIN. I am waiting for a number to be issued to me. I understand
that if I do not provide a TIN to the Fund within 60 days, the Fund is
required to commence 31% backup withholding until I provide a certified
TIN.
/ / EXEMPT RECIPIENT. Individuals cannot be exempt. Check this box only after
reading the instructions to see whether you qualify as an exempt recipient.
(You should still provide a TIN.)
/ / EXEMPT FOREIGN PERSON. Check this box only if the following statement
applies: "I am neither a citizen nor a resident of the United States. I
certify to the best of my knowledge and belief, I qualify as an exempt
foreign person and/or entity as described in the instructions."
Permanent address for tax purposes:
--------------------------------------
Street address
------------------------------------------------------------------------
City State Country Postal code
PLEASE NOTE: The IRS only allows one TIN to be listed on an account. On joint
accounts, it is preferable for the primary account owner (or person listed first
on the account) to list his/her number as requested above.
CERTIFICATION - UNDER THE PENALTIES OF PERJURY, I/WE CERTIFY THAT (1) THE
INFORMATION PROVIDED ON THIS APPLICATION IS TRUE, CORRECT AND COMPLETE, (2) I/WE
HAVE READ THE PROSPECTUS(ES) FOR THE FUND(S) IN WHICH I/WE AM/ARE INVESTING AND
AGREE TO THE TERMS THEREOF, AND (3) I/WE AM/ARE OF LEGAL AGE 0R AN EMANCIPATED
MINOR.
THE UNDERSIGNED ACKNOWLEDGE(S) THAT SHARES OF THE FUND ARE NOT INSURED OR
GUARANTEED BY ANY AGENCY OR INSTITUTION AND THAT AN INVESTMENT IN FUND SHARES
INVOLVES RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
X X
- --------------------------------------- -------------------------------------
Signature Signature
X X
- --------------------------------------- -------------------------------------
Signature Signature
Please make a photocopy of this application for your records.
5. BROKER/DEALER USE ONLY - PLEASE PRINT
Franklin Dealer #
- ----------------------------------------
We hereby submit this application for the purchase of shares of the Fund
indicated in accordance with the terms of our selling agreement with the
Franklin Templeton Distributors, Inc. ("Distributors"), and with the prospectus
for the Funds. We agree to notify Distributors of any purchases made under a
letter of intent or right of accumulation.
WIRE ORDER ONLY: The attached for $ should be applied against
--------------
wire order confirmation number
----------------
dated for
----------------- -------------------------- shares.
Securities Dealer Name
-------------------------------------------------------
Main Office Address
----------------------------------------------------------
Branch # Rep #
----------------- -------------------
Representative Name
--------------------------------------------------
Branch Address
----------------------------------------------------------------
Telephone Number ( )
--------------------
Authorized Signature, Securities Dealer
----------------------------------------
Title
------------------------------------
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ACCEPTED: Franklin Templeton Distributors, Inc. By
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Date
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See reverse for distribution options.
<PAGE>
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E. LETTER OF INTENT (LOI)
/ / I agree to the terms of the Letter of Intent and provisions for reservation
of shares and grant Franklin Templeton Distributors, Inc. the security
interest set forth in the prospectus. Although I am not obligated to do
so, it is my intention to invest over a 13-month period in shares of one or
more Franklin or Templeton funds (including all money market funds in the
Franklin Templeton Group) an aggregate amount at least equal to that which
is checked below.
/ / $100,000-249,999 / / $250,000-499,999
/ / $500,000-999,999 / / $1,000,000-2,500,000
For purchases over $2,500,000, please see the prospectus.
Purchases made within the last 90 days will be included as part of your LOI.
Please write in your account number(s)
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F. RIGHT OF ACCUMULATION (ROA)
Shares may be purchased at the offering price applicable to the total (a)
dollar amount then being purchased plus (b) an amount equal to the cost or
current value (whichever is higher) of the combined holdings of the
purchaser, his or her spouse, and their children under age 21, of shares of
funds in the Franklin Templeton Group including all money market funds in
the Franklin Templeton Group as stated in the prospectus. In order for this
cumulative quantity discount to be made available, the shareholder or his or
her securities dealer must notify Franklin Templeton Investor Services, Inc.
or Franklin Templeton Distributors, Inc. of the total holdings in the
Franklin Templeton Group each time an order is placed.
/ / I own shares of more than one Fund in the Franklin Templeton Group and
qualify for the cumulative quantity discount described above and in the
prospectus.
My other account numbers are:
--------------- --------------- ---------------
8. ACCOUNT REVISION (if applicable)
If you are using this application to REVISE YOUR ACCOUNT REGISTRATION, or wish
to HAVE DISTRIBUTION INCOME SENT TO AN ADDRESS OTHER THAN THE ADDRESS ON YOUR
EXISTING ACCOUNT'S REGISTRATION, a signature guarantee is required. Signatures
of all registered owners must be guaranteed by an "eligible guarantor
institution" as defined under the federal securities laws. See the discussion
of "How to Sell Shares of the Fund" in the prospectus for more information on
signature guarantees. A notary public is NOT an acceptable guarantor.
X
- ------------------------------------------- ----------------------------------
Signature(s) of registered account owners Account number(s)
X
- ------------------------------------------- ----------------------------------
X
- -------------------------------------------
X
- ------------------------------------------- ----------------------------------
Signature guarantee stamp
NOTE: For any change in registration, please send us any outstanding
certificates by registered mail.
<PAGE>
mizes the risk of loss or theft of a share certificate. A lost, stolen or
destroyed certificate cannot be replaced without obtaining a sufficient
indemnity bond. The cost of such a bond, which is generally borne by the
shareholder, can be 2% or more of the value of the lost, stolen or destroyed
certificate. A certificate will be issued if requested in writing by the
shareholder or by the securities dealer.
CONFIRMATIONS
A confirmation statement will be sent to each shareholder semi-annually to
reflect the dividends reinvested during that period and after each other
transaction which affects the shareholder's account. This statement will also
show the total number of shares owned by the shareholder, including the number
of shares in "plan balance" for the account of the shareholder.
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, a shareholder may be able to arrange to
make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which maintains
the account is a member of the Automated Clearing House, or by preauthorized
checks drawn on the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Shareholder Application included with
this Prospectus contains the requirements applicable to this program. In
addition, shareholders may obtain more information concerning this program from
their securities dealers or from Distributors.
The market value of the Fund's shares is subject to fluctuation. Before
undertaking any plan for systematic investment, the investor should keep in mind
that such a program does not assure a profit or protect against a loss.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account, provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum amount
which the shareholder may withdraw is $50 per withdrawal transaction although
this is merely the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. The plan may be established on a monthly,
quarterly, semiannual or annual basis. If the shareholder establishes a plan,
any capital gain distributions and income dividends paid by the Fund will be
reinvested for the shareholder's account in additional shares at net asset
value. Payments will then be made from the liquidation of shares at net asset
value on the day of the transaction (which is generally the first business day
of the month in which the payment is scheduled) with payment generally received
by the shareholder three to five days after the date of liquidation. By
completing the "Special Payment Instructions for Distributions" section of the
Shareholder Application included with this Prospectus, a shareholder may direct
the selected withdrawals to another fund in the Franklin Group of Funds(R) or
the Templeton Group, to another person, or directly to a checking account. If
the bank at which the account is maintained is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If this last option is requested, the shareholder should allow at
least 15 days for initial processing. Withdrawals which may be paid in the
interim will be sent to the address of record. Liquidation of shares may reduce
or possibly exhaust the shares in the shareholder's account, to the extent
withdrawals exceed shares earned through dividends and dis-
21
<PAGE>
tributions, particularly in the event of a market decline. If the withdrawal
amount exceeds the total plan balance, the account will be closed and the
remaining balance will be sent to the shareholder. As with other redemptions, a
liquidation to make a withdrawal payment is a sale for federal income tax
purposes. Because the amount withdrawn under the plan may be more than the
shareholder's actual yield or income, part of the payment may be a return of the
shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Fund would be disadvantageous because of the sales
charge on the additional purchases. The shareholder should ordinarily not make
additional investments of less than $5,000 or three times the annual withdrawals
under the plan during the time such a plan is in effect. A Systematic Withdrawal
Plan may be terminated on written notice by the shareholder or the Fund, and it
will terminate automatically if all shares are liquidated or withdrawn from the
account, or upon the Fund's receipt of notification of the death or incapacity
of the shareholder. Shareholders may change the amount (but not below the
specified minimums) and schedule of withdrawal payments or suspend one such
payment by giving written notice to Investor Services at least seven business
days prior to the end of the month preceding a scheduled payment. Share
certificates may not be issued while a Systematic Withdrawal Plan is in effect.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
Franklin's Institutional Services Department at 1-800/321-8563.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
The Franklin Group of Funds(R) and the Templeton Group consist of a number of
investment companies with various investment objectives or policies. The shares
of most of these investment companies are offered to the public with a sales
charge. If a shareholder's investment objective or outlook for the securities
markets changes, the Fund shares may be exchanged for shares of other mutual
funds in the Franklin Group of Funds or the Templeton Group (as defined under
"How to Buy Shares of the Fund") which are eligible for sale in the
shareholder's state of residence and in conformity with such fund's stated
eligibility requirements and investment minimums. Investors should review the
prospectus of the fund they wish to exchange from and the fund they wish to
exchange into for all specific requirements or limitations on exercising the
exchange privilege, for example, minimum holding periods or applicable sales
charges. Exchanges may be made in any of the following ways:
EXCHANGES BY MAIL
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any
outstanding share certificates.
EXCHANGES BY TELEPHONE
SHAREHOLDERS, OR THEIR INVESTMENT REPRESENTATIVE OF RECORD, IF ANY, MAY EXCHANGE
SHARES OF THE FUND BY TELEPHONE BY CALLING INVESTOR SERVICES AT 1-800/632-2301
OR THE AUTOMATED FRANKLIN TELEFACTS(R) SYSTEM (DAY OR NIGHT) AT 1-800/247-1753.
IF THE SHAREHOLDER DOES NOT WISH THIS PRIVILEGE EXTENDED TO A PARTICULAR
ACCOUNT, THE FUND OR INVESTOR SERVICES SHOULD BE NOTIFIED.
The Telephone Exchange Privilege allows a shareholder to effect exchanges from
the Fund into an
22
<PAGE>
identically registered account in one of the other available funds in the
Franklin Group of Funds or the Templeton Group. The Telephone Exchange Privilege
is available only for uncertificated shares or those which have previously been
deposited in the shareholder's account. The Fund and Investor Services will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. Please refer to "Telephone Transactions - Verification
Procedures."
During periods of drastic economic or market changes, it is possible that the
Telephone Exchange Privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, shareholders should follow the
other exchange procedures discussed in this section, including the procedures
for processing exchanges through securities dealers.
EXCHANGES THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders by telephone or by other means of
electronic transmission from securities dealers who execute a dealer or similar
agreement with Distributors. See also "Exchanges By Telephone" above. Such a
dealer-ordered exchange will be effective only for uncertificated shares on
deposit in the shareholder's account or for which certificates have previously
been deposited. A securities dealer may charge a fee for handling an exchange.
ADDITIONAL INFORMATION REGARDING EXCHANGES
Exchanges are made on the basis of the net asset values of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the investment on
which no sales charge was paid was transferred in from a fund on which the
investor paid a sales charge. Exchanges of shares of the Fund which were
purchased with a lower sales charge to a fund which has a higher sales charge
will be charged the difference, unless the shares were held in the Fund for at
least six months prior to executing the exchange. When an investor requests the
exchange of the total value of the Fund account, declared but unpaid income
dividends and capital gain distributions will be transferred to the fund being
exchanged into and will be invested at net asset value. Because the exchange is
considered a redemption and purchase of shares, the shareholder may realize a
gain or loss for federal income tax purposes. Backup withholding and information
reporting may also apply. Information regarding the possible tax consequences of
such an exchange is included in the tax section in this Prospectus and in the
Statement of Additional Information.
There are differences among the many funds in the Franklin Group of Funds and
the Templeton Group. Before making an exchange, a shareholder should obtain and
review a current prospectus of the fund into which the shareholder wishes to
transfer.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing money market
instruments, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objectives exist immediately.
Subsequently, this money will be withdrawn from such short-term money market
instruments and invested in portfolio securities in as orderly a
23
<PAGE>
manner as is possible when attractive investment opportunities arise.
The Exchange Privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
RETIREMENT ACCOUNTS
Franklin Templeton IRA and 403(b) retirement accounts may accomplish exchanges
directly. Certain restrictions may apply, however, to other types of retirement
plans. See "Restricted Accounts" under "Telephone Transactions."
TIMING ACCOUNTS
Accounts which are administered by allocation or market timing services to
purchase or redeem shares based on predetermined market indicators ("Timing
Accounts") will be charged a $5.00 administrative service fee per each such
exchange. All other exchanges are without charge.
RESTRICTIONS ON EXCHANGES
In accordance with the terms of their respective prospectuses, certain funds do
not accept or may place differing limitations than those below on exchanges by
Timing Accounts.
The Fund reserves the right to temporarily or permanently terminate the exchange
privilege or reject any specific purchase order for any Timing Account or any
person whose transactions seem to follow a timing pattern who: (i) make an
exchange request out of the Fund within two weeks of an earlier exchange request
out of the Fund, or (ii) make more than two exchanges out of the Fund per
calendar quarter, or (iii) exchange 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 reserves the right to refuse the purchase side of exchange requests by
any Timing Account, person, or group if, in the Manager's judgment, the Fund
would be unable to invest effectively in accordance with its investment
objectives and policies, or would otherwise potentially be adversely affected. A
shareholder's purchase exchanges may be restricted or refused if the Fund
receives or anticipates simultaneous orders affecting significant portions of
the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to the Fund and therefore may be
refused.
The Fund and Distributors also, as indicated in "How to Buy Shares of the Fund,"
reserve the right to refuse any order for the purchase of shares.
HOW TO SELL SHARES OF THE FUND
- --------------------------------------------------------------------------------
A shareholder may at any time liquidate shares owned and receive from the Fund
the value of the shares. Shares may be redeemed in any of the following ways:
REDEMPTIONS BY MAIL
Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from the
Fund the value of the shares based upon the net asset value per share next
computed after the written request in proper form is received by Investor
Services. Redemption requests received after the time at which the net asset
value is calculated (at 1:00 p.m. Pacific time) each day that the New York Stock
Exchange (the "Exchange") is open for business will receive the price calculated
on the following business day. Shareholders are requested to provide a telephone
number(s) where
24
<PAGE>
they may be reached during business hours, or in the evening if preferred.
Investor Services' ability to contact a shareholder promptly when necessary will
speed the processing of the redemption.
TO BE CONSIDERED IN PROPER FORM, SIGNATURE(S) MUST BE GUARANTEED IF THE
REDEMPTION REQUEST INVOLVES ANY OF THE FOLLOWING:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage
firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated or
may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.
Signature(s) must be guaranteed by an "eligible guarantor institution" as
defined under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered shareholders exactly as the account is
registered, with the signature(s) guaranteed as referenced above. Shareholders
are advised, for their own protection, to send the share certificate and
assignment form in separate envelopes if they are being mailed in for
redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officer(s) of the corporation, and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustee(s) and
(2) a copy of the pertinent pages of the trust document listing the
25
<PAGE>
trustee(s) or a Certification for Trust if the trustee(s) are not listed on the
account registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form.
REDEMPTIONS BY TELEPHONE
Shareholders who complete the Franklin Templeton Telephone Redemption
Authorization Agreement (the "Agreement"), included with this Prospectus, may
redeem shares of the Fund by telephone, subject to the Restricted Account
exception noted under "Telephone Transactions - Restricted Accounts."
INFORMATION MAY ALSO BE OBTAINED BY WRITING TO THE FUND OR INVESTOR SERVICES AT
THE ADDRESS SHOWN ON THE COVER OR BY CALLING 1-800/632-2301. THE FUND AND
INVESTOR SERVICES WILL EMPLOY REASONABLE PROCEDURES TO CONFIRM THAT INSTRUCTIONS
GIVEN BY TELEPHONE ARE GENUINE. SHAREHOLDERS, HOWEVER, BEAR THE RISK OF LOSS IN
CERTAIN CASES AS DESCRIBED UNDER "TELEPHONE TRANSACTIONS - VERIFICATION
PROCEDURES."
For shareholder accounts with the completed Agreement on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before 1:00 p.m. Pacific time on
any business day will be processed that same day. The redemption check will be
sent within seven days, made payable to all the registered owners on the
account, and will be sent only to the address of record. Redemption requests by
telephone will not be accepted within 30 days following an address change by
telephone. In that case, a shareholder should follow the other redemption
procedures set forth in this Prospectus. Institutional accounts (certain
corporations, bank trust departments, government entities, and qualified
retirement plans which qualify to purchase shares at net asset value pursuant to
the terms of this Prospectus) which wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which is
available from Franklin's Institutional Services Department by telephoning
1-800/321-8563.
REDEEMING SHARES THROUGH SECURITIES DEALERS
The Fund will accept redemption orders by telephone or other means of electronic
transmission from securities dealers who have entered into a dealer or similar
agreement with Distributors. This is known as a repurchase. The only difference
between a normal redemption and a repurchase is that if the shareholder redeems
shares through a dealer, the redemption price will be the net asset value next
calculated after the shareholder's dealer receives the order which is promptly
transmitted to the Fund, rather than on the day the Fund receives the
shareholder's written request in proper form. These documents, as described in
the preceding section, are required even if the shareholder's securities dealer
has placed the repurchase order. After receipt of a repurchase order from the
dealer, the Fund will still require a signed letter of instruction and all other
documents set forth above. A shareholder's letter should reference the Fund, the
account number, the fact that the repurchase was ordered by a dealer and the
dealer's name. Details of the dealer-ordered trade, such as trade date,
confirmation number, and the amount of shares or dollars, will help speed
processing of the redemption. The seven-day period within which the proceeds of
the shareholder's redemption will
26
<PAGE>
be sent will begin when the Fund receives all documents required to complete
("settle") the repurchase in proper form. The redemption proceeds will not earn
dividends or interest during the time between receipt of the dealer's repurchase
order and the date the redemption is processed upon receipt of all documents
necessary to settle the repurchase. Thus, it is in a shareholder's best interest
to have the required documentation completed and forwarded to the Fund as soon
as possible. The shareholder's dealer may charge a fee for handling the order.
The Statement of Additional Information contains more information on the
redemption of shares.
ADDITIONAL INFORMATION REGARDING REDEMPTIONS
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption. In addition, the right of redemption may be suspended or
the date of payment postponed if the Exchange is closed (other than customary
closing) or upon the determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it, by order, for the
protection of shareholders. Of course, the amount received may be more or less
than the amount invested by the shareholder, depending on fluctuations in the
market value of securities owned by the Fund.
RETIREMENT ACCOUNTS
Retirement account liquidations require the completion of certain additional
forms to ensure compliance with IRS regulations. To liquidate a retirement
account, a shareholder or securities dealer may call Franklin's Retirement Plans
Department to obtain the necessary forms.
OTHER
For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the securities dealer may
call Franklin's Dealer Services Department.
TELEPHONE TRANSACTIONS
- --------------------------------------------------------------------------------
Shareholders of the Fund and their investment representative of record, if any,
may be able to execute various transactions by calling Investor Services at
1-800/632-2301.
All shareholders will be able to: (i) effect a change in address, (ii) change a
dividend option (see "Restricted Accounts" below), (iii) transfer Fund shares
in one account to another identically registered account in the Fund, and (iv)
exchange Fund shares as described in this Prospectus by telephone. In addition,
shareholders who complete and file an Agreement as described under "How to Sell
Shares of the Fund - Redemptions by Telephone" will be able to redeem shares of
the Fund.
VERIFICATION PROCEDURES
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and by sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to
27
<PAGE>
be genuine at the time of their receipt, neither they nor their affiliates will
be liable for any loss to the shareholder caused by an unauthorized transaction.
Shareholders are, of course, under no obligation to apply for or accept
telephone transaction privileges. In any instance where the Fund or Investor
Services is not reasonably satisfied that instructions received by telephone are
genuine, the requested transaction will not be executed, and neither the Fund
nor Investor Services will be liable for any losses which may occur because of a
delay in implementing a transaction.
RESTRICTED ACCOUNTS
Telephone redemptions and dividend option changes may not be accepted on FTTC
retirement accounts. To assure compliance with all applicable regulations,
special forms are required for any distribution, redemption, or dividend
payment. While the telephone exchange privilege is extended to Franklin
Templeton IRA and 403(b) retirement accounts, certain restrictions may apply to
other types of retirement plans. Changes to dividend options must also be made
in writing.
To obtain further information regarding distribution or transfer procedures,
including any required forms, retirement account shareholders may call to speak
to a Retirement Plan Specialist at 1-800/527-2020 for Franklin accounts or
1-800/354-9191 (press "2" when prompted to do so) for Templeton accounts.
GENERAL
During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
investment representative for assistance, or to send written instructions to the
Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.
The telephone transaction privilege may be modified or discontinued by the Fund
at any time upon 60 days' written notice to shareholders.
VALUATION OF FUND SHARES
- --------------------------------------------------------------------------------
The net asset value per share of the Fund is determined as of 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 sales charge of the Fund).
The net asset value per share of the Fund is determined in the following manner:
The aggregate of all liabilities, including without limitation the current
market value of any outstanding options written by the Fund, accrued expenses
and taxes and any necessary reserves is deducted from the aggregate gross value
of all assets, and the difference is divided by the number of shares of the Fund
outstanding at the time. For the purpose of determining the aggregate net assets
of the Fund, cash and receivables are valued at their realizable amounts.
Interest is recorded as accrued and dividends are recorded on the ex-dividend
date. Portfolio securities listed on a securities exchange or on the NASDAQ
National Market System for which market quotations are readily available are
valued at the last quoted sale price of the day or, if there is no such reported
sale, within the range of the most recent quoted bid and ask prices.
Over-the-counter portfolio securities for which market quotations are readily
available are valued within the range of the most recent bid and ask prices as
obtained from one or more dealers that make markets in the se-
28
<PAGE>
curities. Portfolio securities which are traded both in the over-the-counter
market and on a stock exchange are valued according to the broadest and most
representative market as determined by the Manager. Portfolio securities
underlying actively traded call options are valued at their market price as
determined above. The current market value of any option held by the Fund is its
last sales price on the relevant exchange prior to the time when assets are
valued. Lacking any sales that day or if the last sale price is outside the bid
and ask prices, the options are valued within the range of the current closing
bid and ask prices if such valuation is believed to fairly reflect the
contract's market value. Other securities for which market quotations are
readily available are valued at the current market price, which may be obtained
from a pricing service, based on a variety of factors, including recent trades,
institutional size trading in similar types of securities (considering yield,
risk and maturity) and/or developments related to specific issues. Securities
and other assets for which market prices are not readily available are valued at
fair value as determined following procedures approved by the Board of
Directors. All money market instruments with a maturity of more than 60 days are
valued at current market, as discussed above. All money market instruments with
a maturity of 60 days or less are valued at their amortized cost, which the
Board of Directors has determined in good faith constitutes fair value for
purposes of complying with the 1940 Act. This valuation method will continue to
be used until such time as the directors determine that it does not constitute
fair value for such purposes. With the approval of directors, the Fund may
utilize a pricing service, bank or securities dealer to perform any of the above
described functions.
HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND
- --------------------------------------------------------------------------------
Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.
From a touch-tone phone, shareholders may obtain current price, yield or
performance information specific to a fund in the Franklin Group of Funds(R) by
calling the automated Franklin TeleFACTS system (day or night) at
1-800/247-1753. Information about the Fund may be accessed by entering Fund Code
03 followed by the # sign, when requested to do so by the automated operator.
The TeleFACTS system is also available for processing exchanges. See "Exchange
Privilege."
To assist shareholders and securities dealers wishing to speak directly with a
representative, the following is a list of the various Franklin departments,
telephone numbers and hours of operation to call. The same numbers may be used
when calling from a rotary phone:
<TABLE>
<CAPTION>
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Shareholder Services ................ 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Dealer Services ..................... 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information .................... 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans .................... 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) .............. 1-800/851-0637 6:00 a.m. to 5:00 p.m.
</TABLE>
29
<PAGE>
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
PERFORMANCE
- --------------------------------------------------------------------------------
Advertisements, sales literature and communications to shareholders may contain
various measures of the Fund's performance, including current yield, various
expressions of total return and current distribution rate. They may occasionally
cite statistics to reflect its volatility or risk.
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five- and
ten-year periods, or portion thereof, to the extent applicable, through the end
of the most recent calendar quarter, assuming reinvestment of all distributions.
The Fund may also furnish total return quotations for other periods, or based on
investments at various sales charge levels or at net asset value. For such
purposes, total return equals the total of all income and capital gain paid to
shareholders, assuming reinvestment of all distributions, plus (or minus) the
change in the value of the original investment, expressed as a percentage of the
purchase price.
Current yield reflects the income per share earned by the Fund's portfolio
investments; it is calculated by dividing the Fund's net investment income per
share during a recent 30-day period by the maximum public offering price on the
last day of that period and annualizing the result.
Yield which is calculated according to a formula prescribed by the SEC (see the
Statement of Additional Information) is not indicative of the dividends or
distributions which were or will be paid to the Fund's shareholders. Dividends
or distributions paid to shareholders are reflected in the current distribution
rate, which may be quoted to shareholders. The current distribution rate is
computed by dividing the total amount of dividends per share paid by the Fund
during the past 12 months by a current maximum offering price. Under certain
circumstances, such as when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it might be appropriate
to annualize the dividends paid during the period such policies were in effect
rather than using the dividends during the past 12 months. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing, and short-term capital
gain, and is calculated over a different period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against Fund income and will assume the payment of the maximum
sales charge on the purchase of shares. When there has been a change in the
sales charge structure, the historical performance figures will be restated to
reflect the new rates. The investment results of the Fund, like all other
investment companies, will fluctuate over time; thus, performance figures should
not be considered to represent what an investment may earn in the future or what
the Fund's yield, distribution rate or total return may be in any future period.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
REPORTS TO SHAREHOLDERS
The Fund's fiscal year ends June 30. Annual Reports containing audited financial
statements of the Fund, including the auditors' report, and
30
<PAGE>
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. 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 the Statement of Additional
Information.
ORGANIZATION
The Fund's authorized capital stock consists of 5,000,000,000 shares of common
stock with no par value. All shares are of one class, have one vote and, when
issued, are fully paid and nonassessable. All shares have equal voting,
participation and liquidation rights, but have no subscription, preemptive or
conversion rights.
VOTING RIGHTS
Shares of the Fund have cumulative voting rights, which means that, in all
elections of directors, each shareholder has the right to cast a number of votes
equal to the number of shares owned multiplied by the number of directors to be
elected at such election and each shareholder may cast the whole number of votes
for one candidate or distribute such votes among two or more candidates.
The Fund does not intend to hold annual shareholders' meetings. The Fund may,
however, hold a special meeting for such purposes as changing fundamental
investment restrictions, approving a new management agreement or any other
matters which are required to be acted on by shareholders under the 1940 Act. A
meeting may also be called by a majority of the Board of Directors or by
shareholders holding at least ten percent of the shares entitled to vote at the
meeting. Shareholders may receive assistance in communicating with other
shareholders in connection with the election or removal of directors such as
that provided in Section 16(c) of the 1940 Act.
REDEMPTIONS BY THE FUND
The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $50, but only where the value
of such account has been reduced by the shareholder's prior voluntary redemption
of shares and has been inactive (except for the reinvestment of distributions)
for a period of at least six months, provided advance notice is given to the
shareholder. More information is included in the Statement of Additional
Information.
OTHER INFORMATION
Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Fund nor its affiliates will be liable for any loss to the shareholder caused by
the shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
ACCOUNT REGISTRATIONS
- --------------------------------------------------------------------------------
An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may
require court action to obtain release of the funds
31
<PAGE>
until the minor reaches the legal age of majority. The account should be
registered in the name of one "Adult" as custodian for the benefit of the
"Minor" under the Uniform Transfer or Gifts to Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, a shareholder may transfer an account in the Fund carried
in "street" or "nominee" name by the shareholder's securities dealer to a
comparably registered Fund account maintained by another securities dealer. Both
the delivering and receiving securities dealers must have executed dealer
agreements on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not process the
transfer and will so inform the shareholder's delivering securities dealer. To
effect the transfer, a shareholder should instruct the securities dealer to
transfer the account to a receiving securities dealer and sign any documents
required by the securities dealer(s) to evidence consent to the transfer. Under
current procedures the account transfer may be processed by the delivering
securities dealer and the Fund after the Fund receives authorization in proper
form from the shareholder's delivering securities dealer. In the future it may
be possible to effect such transfers electronically through the services of the
NSCC.
The Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of record on an
investor's account, the investor will be deemed to have authorized the use of
electronic instructions on the account, including, without limitation, those
initiated through the services of the NSCC, to have adopted as instruction and
signature any such electronic instructions received by the Fund and the
Shareholder Services Agent, and to have authorized them to execute the
instructions without further inquiry. At the present time, such services which
are available, or which are anticipated to be made available in the near future,
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. A
shareholder may also be subject to backup withholding if the IRS or a
32
<PAGE>
securities dealer notifies the Fund that the TIN furnished by the shareholder is
incorrect or that the shareholder is subject to backup withholding for previous
under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a shareholder who has
completed an "awaiting TIN" certification to provide the Fund with a certified
TIN within 60 days after opening the account.
PORTFOLIO OPERATIONS
- --------------------------------------------------------------------------------
The following persons are primarily responsible for the day-to-day management of
the Fund's portfolios:
Conrad B. Herrmann
Portfolio Manager
Franklin Advisers, Inc.
Mr. Herrmann joined Advisers in 1989. He received a bachelor of arts degree from
Brown University and a master's degree in business administration from Harvard
University. Mr. Herrmann is a Chartered Financial Analyst (CFA), and is a member
of the Security Analysts of San Francisco and the Association for Investment
Management and Research (AIMR). He has been portfolio manager of the Fund since
December 1993.
Canyon A. Chan
Portfolio Manager
Franklin Advisers, Inc.
Mr. Chan holds a bachelor of arts degree in quantitative economics from Stanford
University. Mr. Chan has been with Advisers since 1991, and is a member of the
Security Analysts of San Francisco and the Association for Investment Management
and Research (AIMR). He has been portfolio manager of the Fund since December
1993.
33
<PAGE>
THE FRANKLIN TEMPLETON
TELEPHONE REDEMPTION AUTHORIZATION AGREEMENT
You may use Franklin Templeton's telephone redemption privilege to redeem
uncertificated Franklin Templeton Fund shares for up to $50,000 (or your
shareholder account balance, whichever is less) per day, per fund account in
accordance with the terms of the Funds' prospectus.
The telephone redemption privilege is available only to shareholders who
specifically request it. If you would like to add this redemption privilege to
the other telephone transaction privileges now automatically available to
Franklin Templeton Fund shareholders, please sign and return this authorization
to Franklin/Templeton Investor Services, Inc. ("Services"), transfer agent and
shareholder servicing agent for the Franklin Templeton Funds.
SHAREHOLDER AUTHORIZATION: I/We request the telephone redemption privilege
under the terms described below and in the prospectus for each investment
company in Franklin Templeton (a "Franklin Templeton Fund" or a "Fund"), now
open or opened at a later date, holding shares registered as follows:
- --------------------------------------------------------------------------------
Print name(s) as shown in registration (called "Shareholder")
- --------------------------------------------------------------------------------
Account number(s)
- --------------------------------------------------------------------------------
I/We authorize each Fund and Services to honor and act upon telephone requests,
given as provided in this agreement, to redeem shares from any Shareholder
account.
- --------------------------------------- -------------------------------------
Signature(s) of all registered owners
and date
- --------------------------------------- -------------------------------------
Printed name (and title/capacity,
if applicable)
VERIFICATION PROCEDURES: I/We understand and agree that: (1) each Fund and
Services will employ reasonable procedures to confirm that redemption
instructions communicated by telephone are genuine and that if these
confirmation procedures are not followed, the Fund or Services may be liable for
any losses due to unauthorized or fraudulent telephone instructions; (2) the
confirmation procedures will include the recording of telephone calls requesting
redemptions, 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 the sending of
confirmation statements to the address of record each time a redemption is
initiated by telephone; and (3) as long as the Fund and Services follow the
confirmation procedures in acting on instructions communicated by telephone
which were reasonably believed to be genuine at the time of receipt, neither
they nor their parent or affiliates will be liable for any loss, damages or
expenses caused by an unauthorized or fraudulent redemption request.
JOINTLY OWNED/CO-TRUSTEE ACCOUNTS: Each of us signing this agreement as either
joint owners or co-trustees authorize each Fund and Services to honor telephone
redemption requests given by ANY ONE of the signers or our investment
representative of record, if any, ACTING ALONE.
APPOINTMENT OF ATTORNEY-IN-FACT: In order to issue telephone redemption
requests acting alone, each of us individually makes the following appointment:
I hereby appoint the other joint owner(s)/co-trustee(s) as my agent(s)
(attorney[s]-in-fact) with full power and authority to individually act for me
in any lawful way with respect to the issuance of instructions to a Fund or
Services in accordance with the telephone redemption privilege we have
requested by signing this agreement. This appointment shall not be affected by
my subsequent disability or incompetency and shall remain in effect until it is
revoked by either written notice from any one of us delivered to a Fund or
Services by registered mail, return receipt requested, or by a Fund or Services
upon receipt of any information that causes a Fund or Services to believe in
good faith that there is or that there may be a dispute among any of us with
respect to the Franklin Templeton Fund account(s) covered by this agreement.
Each of us agrees to notify the Fund or Services immediately upon the
death of any of the undersigned.
CORPORATE/PARTNERSHIP/TRUST/RETIREMENT ACCOUNTS: The Shareholder and each of
us signing this agreement on behalf of the Shareholder represent and warrant to
each Franklin Templeton Fund and Services that the Shareholder has the authority
to enter into this agreement and that each of us are duly authorized to execute
this agreement on behalf of the Shareholder. The Shareholder agrees that its
election of the telephone redemption privilege means that a Fund or Services may
honor a telephone redemption request given by ANY
officer/partner/member/administrator or agent of Shareholder ACTING ALONE.
RESTRICTED ACCOUNTS: Telephone redemptions and dividend option changes may not
be accepted on Franklin Templeton Trust Company ("FTTC") retirement accounts.
PLEASE RETURN THIS FORM TO:
Franklin/Templeton Investor Services, Inc., Attn: D/P REVISIONS Dept., 777
Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777.
34
<PAGE>
FRANKLIN FUNDS AUTOMATIC INVESTMENT PLAN FRANKLIN TEMPLETON
777 MARINERS ISLAND BLVD., P.O. BOX 7777, SAN MATEO, CA 94403-7777
================================================================================
[FRANKLIN LOGO]
The Franklin Automatic Investment Plan gives you the convenience of
automatically investing in a Fund on a monthly basis. Shares are purchased at
the applicable offering price, as indicated in the Prospectus, next calculated
after receipt of funds from your bank. There is no additional charge for this
service by the Fund or Franklin/Templeton Investor Services, Inc.
Your monthly investments will be made by electronic funds transfer (EFT) from
your checking account if your bank is a member of an Automated Clearing House
(ACH). Otherwise, they will be made by checks prepared by our bank. Your
signature below is the authorizing signature for each transfer or check. This
service is subject to the rules for the bank account, ACH and the Fund.
Franklin may correct any transfer error by a debit or credit to your bank
account and/or Fund account.
You may sign up for the Automatic Investment Plan at the time you open a new
account or any time after you have established an account at Franklin. If the
Automatic Investment Plan is initiated at the time you open your account, the
Fund's minimum initial investment amount is reduced and the account may be
opened with an investment of $25 or more. Existing account holders may choose
any amount, starting with the $25 minimum subsequent amount, for investment in
their Fund account from their bank account. All you need to do is complete the
application below and attach a voided, unsigned check which shows your bank
account number in magnetic coding. Please allow up to six weeks for the Plan
to begin.
CHANGING OR DISCONTINUING THE PLAN
When Franklin/Templeton Investor Services, Inc. is advised by you to stop your
Automatic Investment Plan, no investments will be processed until written notice
is received to initiate the Plan again. Franklin will need ten days written or
verbal notice to stop an Automatic Investment Plan prior to an upcoming pay
date. Ten days written notice is required if you are changing bank information
other than the dollar amount. If a check or transfer is returned to Franklin
for any reason, including stop payment, insufficient funds or account closed,
your Automatic Investment Plan will be discontinued. Franklin may also change
or terminate the service by written notice to you.
EXCHANGES
If you exchange shares from one Franklin fund to another, the Automatic
Investment Plan does not transfer to the new account, but Franklin will
automatically send you a Plan application. Or, you may notify us by telephone
if the Plan is to be transferred and credited to a fund other than that listed
on the original application.
RETIREMENT ACCOUNTS
When using the Automatic Investment Plan for Franklin Templeton Trust Company
retirement accounts, all purchases will be credited as a contribution for the
year in which they are received. Please be sure to monitor the amount of money
credited to your retirement account to avoid making an excess contribution.
- --------------------------------------------------------------------------------
AUTOMATIC INVESTMENT PLAN APPLICATION:
Name(s)
------------------------------------------------------------------------
(Please print as shown on Franklin account registration.)
-------------------------------------------------------------------------
Address
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Telephone
-----------------------------------------------------------------------
Bank's Name
---------------------------------------------------------------------
Branch Address
------------------------------------------------------------------
Names(s) on Bank Account
--------------------------------------------------------
Checking Account No.
------------------------------------------------------------
Please attach a voided check.
[Franklin Use Only: ABA No. ]
-----------------------------------------------------
Please invest my Automatic investments for $ per month in:
---------
Franklin Fund Name
--------------------------------------------------------------
Franklin Fund Account No.
-------------------------------------------------------
Preferred Monthly Date of Checking Account Debit:
1st bank business day on or after the 5th / / or 20th / /
Signature(s) Date
--------------------------------- -------------------------------
- --------------------------------------------------------------------------------
All registered owners must sign.
If you have any questions, please call a Shareholder Services representative,
toll free, at 1-800/632-2301.
================================================================================
AUTOMATIC INVESTMENT PLAN REVISION - Complete only if you are revising existing
Automatic Investment Plan: (and complete section above)
Bank Change Amount Change $
------------------------- ---------------------
(Attach new voided check) (Indicate new amount)
Other
-----------------------------
Note: Please give Franklin ten days written notice to change bank information
other than the dollar amount.
================================================================================
PLEASE RETURN THIS FORM TO:
Franklin/Templeton Investor Services, Inc., Attn: AUTOMATIC INVESTMENT PLAN
Dept., 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777.
35
<PAGE>
INSTRUCTIONS AND IMPORTANT NOTICE
SUBSTITUTE W-9 INSTRUCTIONS INFORMATION
GENERAL. Backup withholding is not an additional tax. Rather, the tax
liability of persons subject to backup withholding will be reduced by the
amount of tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained from the IRS.
OBTAINING A NUMBER. If you do not have a Social Security Number Taxpayer
Identification Number or you do not know your SSN TIN, you must obtain Form
SS-5 or Form SS-4 from your local Social Security or IRS office and apply for
one. If you have checked the "Awaiting TIN" box and signed the certification,
withholding will apply to payments relating to your account unless you provide
a certified TIN within 60 days.
WHAT SSN TIN TO GIVE. Please refer to the following guidelines:
<TABLE>
<CAPTION>
ACCOUNT TYPE GIVE SSN OF ACCOUNT TYPE GIVE EMPLOYER ID# OF
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
- -Individual Individual -Trust, Estate, Trust, Estate,
or Pension or Pension
Plan Trust Plan Trust
- -------------------------------------------------------------------------------
- -Joint Individual Owner who will -Corporation, Corporation,
be paying tax or Partnership, Partnership,
first-named or other or other
individual organization organization
- -------------------------------------------------------------------------------
- -Unif. Gift/
Transfer to Minor Minor -Broker nominee Broker nominee
- -------------------------------------------------------------------------------
- -Sole Proprietor Owner of
business
- -------------------------------------------------------------------------------
- -Legal Guardian Ward, Minor,
or Incompetent
- -------------------------------------------------------------------------------
</TABLE>
EXEMPT RECIPIENTS. Please provide your TIN and check the "Exempt Recipient"
box if you are an exempt recipient. Exempt recipients include:
A corporation A real estate investment trust
A financial institution A common trust fund operated by a
bank under section 584(a)
An organization exempt from tax An exempt charitable remainder trust
under section 501(a), or an or a non-exempt trust described in
individual retirement plan section 4947(a)(1)
A registered dealer in securities An entity registered at all times
or commodities registered in the under the Investment Company Act
U.S. or a U.S. possession of 1940
IRS PENALTIES. If you do not supply us with your SSN TIN, you will be subject
to an IRS $50 penalty unless your failure is due to reasonable cause and not
willful neglect. If you fail to report certain income on your federal income
tax return, you will be treated as negligent and subject to an IRS 20% penalty
on any underpayment of tax attributable to such negligence, unless there was
reasonable cause for the resulting underpayment and you acted in good faith. If
you falsify information on this form or make any other false statement
resulting in no backup withholding on an account which should be subject to
backup withholding, you may be subject to an IRS $500 penalty and certain
criminal penalties including fines and imprisonment.
SUBSTITUTE W-8 INSTRUCTIONS INFORMATION
EXEMPT FOREIGN PERSON. Check the "Exempt Foreign Person" box if you qualify as
a non-resident alien or foreign entity that is not subject to certain U.S.
information return reporting or to backup withholding rules. Dividends paid to
your account may be subject to withholding of up to 30%. You are an "Exempt
Foreign Person" if you are not (1) a citizen or resident of the U.S., or (2) a
U.S. corporation, partnership, estate, or trust. In the case of an individual,
an "Exempt Foreign Person" is one who has been physically present in the U.S.
for less than 31 days during the current calendar year. An individual who is
physically present in the U.S. for at least 31 days during the current calendar
year will still be treated as an "Exempt Foreign Person," provided that the
total number of days physically present in the current calendar year and the
two preceding calendar years does not exceed 183 days (counting all of the days
in the current calendar year, only one-third of the days in the first preceding
calendar year and only one-sixth of the days in the second preceding calendar
year). In addition, lawful permanent residents or green card holders may not
be treated as "Exempt Foreign Persons." If you are an individual or an entity,
you must not now be, or at this time expect to be, engaged in a U.S. trade or
business with respect to which any gain derived from transactions effected by
the Fund/Payer during the calendar year is effectively connected to the U.S.
(or your transactions are exempt from U.S. taxes under a tax treaty).
PERMANENT ADDRESS. The Shareholder Application must contain your permanent
address if you are an "Exempt Foreign Person." If you are an individual,
provide your permanent address. If you are a partnership or corporation,
provide the address of your principal office. If you are an estate or trust,
provide the address of your permanent residence or the principal office of any
fiduciary.
NOTICE OF CHANGE IN STATUS. If you become a U.S. citizen or resident after you
have provided certification of your foreign status, or if you cease to be an
"Exempt Foreign Person," you must notify the Fund/Payer within 30 days of your
change in status. Reporting will then begin on the account(s) listed, and
backup withholding may also begin unless you certify to the Fund/Payer that (1)
the tax payer identification number you have given is correct, and (2) the
Internal Revenue Service has not notified you that you are subject to backup
withholding because you failed to report certain interest or dividend income.
You may use Form W-9, "Payer's Request for Taxpayer Identification Number and
Certification," to make these certifications. If an account is no longer
active, you do not have to notify a Fund/Payer or broker of your change in
status unless you also have another account with the same Fund/Payer that is
still active. If you receive interest from more than one Fund/Payer or have
dealings with more than one broker or barter exchange, file a certificate with
each. If you have more than one account with the same Fund/Payer, the
Fund/Payer may require you to file a separate certificate for each account.
WHEN TO FILE. File these certifications with the Fund before a payment is made
to you, unless you have already done this in either of the two preceding
calendar years.
HOW OFTEN YOU MUST FILE. This certificate generally remains in effect for
three calendar years. A Fund/Payer or broker, however, may require that a new
certificate be filed each time a payment is made. On joint accounts for which
each joint owner is a foreign person, each must provide a certification of
foreign status.
36
<PAGE>
FOR CORPORATE SHAREHOLDERS - FORM OF RESOLUTION
It will be necessary for corporate shareholders to provide a certified copy of a
resolution or other certificate of authority to authorize the purchase as well
as sale (redemption) of shares and withdrawals by checks or drafts. You may
use the following form of resolution or you may prefer to use your own. It is
understood that the Fund, Franklin Advisors, Inc., Franklin Templeton Investor
Services, Inc. and the custodian bank may rely upon these authorizations until
revoked or amended by written notice delivered by registered or certified mail
to the Fund.
CERTIFIED COPY OF RESOLUTION (Corporation or Association)
The undersigned hereby certifies and affirms that he/she is the duly elected
of
- ------------------------------- --------------------------------------------
Title Corporate Name
a organized under the laws of the State of
----------------------------
Type of Organization
and that the following is a true and correct copy
- ------------------------------
State
of a resolution adopted by the Board of Directors at a meeting duly called and
held on .
------------------
Date
RESOLVED, that the of this
------------------------------------------------
Officers' Titles
Corporation or Association are authorized to open an account in the name
of the Corporation or Association with one or more of the funds of the
Franklin Templeton Group ("Funds") and to deposit such funds of this
Corporation or Association in this account as they deem necessary or
desirable; that the persons authorized below may endorse checks and other
instruments for deposit to said account or accounts; and
FURTHER RESOLVED, that any of the following officers are
----------
number
authorized to sign any share assignment on behalf of this Corporation or
Association and to take any other actions as may be necessary to sell or
redeem its shares in the Funds or to sign checks or drafts withdrawing
funds from the account; and
FURTHER RESOLVED, that this Corporation or Association shall hold harmless,
indemnify, and defend the Funds, their custodian bank, Franklin Advisors,
Inc., Franklin Templeton Distributors, Inc., Franklin Templeton Investor
Services, Inc., and their affiliates, from any claim, loss or liability
resulting in whole or in part, directly or indirectly, from their reliance
from time to time upon any certifications by the secretary or any
assistant secretary of this Corporation or Association as to the names of
the individuals occupying such offices and their acting in reliance upon
these resolutions until actual receipt by them of a certified copy of a
resolution of the Board of Directors of the Corporation or Association
modifying or revoking any or all such resolutions.
The undersigned further certifies that the below named persons, whose signatures
appear opposite their names and office titles, are duly elected officers of the
Corporation or Association. (Attach additional list if necessary)
- -------------------------------------- ---------------------------------------
Name/Title (please print or type) Signature
- -------------------------------------- ---------------------------------------
Name/Title (please print or type) Signature
- -------------------------------------- ---------------------------------------
Name/Title (please print or type) Signature
- -------------------------------------- ---------------------------------------
Name/Title (please print or type) Signature
- -------------------------------------- ---------------------------------------
Name of Corporation or Association Date
Certified from minutes
--------------------------------------------------------
Name/Title
CORPORATE SEAL (if appropriate)
37
<PAGE>
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<PAGE>
THE FRANKLIN/TEMPLETON GROUP
To receive a free brochure and prospectus, which contain more complete
information, including charges and expenses on each of the funds listed below,
call Franklin Fund Information, toll free, at 1-800/DIAL BEN (1-800/342-5236)
or Templeton Sales Information at 1-800/292-9293. Please read this prospectus
carefully before you invest or send money.
<TABLE>
<S> <C> <C> <C>
TEMPLETON Colorado FRANKLIN FUNDS SEEKING FRANKLIN FUNDS FOR
GROUP OF FUNDS Connecticut GROWTH AND INCOME NON-U.S. INVESTORS
Americas Government Florida* Balance Sheet Tax-Advantaged
Securities Fund Georgia Investment Fund High Yield Securities Fund
Developing Markets Trust Hawaii** Convertible Tax-Advantaged
Foreign Fund Indiana Securities Fund International Bond Fund
Global Infrastructure Fund Kentucky Equity Income Fund Tax-Advantaged
Global Opportunities Trust Louisiana Global Utilities Fund U.S. Government
Global Rising Maryland Income Fund Securities Fund
Dividends Fund Massachusetts*** Premier Return Fund
Growth Fund Michigan*** Utilities Fund FRANKLIN/TEMPLETON
Income Fund Minnesota*** GLOBAL CURRENCY FUNDS
Real Estate Securities Fund Missouri FRANKLIN FUNDS SEEKING Global Currency Fund
Smaller Companies New Jersey HIGH CURRENT INCOME High Income
Growth Fund New York* AGE High Income Fund Currency Fund
World Fund North Carolina German Government Hard Currency Fund
Ohio*** Bond Fund
FRANKLIN FUNDS SEEKING Oregon Global Government FRANKLIN MONEY
TAX-FREE INCOME Pennsylvania Income Fund MARKET FUNDS
Federal Tax-Free Tennessee** Investment Grade Money Fund
Income Fund Texas Income Fund Federal Money Fund
Federal Intermediate-Term Virginia U.S. Government Tax-Exempt Money Fund
Tax-Free Income Fund Washington** Securities Fund California Tax-Exempt
High Yield Tax-Free
Income Fund FRANKLIN FUNDS SEEKING FRANKLIN FUNDS SEEKING New York Tax-Exempt
Insured Tax-Free CAPITAL GROWTH HIGH CURRENT INCOME Money Fund
Income Fund*** California Growth Fund AND STABILITY OF PRINCIPAL IFT U.S. Treasury Money
Puerto Rico Tax-Free Dyna Tech Fund Adjustable Rate Market Portfolio
Income Fund Equity Fund Securities Fund
Global Health Care Fund Adjustable U.S. FRANKLIN FUND
FRANKLIN STATE-SPECIFIC Gold Fund Government FOR CORPORATIONS
FUNDS SEEKING Growth Fund Securities Fund Corporate Qualfied
TAX-FREE INCOME International Equity Fund Short-Intermediate Dividend Fund
Alabama Japan Fund U.S. Government
Arizona* Pacific Growth Fund Securities Fund FRANKLIN TAX-DEFERRED
Arkansas** Real Estate Securities Fund ANNUITY
California* Small Cap Growth Fund Valuemark
</TABLE>
*Two or more fund options available: long-term portfolio, intermediate-term
portfolio, a portfolio of insured municipal securities, and a high yield
portfolio (CA).
**The fund may invest up to 100% of its assets in bonds that pay interest
subject to the federal alternative minimum tax.
***Portfolio of insured municipal securities.
<PAGE>
FRANKLIN EQUITY FUND FRANKLIN
EQUITY
777 Mariners Island Blvd. FUND
P.O. Box 7777
San Mateo, California 94403-7777
INVESTMENT MANAGER
Franklin Advisers, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
PRINCIPAL UNDERWRITER PROSPECTUS
& APPLICATION
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
P.O. Box 7777 NOVEMBER 1, 1994
San Mateo, California 94403-7777 AS AMENDED JANUARY 19, 1995
CUSTODIAN
Bank of America NT & SA
555 California Street, 4th Floor
San Francisco, California 94104
SHAREHOLDER SERVICES AGENT
Franklin/Templeton Investor Services, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
INDEPENDENT AUDITORS
Coopers & Lybrand L.L.P.
333 Market Street
San Francisco, California 94105
COUNSEL
Stradley, Ronon, Stevens & Young
2600 One Commerce Square
Philadelphia, Pennsylvania 19103
For an enlarged version of this prospectus
please call 1-800/DIAL BEN.
- ------------------------------------------
Your Representative is:
- ------------------------------------------ [FRANKLIN LOGO]
<PAGE>
FRANKLIN [FRANKLIN LOGO]
EQUITY
FUND
STATEMENT OF
ADDITIONAL INFORMATION 777 MARINERS ISLAND BLVD., P.O. BOX 7777
NOVEMBER 1, 1994 SAN MATEO, CA 94403-7777 1-800/DIAL BEN
- --------------------------------------------------------------------------------
<PAGE>
SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE STATEMENT OF ADDITIONAL INFORMATION
FRANKLIN EQUITY FUND
DATED NOVEMBER 1, 1994
1. The following substitutes for the subsection "Purchases at Net Asset Value"
under "Additional Information Regarding Fund Shares":
ADDITIONAL INFORMATION REGARDING PURCHASES
Special Net Asset Value Purchases. As discussed in the Prospectus under "How
to Buy Shares of the Fund - Description of Special Net Asset Value
Purchases," certain categories of investors may purchase shares of the Fund
at without a front-end sales charge ("net asset value") or a contingent
deferred sales charge. Distributors or one of its affiliates may make
payments, out of its own resources, to securities dealers who initiate and
are responsible for such purchases, as indicated below. As a condition for
these payments, Distributors or its affiliates may require reimbursement
from the securities dealers with respect to certain redemptions made within
12 months of the calendar month following purchase, as well as other
conditions, all of which may be imposed by an agreement between
Distributors, or its affiliates, and the securities dealer.
The following amounts may be paid by Distributors or one of its affiliates,
out of its own resources, to securities dealers who initiate and are
responsible for (i) purchases of most equity and taxable income Franklin
Templeton Funds made at net asset value by certain designated retirement
plans (excluding IRA and IRA rollovers): 1.00% on sales of $1 million but
less than $2 million, plus 0.80% on sales of $2 million but less than $3
million, plus 0.50% on sales of $3 million but less than $50 million, plus
0.25% on sales of $50 million but less than $100 million, plus 0.15% on
sales of $100 million or more; and (ii) purchases of most taxable income
Franklin Templeton Funds made at net asset value by non-designated
retirement plans: 0.75% on sales of $1 million but less than $2 million,
plus 0.60% on sales of $2 million but less than $3 million, plus 0.50% on
sales of $3 million but less than $50 million, plus 0.25% on sales of $50
million but less than $100 million, plus 0.15% on sales of $100 million or
more. These payment breakpoints are reset every 12 months for purposes of
additional purchases. With respect to purchases made at net asset value by
certain trust companies and trust departments of banks and certain
retirement plans of organizations with collective retirement plan assets of
$10 million or more, Distributors, or one of its affiliates, out of its own
resources, may pay up to 1% of the amount invested.
Letter of Intent. An investor may qualify for a reduced sales charge on the
purchase of shares of the Fund, as described in the Prospectus. At any time
within 90 days after the first investment which the investor wants to
qualify for the reduced sales charge, a signed Shareholder Application, with
the Letter of Intent section completed, may be filed with the Fund. After
the Letter of Intent is filed, each additional investment will be entitled
to the sales charge applicable to the level of investment indicated on the
Letter. Sales charge reductions based upon purchases in more than one of the
Franklin Templeton Funds will be effective only after notification to
Distributors that the investment qualifies for a discount. The shareholder's
holdings in the Franklin Templeton Funds acquired more than 90 days before
the Letter of Intent is filed will be counted towards completion of the
Letter of Intent but will not be entitled to a retroactive downward
adjustment in the sales charge. Any redemptions made by the shareholder,
other than by a designated benefit plan, during the 13-month period will be
subtracted from the amount of the purchases for purposes of determining
whether the terms of the Letter of Intent have been completed. If the Letter
of Intent is not completed within the 13-month period, there will be an
upward adjustment of the sales charge, depending upon the amount actually
purchased (less redemptions) during the period. The upward adjustment does
not apply to designated benefit plans. An investor who executes a Letter of
Intent prior to a change in the sales charge structure for the Fund will be
entitled to complete the Letter of Intent at the lower of (i) the new sales
charge structure; or (ii) the sales charge structure in effect at the time
the Letter of Intent was filed with the Fund.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in the
investor's name, unless the investor is a designated benefit plan. If the
total purchases, less redemptions, equal the amount specified under the
Letter, the reserved shares will be deposited to an account in the name of
the investor or delivered to the investor or the investor's order. If the
total purchases, less redemptions, exceed the amount specified under the
Letter of Intent and is an amount which would qualify for a further quantity
discount, a retroactive price adjustment will be made by Distributors and
the securities dealer through whom purchases were made pursuant to the
Letter of Intent (to reflect such further quantity discount) on purchases
made within 90 days before and on those made after filing the Letter. 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
<PAGE>
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 of Intent, the additional sales
charge due will be deducted from the proceeds of the redemption, and the
balance will be forwarded to the investor.
If a Letter of Intent is executed on behalf of a benefit plan (such plans
are described under "Purchases at Net Asset Value" in the Prospectus), the
level and any reduction in sales charge for these designated benefit plans
will be based on actual plan participation and the projected investments in
the Franklin Templeton Funds under the Letter of Intent. Benefit plans are
not subject to the requirement to reserve 5% of the total intended purchase,
or to any penalty as a result of the early termination of a plan, nor are
benefit plans entitled to receive retroactive adjustments in price for
investments made before executing the Letter of Intent.
2. The paragraph "Reinvestment Date" under "Additional Information Regarding
Fund Shares" is substituted with the following language:
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.
3. Add the following under "General Information", following the discussion
"Total Return":
YIELD
Current yield reflects the income per share earned by the Fund's portfolio
investments.
Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the maximum offering price per share
on the last day of the period and annualizing the result. Expenses accrued
for the period include any fees charged to all shareholders during the base
period. The yield for the Fund for the 30-day period ended on June 30, 1994
was 1.06%.
This figure was obtained using the following SEC formula:
Yield = 2[(a-b + 1)(6) - 1]
-------------------
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period
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 the above SEC prescribed formula, 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 short-term capital gains, and is calculated
over a different period of time. The distribution rate for the fiscal year
ended June 30, 1994 was 1.53%.
<PAGE>
<PAGE>
FRANKLIN [FRANKLIN LOGO]
EQUITY
FUND
STATEMENT OF
ADDITIONAL INFORMATION 777 MARINERS ISLAND BLVD., P.O. BOX 7777
NOVEMBER 1, 1994 SAN MATEO, CA 94403-7777 1-800/DIAL BEN
- --------------------------------------------------------------------------------
CONTENTS PAGE
About the Fund (See also the
Prospectus "About the Fund,"
"General Information")................................................... 2
The Fund's Investment Objectives and
Restrictions (See also the Prospectus
"Investment Objectives and Policies
of the Fund")............................................................ 2
Officers and Directors ................................................... 10
Investment Advisory and Other Services
(See also the Prospectus "Management
of the Fund")............................................................ 12
The Fund's Policies Regarding
Brokers Used on Portfolio Transactions................................... 13
Additional Information Regarding
Fund Shares (See also the Prospectus
"How to Buy Shares of the Fund,"
"How to Sell Shares of the Fund,"
"Valuation of Fund Shares").............................................. 15
Additional Information
Regarding Taxation....................................................... 17
The Fund's Underwriter.................................................... 19
Distribution Plan......................................................... 19
General Information....................................................... 21
Financial Statements...................................................... 24
Franklin Equity 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 return. It is
anticipated that the Fund's assets will generally be primarily invested in
common stocks or securities convertible into common stocks.
A Prospectus for the Fund dated November 1, 1994, as may be amended from time to
time, which provides the basic information you should know before investing in
the Fund, may be obtained without charge from the Fund at the address listed
above or from the Fund's principal underwriter, Franklin Templeton Distributors,
Inc. ("Distributors"), 777 Mariners Island Blvd., P.O. Box 7777, San Mateo,
California 94403-7777. This Statement of Additional Information is not a
prospectus. It contains information in addition to and in more detail than the
information set forth in the Prospectus. This Statement is intended to provide
you with additional information regarding the activities and operations of the
Fund, and should be read in conjunction with the Prospectus.
1
<PAGE>
ABOUT THE FUND
- --------------------------------------------------------------------------------
Franklin Equity Fund, known as Research Equity Fund, Inc. until October 1984, is
a diversified, open-end management investment company, commonly called a "mutual
fund" and registered as such under the Investment Company Act of 1940 (the "1940
Act"). It was organized in 1933, reincorporated in the state of Maryland in 1973
and was merged into the current California corporation in October 1984 for the
purpose of changing the corporation's domicile. The Fund has only one class of
capital stock of no assigned par value.
THE FUND'S INVESTMENT OBJECTIVES AND RESTRICTIONS
- --------------------------------------------------------------------------------
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 Fund's secondary objective is to provide a reasonable return of
income through the receipt of dividends or interest from its investments. The
payment of dividends may be a consideration when the Fund purchases securities.
FOREIGN SECURITIES
When purchasing foreign securities, the Fund will ordinarily purchase securities
which are traded in the United States or purchase sponsored or unsponsored
American Depositary Receipts ("ADRs"), which are certificates issued by U.S.
banks representing the right to receive securities of a foreign issuer deposited
with that bank or a correspondent bank. A sponsored ADR is an ADR in which
establishment of the issuing facility is brought about by the participation of
the issuer and the depositary institution pursuant to a deposit agreement which
sets out the rights and responsibilities of the issuer, the depositary and the
ADR holder. Under the terms of most sponsored arrangements, depositaries agree
to distribute notices of shareholder meetings and voting instructions, thereby
ensuring that ADR holders will be able to exercise voting rights through the
depositary with respect to the deposited securities. An unsponsored ADR has no
sponsorship by the issuing facility and additionally, more than one depositary
institution may be involved in the issuance of the unsponsored ADR. However, it
typically clears through the Depository Trust Company and therefore, there
should be no additional delays in selling the security or in obtaining
dividends. Although not required, the depositary normally requests a letter of
non-objection from the issuer. In addition, the depositary 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).
Securities which are acquired by the Fund outside the United States and which
are publicly traded in the United States or on a foreign securities exchange or
in a foreign securities market are not considered by the Fund to be illiquid
assets so long as the Fund acquires and holds the securities with the intention
of reselling the securities in the foreign trading market, the Fund reasonably
believes it can readily dispose of the securities for cash in the U.S. or
foreign market and current market quotations are readily available. The Fund
will not acquire outside of the United States the securities of foreign issuers
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.
Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents.
Investments in foreign securities where delivery takes place outside the United
States will have to be made in compliance with any applicable United States and
foreign currency restrictions and tax laws (including laws imposing withholding
taxes on any dividend or interest income) and laws limiting the amount and types
of foreign investments. Changes of governmental administrations or of economic
or monetary policies, in the United States or abroad, or changed circumstances
in dealings between nations or currency convertibility or exchange rates could
result in investment losses for the Fund. Investments in foreign securities may
also subject the Fund to losses due to nationalization, expropriation or
differing accounting practices and treatments. Moreover, 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
2
<PAGE>
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 foreign countries deteriorate
markedly. Furthermore, the reporting and disclosure requirements applicable to
foreign issuers may differ from those applicable to domestic issuers, and there
may be difficulties in obtaining or enforcing judgments against foreign issuers.
As of June 30, 1994, the Fund held no securities of foreign issuers, the
delivery of which took place outside the United States.
TRANSACTIONS IN OPTIONS, FUTURES AND OPTIONS ON FINANCIAL FUTURES
Call and Put Options on Securities. The Fund may write covered put and call
options and purchase put and call options which trade on securities exchanges
and in the over-the-counter market.
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; put
options written by the Fund give the holder the right to sell the underlying
security to the Fund at a stated exercise price. A call option written by the
Fund is "covered" if the Fund owns the underlying security which is subject to
the call or has an absolute and immediate right to acquire that security without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the Fund
holds a call on the same security and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Fund in cash and high
grade debt securities in a segregated account with its custodian. 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 cancelled 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
3
<PAGE>
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
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 Adviser wishes to purchase the underlying
security for the Fund's portfolio at a price lower than the current market price
of the security. 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 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 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 ("a protective
put") owned by the Fund as a hedging technique in order to protect against an
anticipated decline in the value of the security. 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 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 when the Adviser deems it
desirable to continue to hold the security 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
is eventually sold.
The Fund may also purchase put options at a time when the Fund does not own the
underlying security. By purchasing put options on a security it does not own,
the Fund seeks to benefit from a decline in the market price of the underlying
security. If the put option is not sold when it has remaining value, and if the
market price of the underlying security 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 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. Just as with exchange traded options, OTC call options give the
holder the right to buy an underlying security from an option writer at a stated
exercise price; OTC put options give the holder the right to sell an underlying
security to an option writer at a stated exercise price. However, OTC options
differ from exchange traded options in certain material respects.
OTC options are arranged directly with dealers and not, as is the case with
exchange traded options, with a clearing corporation. Thus, there is a risk of
non-performance by the dealer. Because there is no exchange, pricing is
typically done by reference to information from market makers. However, OTC
options are available for a greater variety of securities, and in a wider range
of expiration dates and exercise prices, than exchange traded options; and the
writer of an OTC option is paid the premium in advance by the dealer.
There can be no assurance that a continuous liquid secondary market will exist
for any particular option
4
<PAGE>
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.
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.
At the same time a futures contract is purchased or sold, the Fund must
allocate cash or securities as a deposit payment ("initial deposit"). Daily
thereafter, the futures contract is valued and the payment of "variation
margin" may be required since each day the Fund would provide or receive cash
that reflects any decline or increase in the contract's value.
Although 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 resulting from market
conditions in the values of its securities or securities which it intends to
purchase and, to the extent consistent therewith, to accommodate cash flows. The
Fund will not enter into any stock index or financial futures contract or
related option if, immediately thereafter, more than one-third of the Fund's
total assets would be represented by futures contracts or related options. In
addition, the Fund may not purchase or sell futures contracts or purchase or
sell related options if, immediately thereafter, the sum of the amount of
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 fluc-
5
<PAGE>
tuations in 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 Securities and
Exchange Commission, 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 AND BOND INDEX FUTURES AND OPTIONS ON SUCH 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 a stock index futures give the holder the right to receive
cash. Upon exercise of the option, the delivery of the futures position by the
writer of the option to the holder of the option will be accompanied by delivery
of the accumulated balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. If an option is
exercised on the last trading day prior to the expiration date of the option,
the settlement will be made entirely in cash equal to the difference between the
exercise price of the option and the closing price of the futures contract on
the expiration date.
Bond Index Futures and Options on such Contracts. The Fund may purchase and sell
futures contracts based on an index of debt securities and options on such
futures contracts to the extent they currently exist and, in the future, may be
developed. The Fund reserves the right to conduct futures and options
transactions based on an index which may be developed in the future to correlate
with price movements in certain categories of debt securities. The Fund's
investment strategy in employing futures contracts based on an index of debt
securities will be similar to that used by it in other financial futures
transactions.
The Fund may also purchase and write put and call options on such index futures
and enter into closing transactions with respect to such options. See the
section of this prospectus captioned Risk Factors and Considerations Regarding
Options, Futures and Options on Futures," for a discussion of the risk regarding
the Fund's transactions in financial futures.
Future Developments. The Fund may take advantage of opportunities in the area of
options and futures contracts and options on futures contracts and any other
derivative investments which are not presently contemplated for use by the Fund
or which are not currently available but which may be developed, to the extent
such opportunities are both consistent with the Fund's investment objective and
legally permissible for the Fund. Prior to investing in any such investment
vehicle, the Fund will supplement its prospectus, if appropriate.
RISK FACTORS AND CONSIDERATIONS REGARDING OPTIONS, FUTURES AND OPTIONS ON
FUTURES
The Fund's ability to hedge effectively all or a portion of its securities
through transactions in options on stock 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
6
<PAGE>
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 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 contracts which any person may trade on a
particular trading day. An exchange may order the liquidation of positions found
to be in violation of these limits and it may impose other sanctions or
restrictions. The Fund does not believe that these trading and positions limits
will have an adverse impact on the Fund's strategies for hedging its securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Investment Adviser may
still not result in a successful transaction.
In addition, futures contracts entail risks. Although the Fund believes that
use of such contracts will benefit the Fund, if the Investment Adviser's
investment judgment about the general direction of interest rates is incorrect,
the Fund's overall performance would be poorer than if it had not entered into
any such contract. For example, if the Fund has hedged against the possibility
of an increase in interest rates which would adversely affect the price of
bonds held in its portfolio and interest rates decrease instead, the Fund will
lose part or all of the benefit of the increased value of its bonds which it
has hedged because it will have offsetting losses in its futures positions. In
addition, in such
7
<PAGE>
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.
REPURCHASE TRANSACTIONS
The Fund may enter into repurchase agreements with government securities dealers
recognized by the Federal Reserve Board or with member banks of the Federal
Reserve System. This is an agreement in which the seller of a security agrees to
repurchase the security sold at a mutually agreed upon time and price. It may
also be viewed as the loan of money by the Fund to the seller. The resale price
is normally in excess of the purchase price, reflecting an agreed upon interest
rate. The interest rate is effective for the period of time in which the Fund is
invested in the agreement and is not related to the coupon rate on the
underlying security. The period of these repurchase agreements will usually be
short, from overnight to one week, and at no time will the Fund invest in
repurchase agreements for more than one year. However, the securities which are
subject to repurchase agreements may have maturity dates in excess of one year
from the effective date of the repurchase agreements. The Fund will always
receive as collateral securities whose initial market value, including accrued
interest, will be at least equal to 102% of the dollar amount invested by the
Fund in each agreement, and such collateral securities will be marked to market
daily to maintain collateral coverage of at least 100%. The securities
collateralizing the repurchase agreement will be obligations which are
guaranteed as to payment of principal and interest by the U.S. Government, its
agencies, or federally sponsored quasi-public corporations. The Fund will make
payment for such securities only upon physical delivery or evidence of book
entry transfer to the account of its custodian. The Fund may not enter into a
repurchase agreement with more than seven days duration if, as a result, more
than 10% of the market value of the Fund's total assets would be invested in
such repurchase agreements.
Subject to the conditions set forth immediately above, the Fund may also 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. Such a repurchase agreement is an agreement under which
the Fund acquires securities, which meet the standards for collateral as
described above, from a commercial bank, broker or dealer subject to resale to
the seller at an agreed upon price and date (normally the next business day). In
addition, at such time as the Fund determines to engage in repurchase
agreements, the Fund's Board of Directors will monitor the Fund's repurchase
agreement transactions generally and will establish guidelines and standards for
review by the investment adviser of the creditworthiness of any bank, broker or
dealer party to a repurchase agreement with the Fund.
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
management 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.
TIMING OF SECURITIES TRANSACTIONS
Normally, the Fund will purchase securities for investment with a view to
long-term appreciation. The Fund may, however, on occasion purchase securities
with the expectation of realizing gains over the short term. Changes in
particular portfolio holdings may be made whenever it is considered that a
security no longer has the optimum growth potential or has reached its
anticipated level of per-
8
<PAGE>
formance, 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. The differences between the tax
treatment of long-term gains and short-term gains may, however, be considered in
determining the timing of sales of portfolio securities.
The Fund's portfolio turnover rates are set forth in the Financial Highlights
table in the Prospectus.
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
Fund's shareholders. In order to change any of these restrictions, the lesser of
(i) 67% or more of the voting securities present at a meeting of shareholders if
the holders of more than 50% of the voting securities of the Fund are
represented at that meeting or (ii) more than 50% of the outstanding voting
securities of the Fund must vote to make the change.
THE FUND DOES NOT:
1. Purchase the securities of any one issuer (other than obligations of the
United States) if immediately thereafter and as a result of the purchase, the
Fund would (a) have invested more than 5% of the value of the total assets in
the securities of the issuer, or (b) hold more than 10% of any or all classes of
the securities of any one issuer;
2. Make loans to other persons, except by the purchase of bonds, debentures or
similar obligations which are publicly distributed or of a character usually
acquired by institutional investors or through loans of the Fund's portfolio
securities, or to the extent the entry into a repurchase agreement may be deemed
a loan;
3. Borrow money, except for temporary or emergency (but not investment)
purposes, and then only from banks and only in an amount up to 5% of the value
of the assets;
4. Invest more than 25% of the Fund's assets (at the time of the most recent
investment) in any single industry;
5. Underwrite securities of other issuers, or acquire securities which, at the
time of the acquisition, could be disposed of publicly by the Fund only after
registration under the Securities Act of 1933;
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 invest in commodities
or commodity contracts;
8. Effect short sales, unless at the time the Fund owns securities equivalent
in kind and amount to those sold (which will normally be for deferring
recognition of gains or losses for tax purposes). The Fund has not in the past,
nor does it currently intend to employ this investment technique;
9. Invest more than 5% of the Fund's total assets in companies which have a
record of less than three years continuous operation, including the operations
of any predecessor companies;
10. Invest directly in real estate (although the Fund may invest in real estate
investment trusts) or in the securities of other open-end investment companies,
except: (a) where there is no commission other than the customary brokerage
commission; except (b) that securities of another open-end investment company
may be acquired pursuant to a plan of reorganization, merger, consolidation or
acquisition; and (c) except to the extent the Fund invests its uninvested daily
cash balances in shares of Franklin Money Fund and other money market funds in
the Franklin Group of Funds provided i) its purchases and redemptions of such
money market fund shares may not be subject to any purchase or redemption fees,
ii) its investments may not be subject to duplication of management fees, nor to
any charge related to the expense of distributing the Fund's shares (as
determined under Rule 12b-1, as amended under the federal securities laws) and
iii) provided aggregate investments by the Fund in any such money market fund do
not exceed (A) the greater of (1) 5% of the Fund's total net assets or (2) $2.5
million, or (B) more than 3% of the outstanding shares of any such money market
fund; or
11. Purchase or retain in the Fund's 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 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 with
respect to short-term investments of cash pending investment into portfolio
securities of the type discussed in the Prospectus), except that an order to
purchase or sell may be combined with
9
<PAGE>
orders from other persons to obtain lower brokerage commissions.
Pursuant to an undertaking given to the Texas State Securities Board, the Fund
may not invest in warrants (valued at the lower of cost or market) in excess of
5.0% of the value of the Fund's net assets. No more than 2.0% of the value of
the Funds net assets may be invested in warrants (valued at the lower of cost or
market) which are not listed on the New York or American Stock Exchanges. In
addition, 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.
Finally, the Fund does not currently expect to invest in Franklin money market
funds, although the Fund is legally authorized to do so subject to the
limitations set forth above.
OFFICERS AND DIRECTORS
- --------------------------------------------------------------------------------
The Board of Directors has the responsibility for the overall management of the
Fund, including general supervision and review of its investment activities. The
directors, in turn, elect the officers of the Fund who are responsible for
administering the 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 (*).
<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Fund Principal Occupations During Past Five Years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Frank H. Abbott, III Director President and Director, Abbott Corporation (an investment company); and
1045 Sansome St. Mother Lode Gold Mines Consolidated; and director, trustee or managing
San Francisco, CA 94111 general partner, as the case may be, of most of the investment
companies in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
Harris J. Ashton Director President, Chief Executive Officer and Chairman of the Board of General
General Host Corporation Host Corporation (nursery and craft centers); Director of RBC Holdings,
Metro Center, 1 Station Place Inc. (a bank holding company), Bar-S Foods and Sunbelt Nursery Group,
Stamford, CT 06904-2045 Inc.; director of certain of the investment companies in the Templeton
Group of Funds; and director, trustee or managing general partner, as
the case may be, of most of the investment companies in the Franklin
Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
S. Joseph Fortunato Director Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director,
Park Avenue at Morris County General Host Corporation; director of certain of the investment
P. O. Box 1945 companies in the Templeton Group of Funds; and director, trustee or
Morristown, NJ 07962-1945 managing general partner, as the case may be, of most of the investment
companies in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
David W. Garbellano Director Private Investor; Assistant Secretary/Treasurer and Director, Berkeley
111 New Montgomery St., #402 Science Corporation (a venture capital company); and director, trustee
San Francisco, CA 94105 or managing general partner, as the case may be, of most of the
investment companies in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Fund Principal Occupations During Past Five Years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
* Charles B. Johnson Chairman of the President and Director, Franklin Resources, Inc. and Franklin/Templeton
777 Mariners Island Blvd. Board and Director Distributors, Inc.; Chairman of the Board and Director, Franklin
San Mateo, CA 94404 Advisers, Inc.; Director, Franklin/Templeton Investor Services, Inc.
and General Host Corporation; director of certain of the investment
companies in the Templeton Group of Funds; 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 most of the investment
companies in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
* Charles E. Johnson President and Senior Vice President, Franklin Resources, Inc. and Franklin/Templeton
777 Mariners Island Blvd. Director Distributors, Inc.; President and Director, Templeton Worldwide, Inc.;
San Mateo CA 94404 President, Franklin Institutional Services Corporation; director of
certain of the investment companies in the Templeton Group of Funds;
officer and/or director, as the case may be, for some of the
subsidiaries of Franklin Resources, Inc.; and officer and/or director
or trustee, as the case may be, of some of the investment companies in
the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
* Rupert H. Johnson, Jr. Vice President and Executive Vice President and Director, Franklin Resources, Inc. and
777 Mariners Island Blvd. Director Franklin/Templeton Distributors, Inc.; President and Director, Franklin
San Mateo, CA 94404 Advisers, Inc.; Director, Franklin/Templeton Investor Services, Inc.;
director of certain of the investment companies in the Templeton Group
of Funds; 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 most of the investment companies in the Franklin
Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
Frank W. T. LaHaye Director General Partner, Peregrine Associates and Miller & LaHaye, which are
20833 Stevens Creek Blvd. General Partners of Peregrine Ventures and Peregrine Ventures II
Suite 102 (venture capital firms); Chairman of the Board and Director,
Cupertino, CA 95014 Quarterdeck Office Systems, Inc.; Director, FischerImaging Corporation;
and director or trustee, as the case may be, of most of the investment
companies in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
* R. Martin Wiskemann Vice President and Senior Vice President, Portfolio Manager and Director, Franklin
777 Mariners Island Blvd. Director Advisers, Inc.; Senior Vice President, Franklin Management, Inc.; Vice
San Mateo, CA 94404 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 many of the investment companies in the Franklin
Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Fund Principal Occupations During Past Five Years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Harmon E. Burns Vice President Executive Vice President, Secretary and Director, Franklin Resources,
777 Mariners Island Blvd. Inc.; Executive Vice President and Director, Franklin/Templeton
San Mateo, CA 94404 Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; director of
certain of the investment companies in the Templeton Group of Funds;
and officer and/or director of other subsidiaries of Franklin
Resources, Inc. and officer and/or director or trustee of all the
investment companies in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
Kenneth V. Domingues Vice President and Senior Vice President, Franklin Resources, Inc. and Franklin Advisers,
777 Mariners Island Blvd. Treasurer Inc.; Vice President, Franklin/Templeton Distributors, Inc.; officer or
San Mateo, CA 94404 director of other subsidiaries of Franklin Resources, Inc. and officer
and/or managing general partner of all the investment companies in the
Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
Edward V. McVey Vice President Senior Vice President/National Sales Manager, Franklin/Templeton
777 Mariners Island Blvd. Distributors, Inc; and officer of many of the investment companies in
San Mateo, CA 94404 the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
Deborah R. Gatzek Vice President and Senior Vice President - Legal, Franklin Resources, Inc. and
777 Mariners Island Blvd. Secretary Franklin/Templeton Distributors, Inc.; Vice President, Franklin
San Mateo, CA 94404 Advisers, Inc.; and officer of all the investment companies in the
Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
As indicated above, certain of the directors and officers hold positions with
other companies in the Franklin Group of Funds(R). Directors not affiliated with
the investment manager are currently paid fees of $200 per month plus $200 per
meeting attended and are reimbursed for expenses incurred in connection with
attending such meetings. During the fiscal year ended June 30, 1994, fees and
expenses totaling $24,941 were paid to directors of the Fund who are not
affiliated with the investment manager. No officer or director received any
other compensation directly from the Fund. As of August 2, 1994, the directors
and officers, as a group, owned of record and beneficially 219,422.171 shares,
or less than 1% of the total outstanding shares of 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. Charles B. Johnson and Rupert H. Johnson, Jr. are
brothers. Charles E. Johnson is the son of Charles B. Johnson and the nephew of
Rupert H. Johnson, Jr.
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 common stock.
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. Charles B. Johnson, Rupert H. Johnson, Jr., and R.
Martin Wiskemann are principal shareholders of Resources and own approximately
22%, 16% and 10%, respectively, of Resources' outstanding shares. Resources owns
several other subsidiaries which are involved in investment management and
shareholder services. The Manager and other subsidiary companies of Resources
cur-
12
<PAGE>
rently manage over $117 billion in assets for over 3.7 million shareholders. The
table above indicates those officers and directors of the Fund who are also
affiliated persons of Distributors and of Advisers.
Pursuant to the management agreement, the Manager provides investment research
and portfolio management services, including the selection of securities for the
Fund to purchase, hold or sell and the selection of brokers through whom the
Fund's portfolio transactions are executed. The Manager's activities are subject
to the review and supervision of the Fund's Board of Directors to whom the
Manager renders periodic reports of the Fund's investment activities. The
Manager, at its own expense, furnishes the Fund with office space and office
furnishings, facilities and equipment required for managing the business affairs
of the Fund; maintains all internal bookkeeping, clerical, secretarial and
administrative personnel and services; and provides certain telephone and other
mechanical services. The Manager is covered by fidelity insurance on its
officers, directors and employees for the protection of the Fund. The Fund bears
all of its expenses not assumed by the Manager. See the Statement of Operations
in the financial statements at the end of this Statement of Additional
Information for additional details of these expenses.
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.
Management fees for the fiscal years ended June 30, 1992, 1993 and 1994 were
$2,000,940; $1,866,888 and $1,679,738 respectively.
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 management agreement is in effect until April 30, 1995. Thereafter, it may
continue in effect for successive annual periods providing such continuance is
specifically approved at least annually by a vote of the Fund's Board of
Directors or by a vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the Fund's
directors who are not parties to the management agreement or interested persons
of any such party (other than as directors of the Fund), cast in person at a
meeting called for that purpose. The management agreement may be terminated
without penalty at any time by the Fund or by the Manager on 30 days' written
notice and will automatically terminate in the event of its assignment, as
defined in the 1940 Act.
Franklin/Templeton Investor Services, Inc. ("Investor Services" or "Shareholder
Services Agent"), a wholly-owned subsidiary of Resources, is the shareholder
servicing agent for the Fund and acts as the Fund's transfer agent and
dividend-paying agent. Investor Services is compensated on the basis of a fixed
fee per account.
Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian of the securities and other assets of the
Fund. Citibank Delaware, One Penn's Way, New Castle, Delaware 19720, acts as
custodian in connection with transfer services through bank automated clearing
houses. The custodians do not participate in decisions relating to the purchase
and sale of portfolio securities.
Coopers & Lybrand, 333 Market Street, San Francisco, California 94105, are the
Fund's independent auditors. During the fiscal year ended June 30, 1994, their
auditing services consisted of rendering an opinion on the financial statements
of the Fund included in the Fund's Annual Report and this Statement of
Additional Information.
THE FUND'S POLICIES REGARDING BROKERS USED ON PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
Under the current management agreement with Advisers, the selection of brokers
and dealers to execute transactions in the Fund's portfolio is made by the
Manager in accordance with criteria set forth in the management agreement and
any directions which the Fund's Board of Directors may give.
13
<PAGE>
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 will seek 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 securities
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. However, 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.
14
<PAGE>
During the fiscal years ended 1992, 1993 and 1994, the Fund paid total brokerage
commissions of $596,901, $565,538, and $982,046, respectively. In the fiscal
year ended on the date of the accompanying financial statements, the Fund
acquired securities issued by Citicorp and Chemical Banking Corp. which were
valued in the aggregate at $2,310,000 and $2,591,875, respectively, as of the
end of such fiscal year. Except as stated above, the Fund did not own any
securities issued by its regular broker-dealers as of the end of such fiscal
year.
ADDITIONAL INFORMATION REGARDING FUND SHARES
- --------------------------------------------------------------------------------
All checks, drafts, wires and other payment mediums used for purchasing or
redeeming shares of the Fund must be denominated in U.S. dollars. The Fund
reserves the right, in its sole discretion, to either (a) reject any order for
the purchase or sale of shares denominated in any other currency, or (b) to
honor the transaction or make adjustments to a shareholder's account for the
transaction as of a date and with a foreign currency exchange factor determined
by the drawee bank.
In connection with exchanges (see Prospectus, under "Exchange Privilege"), it
should be noted that since the proceeds from the sale of shares of an investment
company generally are not available until the fifth business day following the
redemption, the funds into which the Fund shareholders are seeking to exchange
reserve the right to delay issuing shares pursuant to an exchange until said
fifth business day. The redemption of shares of the Fund to complete an exchange
for shares of any of the investment companies will be effected at the close of
business on the day the request for exchange is received in proper form at the
net asset value then effective.
Dividend checks which are returned to the Fund marked "unable to forward" by the
postal service will be deemed to be a request by the shareholder to change the
dividend option, and the proceeds will be reinvested in additional shares at the
public offering price (or net asset value if a capital gain distribution) until
new instructions are received.
The Fund may deduct from a shareholder's account the costs of its efforts to
locate a shareholder if mail is returned as undeliverable or the Fund is
otherwise unable to locate the shareholder or verify the current mailing
address. These costs may include a percentage of the account when a search
company charges a percentage fee in exchange for their location services.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to such banks' discretionary trust funds at net asset
value. The banks may charge service fees to their customers who participate in
the discretionary trusts. Pursuant to agreements, a portion of such service fees
may be paid to Distributors, or an affiliate of Distributors, to help defray
expenses of maintaining a service office in Taiwan, including expenses related
to local literature fulfillment and communication facilities.
Shares of the Fund may be offered to investors in Taiwan through securities
firms known locally as Securities Investment Consulting Enterprises. In
conformity with local business practices in Taiwan, shares of the Fund will be
offered with the following schedule of sales charges:
<TABLE>
<CAPTION>
SALES
SIZE OF PURCHASE CHARGE
- --------------------------------------------- ------
<S> <C>
Up to U.S. $100,000.......................... 3%
U.S. $100,000 to U.S. $1,000,000............. 2%
Over U.S. $1,000,000......................... 1%
</TABLE>
PURCHASES AND REDEMPTIONS THROUGH SECURITIES DEALERS
Orders for the purchase of shares of the Fund received in proper form prior to
1:00 p.m. Pacific time any business day that the New York Stock Exchange (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 1:00 p.m.
Pacific time will be effected at the Fund's public offering price on the day it
is next calculated. The use of the term "securities dealer" herein shall include
other financial institutions which, pursuant to an agreement with Distributors
(directly or through affiliates), handle customer orders and accounts with the
Fund. Such reference, however, is for convenience only and does not indicate a
legal conclusion of capacity.
Orders for the redemption of shares are effected at net asset value subject to
the same conditions concerning time of receipt in proper form. It is the
securities dealer's responsibility to transmit the order in a timely fashion
and any loss to the customer resulting from failure to do so must be settled
between the customer and the securities dealer.
PURCHASES AT NET ASSET VALUE
As discussed in the Prospectus, certain categories of investors may purchase
shares of the Fund at net asset value (without a sales charge) or at a reduced
sales charge. The reason for this is that
15
<PAGE>
there is minimal or no sales effort required with respect to these investors. If
certain investments at net asset value are made through a dealer who has
executed a dealer or similar agreement with Distributors, Distributors or its
affiliates may make a payment, out of their own resources, to such dealer in an
amount not to exceed 0.25% of the amount invested (1% for certain 401(k) or
similar category of investor as stated in the Prospectus), paid pro rata on a
quarterly basis on average quarterly balances for a period of one year.
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. In the case of
requests for redemption in excess of such amounts, the directors reserve the
right to make payments in whole or in part in securities or other assets of the
Fund from which the shareholder is redeeming, in case of an emergency, or if the
payment of such a redemption in cash would be detrimental to the existing
shareholders of the Fund. In such circumstances, the securities distributed
would be valued at the price used to compute the Fund's net assets. Should the
Fund do so, a shareholder may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind;
however, should it happen, shareholders may not be able to timely recover their
investment and may also incur brokerage costs in selling such securities.
REDEMPTIONS BY THE FUND
Due to the relatively high cost of handling small investments, the Fund reserves
the right to redeem, involuntarily, at net asset value, the shares of any
shareholder whose account has a value of less than one-half of the initial
minimum investment required for that shareholder, but only where the value of
such account has been reduced by the shareholder's prior voluntary redemption of
shares. Until further notice, it is the present policy of the Fund not to
exercise this right with respect to any shareholder whose account has a value of
$50 or more. In any event, before the Fund redeems such shares and sends the
proceeds to the shareholder, it will notify the shareholder that the value of
the shares in the account is less than the minimum amount and allow the
shareholder 30 days to make an additional investment in an amount which will
increase the value of the account to at least $100.
CALCULATION OF NET ASSET VALUE
As noted in the Prospectus, the Fund generally calculates net asset value as of
1:00 p.m. Pacific time each day that the Exchange is open for trading. As of the
date of this Statement of Additional Information, the Fund is informed that the
Exchange observes the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
The Fund's portfolio securities are valued as stated in the Prospectus.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times prior to
the close of the Exchange. The values of such securities used in computing the
net asset value of the Fund's shares are determined as of such times.
Occasionally, events affecting the values of such securities and such exchange
rates may occur between the times at which they are determined and 1:00 p.m.
Pacific time which will not be reflected in the computation of the Fund's net
asset value. If events materially affecting the value of such securities occur
during such period, then these securities will be valued at their fair value as
determined in good faith by the Fund's Board.
REINVESTMENT DATE
The dividend reinvestment date is the date on which additional shares are
purchased for the investor who has elected to have dividends reinvested. This
date will vary from month to month, based on operational considerations, and is
not necessarily the same date as the record date or the payable date for cash
dividends.
SPECIAL SERVICES
The Trust and Institutional Services Division of Distributors provides
specialized services, including recordkeeping, for institutional investors of
the Fund. The cost of these services is not borne by the Fund.
Franklin/Templeton Investor Services, Inc. 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
16
<PAGE>
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 has elected and qualified to be treated as
a regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended (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.
Gain realized by the Fund from transactions entered into after April 30, 1993
that are deemed to constitute "conversion transactions" under the Code and which
would otherwise produce capital gain may be recharacterized as ordinary income
to the extent that such gain does not exceed an amount defined by the Code as
the "applicable imputed income amount." A conversion transaction is any
transaction in which substantially all of the Fund's expected return is
attributable to the time value of the Fund's net investment in such transaction
and any one of the following criteria are met: 1) there is an acquisition of
property with a substantially contemporaneous agreement to sell the same or
substantially identical property in the future; 2) the transaction is an
applicable straddle; 3) the transaction was marketed or sold to the Fund on the
basis that it would have the economic characteristics of a loan but would be
taxed as capital gain; or 4) the transaction is specified in Treasury
regulations to be promulgated in the future. The applicable imputed income
amount, which represents the deemed return on the conversion transaction based
upon the time value of money, is computed a yield using a yield equal to 120
percent of the applicable federal rate, reduced by any prior recharacterizations
under this provision or Section 263(g) of the Code concerning capitalized
carrying costs.
Subject to the limitations discussed below, all or a portion of the income
distributions paid by a Fund may be treated by corporate shareholders as
qualifying dividends for purposes of the dividends-received deduction under
federal income tax law. If the aggregate qualifying dividends received by the
Fund (generally, dividends from U.S. domestic corporations, the stock in which
is not debt-financed by the Fund and is held for at least a minimum holding
period) is less than 100% of its distributable income, then the amount of the
Fund's dividends paid to corporate shareholders which may be designated as
eligible for such deduction will not exceed the aggregate qualifying dividends
received by the Fund for the taxable year. The amount or percentage of income
qualifying for the corporate dividends-received deduction will be declared by
the Fund annually in a notice to shareholders mailed shortly after the end of
the Fund's fiscal year.
Corporate shareholders should note that dividends paid by 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 net
short-term capital gain (in excess of any net long-term capital loss or capital
loss carryover) included in investment company taxable income and distributed by
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 for corporate shareholders who
finance their purchase of Fund shares with debt obligations or who carry their
investment in Fund shares through debt financing. In this case, their
dividends-received deduction will be reduced by the percentage of their
investment which is debt-financed and their deduction will be allowable only
with respect to the dividends attributable to the portion of their investment
which is not debt-financed. 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.
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
17
<PAGE>
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 and pay such dividends, if any, in December 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, a gain or loss will be
recognized in an amount equal to the difference between the shareholder's basis
in the shares and the amount received, subject to the rules described below. If
such shares are a capital asset in the hands of the shareholder, any gain or
loss will be a 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.
Any loss realized upon the redemption of shares within six months from the date
of their purchase will be treated as a long-term capital loss to the extent of
amounts treated as distributions of net long-term capital gain during such
six-month period.
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 Group of Funds (defined under
"How to Buy Shares of the Fund") and a sales charge which would otherwise apply
to the reinvestment is reduced or eliminated. Any portion of such sales charge
excluded from the tax basis of the shares sold will be added to the tax basis of
the shares acquired in the reinvestment. Shareholders should consult with their
tax advisors concerning the tax rules applicable to the redemption or exchange
of Fund shares.
The Fund is authorized to invest in foreign securities (see the discussion in
the prospectus under Investment Objectives and Policies of the Fund). Such
investments, if made, will have the following tax consequences.
The Fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. Because the Fund will likely invest 50% or less of its
total assets in securities of foreign corporations, the Fund will not be
entitled under the Code to pass-through to its shareholders their pro rata share
of the foreign taxes paid by the Fund. These taxes will be taken as a deduction
by the Fund.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currencies, foreign currency payables or
receivables, 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. Additionally, investments in
foreign securities pose special issues to the Fund in meeting its asset
diversification and income tests as a regulated investment company. The Fund
will limit its investments in foreign securities to the extent necessary to
comply with these requirements.
The Fund will limit its equity investments in non-U.S. corporations that would
be treated as a Passive Foreign Investment Company (PFIC) under the Code in
order to avoid adverse tax consequences upon the disposition of, or the receipt
of "excess distributions" with respect to, such equity investments. To the
extent the Fund does invest in PFICs, it may adopt certain tax strategies to
reduce or eliminate the adverse effects of certain federal tax provisions
governing PFIC investments. Many non-U.S. banks and insurance companies may not
be treated as PFICs if they satisfy certain technical requirements under the
Code.
To the extent that the Fund does invest in foreign securities which are
determined to be PFIC securities and is required to pay a tax on such an
investment, a credit for this tax would not be allowed to be passed through to
the Fund's shareholders. Therefore, the payment of this tax would reduce the
Fund's economic return from its PFIC investment. The recognition of income upon
the disposition of or the receipt of excess distributions from the PFIC
18
<PAGE>
security may also change the character of such income from capital gain to
ordinary income. For these and other operational reasons, the Fund will
generally avoid, where possible, investment in foreign securities which are
known to be or potentially may be classified as PFIC securities.
The Fund's investment in covered call options may be subject to many complex and
special tax rules. A written call option by the Fund that expires without being
exercised or sold will generally be treated as a short-term capital gain by the
Fund. If exercise of the option appears imminent, the Fund will generally
attempt a closing purchase transaction using another call option with the same
terms. When this occurs, the Fund will normally recognize a short-term capital
gain or loss on the transaction. If the Fund decides to deliver the underlying
stock in its portfolio, the stock is deemed to be sold for the call price plus
option premium received. Gain or loss is determined based upon the Fund's cost
in the security and is classified as short-term or long-term or based upon the
holding period of the stock and without regard to the holding period of the
option.
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. An exception to these
rules is applicable if the option is deemed to be a "qualified covered option."
Such determination will be made if: 1) the option has more than 30 days before
its expiration; 2) it is traded on a national exchange; 3) it is not "deep in
the money"; 4) it is not granted by an options dealer in the course of his
dealer activity; and 5) any gain or loss with respect to such option is a
capital gain or loss.
As a regulated investment company, the Fund is also subject to the requirement
that less than 30% of its annual gross income be derived from the sale or other
disposition of securities and certain other investments held for less than three
months ("short-short income"). This requirement may limit the Fund's ability to
engage in options because these transactions are often consummated in less than
three months, may require the sale of portfolio securities held less than three
months and may, as in the case of short sales of portfolio securities, reduce
the holding periods of certain securities within the Fund, resulting in
additional short-short income for the Fund.
The Fund will monitor its transactions in such options and contracts and may
make certain other tax elections in order to mitigate the effect of the above
rules and to prevent disqualification of the Fund as a regulated investment
company under Subchapter M of the Code.
THE FUND'S UNDERWRITER
- --------------------------------------------------------------------------------
Pursuant to an underwriting agreement in effect until April 30, 1995,
Distributors acts as principal underwriter in a continuous public offering for
shares of the Fund. Distributors pays the expenses of distribution of Fund
shares, including advertising expenses and the costs of printing sales material
and prospectuses used to offer shares to the public. The Fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of Distributors)
and of sending prospectuses to existing shareholders.
The underwriting agreement will continue in effect for successive annual periods
provided that its continuance is specifically approved at least annually by a
vote of the Fund's Board of Directors, or by a vote of the holders of a majority
of the Fund's outstanding voting securities, and in either event by a majority
vote of the Fund's directors who are not parties to the underwriting agreement
or interested persons of any such party (other than as directors of the Fund),
cast in person at a meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may be terminated by
either party on 90 days' written notice.
Distributors allows the entire underwriting commission on the sale of Fund
shares. In connection with the offering of the Fund's shares, aggregate
underwriting commissions for the fiscal years ended 1992, 1993 and 1994 were
$1,459,742, $1,010,505 and $754,562, respectively. After reallowances to
dealers, Distributors retained $112,236, $91,089 and $50,236 during the fiscal
years ended June 30, 1992, 1993 and 1994, respectively. Distributors received no
other compensation from the Fund for acting as underwriter.
DISTRIBUTION PLAN
- --------------------------------------------------------------------------------
The Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the 1940 Act,
as adopted, provides for the Fund to pay up to a maximum of 0.25% per annum of
its average daily net assets for expenses incurred in the promotion and
distribution of its shares.
19
<PAGE>
Pursuant to the Plan, Distributors or others will be entitled to be reimbursed
each quarter (up to the maximum as stated above) for actual expenses incurred in
the distribution and promotion of the Fund's shares, including, but not limited
to, the printing of prospectuses and reports used for sales purposes, expenses
of preparation and distribution of sales literature and related expenses,
advertisements, and other distribution-related expenses, including a prorated
portion of Distributors' overhead expenses attributable to the distribution of
Fund shares, as well as any distribution or service fees paid to securities
dealers or their firms or others who have executed a servicing agreement with
Distributors.
In addition to the payments to which Distributors or others are entitled under
the Plan, the Plan also provides that to the extent the Fund, the Manager or
Distributors or other parties on behalf of the Fund, the Manager or
Distributors, make payments that are deemed to be payments for the financing of
any activity primarily intended to result in the sale of shares of the Fund
within the context of Rule 12b-1 under the 1940 Act, then such payments shall be
deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include payments
made under the Plan, plus any other payments deemed to be made pursuant to the
Plan, exceed the amount permitted to be paid pursuant to the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., Article III,
Section 26(d)4.
The terms and provisions of the Plan relating to required reports, term, and
approval are consistent with Rule 12b-1. The Plan does not permit unreimbursed
expenses incurred in a particular year to be carried over to or reimbursed in
subsequent years.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the Plan as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. Such banking institutions, however, are permitted to receive fees under
the Plan for administrative servicing or for agency transactions. If a bank were
prohibited from providing such services, its customers who are shareholders
would be permitted to remain shareholders of the Fund, and alternate means for
continuing the servicing of such shareholders would be sought. In such an event,
changes in the services provided might occur and such shareholders might no
longer be able to avail themselves of any automatic investment or other services
then being provided by the bank. It is not expected that shareholders would
suffer any adverse financial consequences as a result of any of these changes.
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law expressed herein, and banks and
financial institutions selling shares of the Fund may be required to register as
dealers pursuant to state law.
The Board of Directors has determined that a consistent cash flow resulting from
the sale of new shares is necessary and appropriate to meet redemptions and to
take advantage of buying opportunities of portfolio securities without having to
make unwarranted liquidations of other portfolio securities. The Board of
Directors, therefore, felt that it would benefit the Fund to have monies
available for the direct distribution activities of Distributors or others in
promoting the sale of its shares. The Board of Directors, including the
non-interested directors, concluded that, in the exercise of their reasonable
business judgment and in light of their fiduciary duties, there is a reasonable
likelihood that the Plan will benefit the Fund and its shareholders.
The Plan was approved by shareholders on April 13, 1994 and by the directors of
the Fund, including those directors who are not interested persons, as defined
in the 1940 Act. The Plan is effective for an initial period through April 30,
1995 and is renewable annually by a vote of the Fund's Board of Directors,
including a majority vote of the directors who are non-interested persons of
the Fund and who have no direct or indirect financial interest in the operation
of the Plan, cast in person at a meeting called for that purpose. It is also
required that the selection and nomination of such directors be done by the
non-interested directors. The Plan and any related agreement may be terminated
at any time, without any penalty, by vote of a majority of the non-interested
directors on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of the
Management Agreement with the Manager or by vote of a majority of the Fund's
outstanding shares. Distributors or any dealer or other firm may also terminate
their respective distribution or service agreement at any time upon written
notice.
The Plan and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by
20
<PAGE>
a majority of the Fund's outstanding shares, and all material amendments to the
Plan or any related agreements shall be approved by a vote of the non-interested
directors, cast in person at a meeting called for the purpose of voting on any
such amendment.
Distributors is required to report in writing to the Board of Directors at least
quarterly on the amounts and purpose of any payment made under the Plan and any
related agreements, as well as to furnish the Board of Directors with such other
information as may reasonably be requested in order to enable the Board of
Directors to make an informed determination of whether the Plan should be
continued.
During the fiscal year ended June 30, 1994, a total of $104,654 was paid by the
Fund to eligible parties under the Plan.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
PERFORMANCE
As noted in the Prospectus, the Fund may from time to time quote various
performance figures to illustrate the Fund's past performance. It may
occasionally cite statistics to reflect its volatility or risk.
Performance quotations by investment companies are subject to rules adopted by
the Securities and Exchange Commission ("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 sales charge is deducted from the initial
$1,000 purchase order, and that capital gains and income dividends are
reinvested at net asset value on the reinvestment dates during the period. 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.
With the reinvestment of dividends at net asset value (without a sales charge)
effective May 1, 1994, and the maximum sales charge of 4.50% effective July 1,
1994, all historical performance information quoted below and used in future
sales materials will be restated to reflect these changes.
The average annual compounded rates of return for the Fund for the indicated
one-, five- and ten-year periods ended on the date of the financial statements
included herein are -2.26%, 4.50% and 11.94%, respectively.
These figures were calculated according to the SEC formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 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 its average return over one-, five- or ten-year periods. The total
rates of return for the Fund for the one-, five- or ten-year periods ended on
the date of the financial statements included herein are -2.26%, 24.62% and
208.99%, respectively.
In considering these total return quotations investors should remember that the
4.5% maximum sales charge reflected in each quotation is a one time fee (charged
on all direct purchases and reinvested dividends) 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.
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.
21
<PAGE>
One measure of volatility is beta. Beta is the volatility of a fund relative to
the total market as represented by the Standard & Poor's 500 Stock Index. A beta
of more than 1.00 indicates volatility greater than the market, and a beta of
less than 1.00 indicates volatility less than the market. Another measure of
volatility or risk is standard deviation. Standard deviation is used to measure
variability of net asset value or total return around an average, over a
specified period of time. The premise is that greater volatility connotes
greater risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
With respect to those categories of investors who are permitted to purchase
shares of the Fund at net asset value, sales literature pertaining to the Fund
may quote a current distribution rate, yield, total return, average annual total
return and other measures of performance as described elsewhere in this
Statement of Additional Information 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. Franklin Resources, Inc. is the parent company of
advisers and underwriter of both the Franklin Group of Funds and the 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.
The following publications, indices, and averages are examples of materials that
may be used:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - unmanaged
indices of all industrial, utilities, transportation, and finance stocks listed
on the New York Stock Exchange.
d) Wilshire 5000 Equity Index - represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry. Rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for equity funds.
h) Financial publications: The Wall Street Journal and Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
22
<PAGE>
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.
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 averages are generally
unmanaged, and that the items included in the calculations of such averages may
not be identical to the formula used by the Fund to calculate its figures. In
addition there can be no assurance that the Fund will continue this performance
as compared to such other averages.
OTHER FEATURES AND BENEFITS
The Fund may help investors achieve various investment goals such as
accumulating money for retirement, saving for a down payment on a home, college
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 Income
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 Group of Funds and may be considered in a
program for diversification of assets.
The Fund may identify itself by its NASDAQ or CUSIP number.
The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin number one of
32 mutual fund groups for five out of the past six years. One other fund group
was also ranked number one in 1993.
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.
23
<PAGE>
FRANKLIN EQUITY FUND
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
of Franklin Equity Fund:
We have audited the accompanying statement of assets and liabilities of Franklin
Equity Fund, including the statement of investments in securities and net
assets, as of June 30, 1994, and the related statement of operations for the
year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights included under the
caption "Financial Highlights" for each of the five years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1994 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Franklin Equity Fund as of June 30, 1994, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND
San Francisco, California
August 3, 1994
24
<PAGE>
FRANKLIN EQUITY FUND
- -------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 92.8%
ADVERTISING 1.7%
100,000 Omnicom Group, Inc. ........................................................... $ 4,825,000
------------
AEROSPACE/DEFENSE 2.4%
80,000 Martin Marietta Corp. ......................................................... 3,530,000
50,000 Raytheon Co. .................................................................. 3,237,500
------------
6,767,500
------------
APPAREL 2.9%
180,000 (a)Fruit of the Loom, Inc. ....................................................... 4,702,500
70,000 VF Corp. ...................................................................... 3,325,000
------------
8,027,500
------------
AUTOMOBILES 1.7%
100,000 Chrysler Corp. ................................................................ 4,712,500
------------
BEVERAGE .9%
50,000 Anheuser-Busch Cos., Inc. ..................................................... 2,537,500
------------
BROADCASTING & CABLE TV 1.2%
150,000 TCA Cable TV, Inc. ............................................................ 3,393,750
------------
CHEMICAL, SPECIALTY 2.7%
260,000 Crompton & Knowles Corp. ...................................................... 4,485,000
110,000 Vigoro Corp. .................................................................. 3,093,750
------------
7,578,750
------------
COMMERCIAL SERVICES 2.1%
135,000 Dial Corp. .................................................................... 5,771,250
------------
COMPUTER/PERIPHERALS 4.1%
120,000 (a)Cisco Systems, Inc. ........................................................... 2,805,000
150,000 (a)Compaq Computer Corp. ......................................................... 4,837,500
160,000 (a)Synoptics Communications, Inc. ................................................ 2,180,000
65,400 (a)Wellfleet Communications, Inc. ................................................ 1,635,000
------------
11,457,500
------------
CONSUMER PRODUCTS .7%
20,000 Unilever N.V., New York Shares ................................................ 2,015,000
------------
DRUGS 7.7%
90,000 American Cyanamid Co. ......................................................... 5,040,000
60,000 American Home Products Corp. .................................................. 3,405,000
60,000 Bristol-Myers Squibb Co. ...................................................... 3,217,500
78,600 (a)Noven Pharmaceuticals, Inc. ................................................... 1,061,100
100,000 Teva Pharmaceutical Industries, Ltd. .......................................... 2,400,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
FRANKLIN EQUITY FUND
- -------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
DRUGS (CONT.)
130,400 Upjohn Co. ................................................................... $ 3,797,900
70,000 Zeneca Group Plc., ADR ....................................................... 2,336,250
------------
21,257,750
------------
ENTERTAINMENT .7%
85,000 Gaylord Entertainment Co. .................................................... 2,082,500
------------
ENVIRONMENTAL PROTECTION & PURIFICATION 2.0%
300,000 Wheelabrator Technologies, Inc. .............................................. 5,587,500
------------
FINANCIAL/BANKS 7.1%
20,000 Bankers Trust New York Corp. ................................................. 1,332,500
60,000 Chemical Banking Corp. ....................................................... 2,310,000
65,000 Citicorp ..................................................................... 2,591,875
60,000 First Chicago Corp. .......................................................... 2,887,500
150,000 Huntington Bancshares, Inc. .................................................. 3,806,250
35,000 J.P. Morgan & Co., Inc. ...................................................... 2,165,625
150,000 KeyCorp ...................................................................... 4,781,250
------------
19,875,000
------------
FOOD-PROCESSING .9%
80,000 Pioneer Hi-Bred International, Inc. .......................................... 2,620,000
------------
FOREST PRODUCTS/PAPER 1.6%
40,000 International Paper Co. ...................................................... 2,650,000
100,000 Pope & Talbot, Inc. .......................................................... 1,800,000
------------
4,450,000
------------
HOME BUILDING 1.6%
60,000 (a)Beazer Homes USA, Inc. ....................................................... 915,000
195,000 Lennar Corp. ................................................................. 3,680,625
------------
4,595,625
------------
HOSPITAL MANAGEMENT/SERVICES 1.8%
90,000 (a)GranCare, Inc. ............................................................... 1,856,250
60,000 (a)Healthtrust, Inc. - The Hospital Co. ......................................... 1,665,000
57,200 (a)Homedco Group, Inc. .......................................................... 1,601,600
------------
5,122,850
------------
INSURANCE 1.7%
130,000 Leucadia National Corp. ...................................................... 4,680,000
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
FRANKLIN EQUITY FUND
- -------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
MACHINERY 2.0%
30,000 (a)FMC Corp. ..................................................................... $ 1,623,750
155,000 Roper Industries, Inc. ........................................................ 4,068,750
------------
5,692,500
------------
MEDICAL SERVICES 1.2%
150,000 (a)Beverly Enterprises ........................................................... 1,818,750
100,000 (a)NovaCare, Inc. ................................................................ 1,600,000
------------
3,418,750
------------
MEDICAL SUPPLIES 1.5%
125,000 St. Jude Medical, Inc. ........................................................ 4,062,500
------------
MINING 1.7%
200,000 American Barrick Resources Corp. .............................................. 4,775,000
------------
MULTIFORM INDUSTRIES 3.4%
210,600 Pittston Co. .................................................................. 5,633,550
50,000 Premark International, Inc. ................................................... 3,762,500
------------
9,396,050
------------
NATURAL GAS, DIVERSIFIED 4.9%
280,000 Enron Oil & Gas Co. ........................................................... 6,440,000
125,000 Sonat, Inc. ................................................................... 3,843,750
123,800 Williams Cos., Inc. ........................................................... 3,543,775
------------
13,827,525
------------
OIL REFINERS 2.8%
80,000 Tosco Corp. ................................................................... 2,380,000
210,000 Ultramar Corp. ................................................................ 5,512,500
------------
7,892,500
------------
OILFIELD SERVICES 1.3%
250,000 (a)Hornbeck Offshore Services, Inc. .............................................. 3,562,500
------------
PAPER & FOREST PRODUCTS .5%
50,000 Louisiana-Pacific Corp. ....................................................... 1,525,000
------------
PETROLEUM 5.5%
60,000 Amoco Corp. ................................................................... 3,420,000
144,000 Chevron Corp. ................................................................. 6,030,000
40,000 Mobil Corp. ................................................................... 3,265,000
110,000 YPF S.A. ...................................................................... 2,626,250
------------
15,341,250
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
FRANKLIN EQUITY FUND
- -------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
PUBLISHING/PRINTING 1.0%
50,000 Tribune Co. ................................................................... $ 2,662,500
------------
RETAIL, SPECIAL LINES 1.2%
225,000 Ross Stores, Inc. ............................................................. 3,290,625
------------
RETAIL STORES 3.9%
254,500 Family Dollar Stores, Inc. .................................................... 3,403,938
65,000 (a)Kohl's Corp. .................................................................. 3,055,000
260,700 (a)MacFrugals Bargains Closeouts, Inc. ........................................... 4,529,663
------------
10,988,601
------------
SEMICONDUCTORS 3.1%
125,000 (a)Exar Corp. .................................................................... 3,250,000
61,700 Intel Corp. ................................................................... 3,609,450
100,000 (a)National Semiconductor Corp. .................................................. 1,725,000
------------
8,584,450
------------
SHOES 1.1%
50,000 Nike, Inc., Class B ........................................................... 2,987,500
------------
TELECOMMUNICATIONS 3.3%
80,000 GTE Corp. ..................................................................... 2,520,000
40,000 (a)Newbridge Networks Corp. ...................................................... 1,375,000
80,000 Pacific Telesis Group ......................................................... 2,470,000
50,000 Telefonos de Mexico, S.A. ..................................................... 2,793,750
------------
9,158,750
------------
TOBACCO 1.0%
55,000 Philip Morris Cos., Inc. ...................................................... 2,832,500
------------
TOILETRIES & COSMETICS 2.2%
60,000 Avon Products, Inc. ........................................................... 3,532,500
75,000 Tambrands, Inc. ............................................................... 2,756,250
------------
6,288,750
------------
TOYS & SCHOOL SUPPLIES 2.2%
100,000 (a)Acclaim Entertainment, Inc. ................................................... 1,621,875
175,077 Mattel, Inc. .................................................................. 4,442,578
------------
6,064,453
------------
TRANSPORTATION 1.9%
230,000 (a)Chicago & North Western Holdings Corp. ........................................ 5,318,750
------------
TRUCK TRANSPORT: LEASING .9%
40,000 Roadway Services, Inc. ........................................................ 2,520,000
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
FRANKLIN EQUITY FUND
- -------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
UTILITIES .7%
110,920 AES Corp. ..................................................................... $ 2,079,750
------------
TOTAL COMMON STOCKS (COST $261,974,466) ................................. 259,627,679
------------
FACE
AMOUNT
-----------
(b)SHORT TERM INVESTMENTS 4.8%
CERTIFICATES OF DEPOSIT .7%
$ 2,000,000 Banque Nationale de Paris, New York Branch, 4.17%, 07/05/94 (COST $1,999,922).. 1,999,922
------------
COMMERCIAL PAPER 4.1%
10,000,000 American Express Credit Corp., 4.303% - 4.382%, 07/25/94 - 08/15/94 ........... 10,000,000
1,500,000 Associates Corp. of North America, 4.606%, 07/11/94 ........................... 1,500,000
------------
TOTAL COMMERCIAL PAPER (COST $11,500,000) ............................... 11,500,000
------------
U.S. GOVERNMENT SECURITIES
80,000 U.S. Treasury Bills, 3.53%, 07/07/94 (COST $79,950)............................ 79,950
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $275,554,338) ...... 273,207,551
------------
(c,d)RECEIVABLES FROM REPURCHASE AGREEMENTS 1.8%
5,116,749 Joint Repurchase Agreement, 4.331%, 07/01/94 (Maturity Value $4,940,487),
(COST $4,939,893)
Collateral: U.S. Treasury Bills, 06/29/95
U.S. Treasury Notes, 4.375% - 8.875%, 11/15/96 - 03/31/99 ....... 4,939,893
------------
TOTAL INVESTMENTS (COST $280,494,231) 99.4% .................... 278,147,444
OTHER ASSETS AND LIABILITIES, NET .6% .......................... 1,732,956
------------
NET ASSETS 100.0% .............................................. $279,880,400
============
At June 30, 1994, the net unrealized depreciation based on the cost of
investments for income tax purposes of $280,496,399 was as follows:
Aggregate gross unrealized appreciation for all investments in which
there was an excess of value over tax cost ................................. $ 20,229,739
Aggregate gross unrealized depreciation for all investments in which
there was an excess of tax cost over value ................................. (22,578,694)
------------
Net unrealized depreciation ................................................. $ (2,348,955)
============
</TABLE>
(a) Non-income producing.
(b) Certain short-term securities are traded on a discount basis; the rates
shown are the discount rates at the time of purchase by the Fund. Other
securities bear interest at the rates shown, payable at fixed dates or upon
maturity.
(c) Face amount for repurchase agreements is for the underlying collateral.
(d) See Note 1e regarding joint repurchase agreement.
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
FRANKLIN EQUITY FUND
- -------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1994
<TABLE>
<S> <C>
Assets:
Investments in securities, at value
(identified cost $275,554,338) $273,207,551
Receivables from repurchase
agreements at value and cost 4,939,893
Receivables:
Dividends and interest 608,527
Investment securities sold 3,226,656
Capital shares sold 28,329
------------
Total assets 282,010,956
------------
Liabilities:
Payables:
Investment securities purchased 1,438,050
Capital shares repurchased 377,664
Management fees 125,844
Distribution fees 104,654
Shareholder servicing costs 23,000
Bank overdraft 20,344
Accrued expenses and other liabilities 41,000
------------
Total liabilities 2,130,556
------------
Net assets, at value $279,880,400
============
Net assets consist of:
Undistributed net investment income $ 69,156
Unrealized depreciation on investments (2,346,787)
Accumulated net realized gain 25,998,861
Capital shares 256,159,170
------------
Net assets, at value $279,880,400
============
Computation of net asset value and
offering price per share:
Net asset value and redemption price
per share ($279,880,400 / 42,857,374
shares of capital stock outstanding) $6.53
============
Maximum offering price (100/96 of $6.53)* $6.80
============
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1994
<TABLE>
<S> <C> <C>
Investment income:
Dividends $5,942,988
Interest 665,743
----------
Total income $ 6,608,731
Expenses:
Management fees (Note 5) 1,679,738
Distribution fees 104,654
Shareholder servicing costs
(Note 5) 292,407
Reports to shareholders 286,996
Custodian fees 35,051
Professional fees 34,626
Directors' fees and expenses 24,941
Registration and filing fees 53,351
Other 18,534
----------
Total expenses 2,530,298
------------
Net investment income 4,078,433
------------
Realized and unrealized gain
(loss) on investments:
Net realized gain 43,486,304
Net unrealized depreciation
during the year (38,366,022)
------------
Net realized and unrealized
gain on investments 5,120,282
------------
Net increase in net assets
resulting from operations $ 9,198,715
============
</TABLE>
*On sales of $100,000 or more the offering price is reduced as stated in the
section of the Prospectus entitled "How to Buy Shares of the Fund."
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
FRANKLIN EQUITY FUND
- -------------------------------------------------------------------------------
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED JUNE 30, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income......................................................... $ 4,078,433 $ 5,989,136
Net realized gain from security transactions.................................. 43,486,304 17,099,466
Net unrealized appreciation (depreciation) during the year.................... (38,366,022) 10,709,428
------------ ------------
Net increase in net assets resulting from operations...................... 9,198,715 33,798,030
Distributions to shareholders:
From undistributed net investment income....................................... (4,360,241) (5,824,756)
From net realized capital gains................................................ (34,433,434) (21,312,355)
Decrease in net assets from capital share transactions (Note 3)................. (36,279,318) (25,732,281)
------------ ------------
Net decrease in net assets................................................ (65,874,278) (19,071,362)
Net assets:
Beginning of year.............................................................. 345,754,678 364,826,040
------------ ------------
End of year (including undistributed net investment income of
$69,156 - 1994 and $809,608 - 1993)........................................... $279,880,400 $345,754,678
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
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FRANKLIN EQUITY FUND
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NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Franklin Equity Fund (the Fund) is an open-end, diversified management
investment company (mutual fund), registered under the Investment Company Act of
1940 as amended.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
a. SECURITY VALUATION: Portfolio securities listed on a securities exchange or
on the NASDAQ National Market System for which market quotations are readily
available are valued at the last quoted sale price of the day or, if there is no
such reported sale, within the range of the most recent quoted bid and asked
prices. Other securities for which market quotations are readily available are
valued at current market values, obtained from a pricing service, which are
based on a variety of factors, including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific securities. Portfolio securities which
are traded both in the over-the-counter market and on a securities exchange are
valued according to the broadest and most representative market as determined by
the Manager. Other securities for which market quotations are not available, if
any, are valued in accordance with procedures established by the Board of
Directors.
Short-term securities and similar investments with remaining maturities of 60
days or less are valued at amortized cost, which approximates value.
b. INCOME TAXES: The Fund intends to continue to qualify for the tax treatment
applicable to regulated investment companies under the Internal Revenue Code and
to make the requisite distributions to its shareholders which will be sufficient
to relieve it from income and excise taxes. Therefore, no income tax provision
is required.
c. SECURITY TRANSACTIONS: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses on
security transactions are determined on the basis of specific identification for
both financial statement and income tax purposes.
d. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS: Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income and estimated expenses are accrued daily.
Net realized capital gains differ for financial statement and tax purposes
primarily due to losses deferred for wash sale transactions.
e. REPURCHASE AGREEMENTS: The Fund may enter into a Joint Repurchase Agreement
whereby its uninvested cash balance is deposited into a joint cash account to be
used to invest in one or more repurchase agreements with government securities
dealers recognized by the Federal Reserve Board and/or member banks of the
Federal Reserve System. The value and face amount of the Joint Repurchase
Agreement has been allocated to the Fund based on its pro-rata interest at June
30, 1994.
In a repurchase agreement, the Fund purchases a U.S. government security from a
dealer or bank subject to an agreement to resell it at a mutually agreed upon
price and date. Such a transaction is accounted for as a loan by the Fund to the
seller, collateralized by the underlying security. The transaction requires the
initial collateralization of the seller's obligation by U.S. government
securities with market value, including accrued interest, of at least 102% of
the dollar amount invested by the Fund, with the value of the underlying
security marked to market daily to maintain coverage of at least 100%. The
collateral is delivered to the Fund's custodian and held until resold to the
dealer or bank. At June 30, 1994, the outstanding joint repurchase agreement
held by the Fund had been entered into on that date.
f. CHANGE IN ACCOUNTING FOR DISTRIBUTIONS TO SHAREHOLDERS: Effective June 30,
1994, the Fund adopted AICPA Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. As a result, components
of net assets have been reclassified to better present financial statement
amounts and distributions in accordance with Statement of Position 93-2.
Accordingly, amounts as of June 30, 1994 have been restated to reflect a
decrease in additional paid-in capital of $1,172,372, an increase in accumulated
net realized gain of $1,631,016, and a decrease in undistributed net investment
income of $458,644.
32
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FRANKLIN EQUITY FUND
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NOTES TO FINANCIAL STATEMENTS (CONT.)
2. DISTRIBUTIONS
At June 30, 1994 for tax purposes, the Fund had accumulated undistributed net
realized capital gains of $26,001,029.
For tax purposes, the aggregate cost of securities is higher (and unrealized
depreciation is higher) than for financial reporting purposes at June 30, 1994
by $2,168.
3. CAPITAL STOCK
At June 30, 1994, there were 5,000,000,000 shares of no par value capital stock
authorized, and capital paid in aggregated $256,159,170. Transactions in capital
stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------
1994 1993
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares sold...................................... 2,049,264 $ 14,306,753 5,291,576 $ 38,022,756
Shares issued in reinvestment of distributions... 5,049,835 34,562,962 3,213,035 23,136,160
Shares redeemed.................................. (7,611,250) (54,438,166) (11,547,949) (83,288,298)
Changes from exercise of exchange privilege:
Shares sold..................................... 53,117,221 374,441,701 45,511,593 327,800,303
Shares redeemed................................. (57,452,558) (405,152,568) (46,004,878) (331,403,202)
----------- ------------- ----------- -------------
Net decrease..................................... (4,847,488) $ (36,279,318) (3,536,623) $ (25,732,281)
=========== ============= =========== =============
</TABLE>
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding purchases and sales of short-term
securities) for the year ended June 30, 1994 aggregated $285,653,669, and
$358,819,551, respectively.
5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Franklin Advisers, Inc., under terms of an agreement, provides investment
advice, administrative services, office space, and facilities to the Fund, and
receives fees computed monthly on the net assets of the Fund at the last day of
the month at an annualized rate of 5/8 of 1% of the first $100 million of net
assets, 1/2 of 1% of net assets in excess of $100 million up to $250 million and
45/100 of 1% of net assets in excess of $250 million. Fees incurred by the Fund
aggregated $1,679,738 for the year ended June 30, 1994. The terms of the
management agreement provide that annual aggregate expenses of the Fund be
limited to the extent necessary to comply with the limitations set forth in the
laws, regulations and administrative interpretations of the states in which the
Fund's shares are registered. There was no reimbursement to the Fund under this
provision for the year ended June 30, 1994.
In its capacity as underwriter for the shares of the Fund, Franklin/Templeton
Distributors, Inc. received commissions on sales of the Fund's capital stock for
the year ended June 30, 1994 totalling $754,562 of which $704,326 was paid to
other dealers. Commissions are deducted from the gross proceeds received from
the sale of the capital stock of the Fund and as such are not expenses of the
Fund.
Under the terms of a shareholder services agreement with Franklin/Templeton
Investor Services, Inc., the Fund pays costs on a per shareholder account basis.
Shareholder servicing costs incurred for the year ended June 30, 1994 were
$292,407, of which $284,376 was paid to Franklin/Templeton Investor Services,
Inc.
Effective May 1, 1994, the Fund implemented a plan of distribution under Rule
12b-1 of the Investment Company Act of 1940, pursuant to which the Fund will
reimburse Franklin/Templeton Distributors, Inc. in an amount up to a maximum of
33
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FRANKLIN EQUITY FUND
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NOTES TO FINANCIAL STATEMENTS (CONT.)
5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)
0.25% per annum of the Fund's average daily net assets for costs incurred in the
promotion, offering and marketing of the Fund's shares. Fees incurred by the
Fund under the agreement aggregated $104,654 for the year ended June 30, 1994.
Certain officers and directors of the Fund are also officers and/or directors of
Franklin/Templeton Distributors, Inc., Franklin Advisers, Inc., and
Franklin/Templeton Investor Services, Inc., all wholly-owned subsidiaries of
Franklin Resources, Inc.
6. FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each year
are set forth in the Prospectus under the caption "Financial Highlights."
Of the income dividends paid by the Fund during the year ended June 30, 1994,
100% qualified for the 70% dividends-received deduction for corporations.
34
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